History of Banking in Ghana

Introduction:

This note will discuss the history of banking in Ghana. The history will be divided into four epochs: the colonial period, the era of dual banking, the economic recovery programme era, and the era of globalisation and intense competition.

1. The Colonial Period (1896–1957):

The colonial period was characterised by the following:

A. Bank of British West Africa and Colonial Bank:

During the colonial period, the colonial government’s objective was to provide banking services to the British colonial administration [1]. Pursuant to this objective, the following two banks were set up in the Gold Coast:

1. Bank of British West Africa (Now Standard Chartered Bank Ghana)—Set up on 16^th June, 1896.
2. Colonial Bank—Set up in 1917. It later merged with some other banks to become Barclays Bank (Dominion Colonial and Overseas).

These two banks, both British in origin, served the colonial administration and, among others, facilitated the trading of commercial firms and assisted in revenue collection and payment of salaries by the colonial government. Both banks opened new branches in the Gold Coast in 1953.

B. Bank of the Gold Coast:

In 1952, the Bank of the Gold Coast was established under the Bank of the Gold Coast Ordinance of 1952. The bank began operations in Accra in May 1953. According to Uche [2], the establishment of this bank

…was a result of Africans’ clamour for an indigenous institution that would provide them with much-needed capital for investment and commerce. There had been a widespread belief among Africans that branches of foreign-based banks did not accord them the same facilities as European firms. Even when they were provided, Africans were usually charged higher rates.

Similarly, Antwi-Asare and Addition [3] advanced that

The colonial government was under considerable pressure from the locals because the two major existing banks (BBG and the British Bank of West Africa) favoured the European, Levantine and Asian communities in their operations. They advanced credit to indigenous entrepreneurs on only rare occasions. Sir Cecil Trevor was contracted in 1951 by the government to examine the whole field of banking in the Gold Coast, in particular, the question of setting up a National Bank on commercial lines. He recommended the formation of a bank partly owned by the government to be managed and staffed by locals. He emphasised that its aim should be to operate for the benefit of the indigenous private sector, while maintaining government accounts and acting as agent in the flotation of government bonds. Upon these recommendations the Bank of the Gold Coast was established and began operations in 1953.

In essence, the Bank of the Gold Coast was established to deal with the exclusion of locals from the banking system. The Bank of the Gold Coast would later split to become the Ghana Commercial Bank and the Bank of Ghana.

C. Gold Coast Co-operative Bank and Post Office Savings Bank:

The colonial reports on the Gold Coast [4] also make mention of the existence of the Gold Coast Co-operative Bank, which had its main functions consisting of

…financing the operations of the Gold Coast Co-operative Marketing Association, and, to a lesser degree, the Gold Coast Co-operative Wholesale Establishment. During the financial year 1952-53 it issued loans totalling £233,755 through the co-operative unions to the village co-operative societies.

The reports also speak of the Post Office Savings Bank [4]. According to the Bank of Ghana [5], the Post Office Savings Bank “was, in fact, not a bank by definition; it was only an institution set up by the government to mobilise public savings through the agency of the numerous post offices in the country, for investment in government paper.”

D. Bank of Ghana:

On 4th March, 1957, just two days before the declaration of political independence, the Bank of Ghana was formally established by the Bank of Ghana Ordinance (No. 34) of 1957 passed by the British Parliament. The long title of the ordinance was “An ordinance to establish a central bank.” Its mandate included the following:

1. To issue and redeem local currency.
2. Manage foreign reserves.
3. Influence credit allocation to maintain monetary stability.
4. Act as the banker and financial advisor to the government.

2. The Era of Dual Banking (1957–1983)

The second epoch in the development of Ghana’s banking system is commonly described as the era of dual banking. According to Djokoto [1],

…the economic policy during this period was the creation of a socialist society where the key factors of production, including the provision of banking and other financial services were controlled and owned by the State.

Pursuant to this policy, there was the establishment of several banks by Parliament. Among others, the following banks were established:

1. National Investment Bank: This was established by National Investment Bank Act, 1963 (Act 163). Per Section 3, the objects of the bank included carrying on the business of assisting industrial, commercial, agricultural and other enterprises in general by
1. assisting in the establishment, expansion and modernisation of such enterprises;
2. encouraging and facilitating the participation of internal and external capital in such enterprises
3. counselling and encouraging small Ghanaian business concerns; and
4. seeking to bring together investment opportunities, internal and external capital, and experienced management.
2. Agricultural Development Bank: This was established by The Agricultural Development Credit and Co-Operative Bank Act, 1965 (Act 286). Per Section 13, the functions of the bank included the provision of “credit in cash or in kind, and shall make provision for credit to farmers for the repayment of debts incurred by them in connection with the development of their farms, for the hiring and renting of materials, equipment and services and for warehousing facilities, on such terms and subject to such conditions as may be prescribed by regulations made under this Act, to agriculturists for the purposes of agriculture and to persons engaged in cottage industries.”

It is clear from the objects and functions of these banks that the State deliberately sought to use banks as instruments of economic policy.

On 16^th May, 1963, the Bank of Ghana Act, 1963 (Act 182) was passed. In Section 1(1), it was provided that

On the coming into operation of this Act the Bank of Ghana established under the provisions of the Bank of Ghana Ordinance No. 34 of 1957 shall continue to operate subject to the provisions of this Act as a body corporate with perpetual succession and a co.n1n1on seal; and may sue or be sued in its corporate name.

Per Section 3 of Act 182, the principal objects of the Bank of Ghana was to

1. Issue and redeem bank notes and coins.
2. Administer, regulate, and direct the currency system.
3. Regulate and direct the credit and banking system in accordance with the economic policy of the government and the provisions of Act 182.
4. Promote by monetary measures the stabilisation of the value of the currency within and outside Ghana.
5. Propose to the government measures which are likely to have a favourable effect on the balance of payments, movement of prices, the state of public finances and the general development of the national economy and monetary stability.
6. Do all such things as are incidental or conducive to the efficient performance of its functions under Section 3 of Act 182 or any other enactment.

In Section 15, the Bank of Ghana was equally given the sole right to issue currency notes, banknotes, or coins. Per this section, neither the government nor any other person shall issue notes and coins.

Per Section 36(1), it was “the sole banker and fiscal agent in Ghana of the Government and may act as banker to any Government institution or agency.”

On 21st July, 1970, the Banking Act, 1970 (Act 339) was also passed. This was “An act to regulate the operation of banking business and for other purposes connected therewith.” Per Section 1, only a body corporate incorporated in Ghana could carry on the business of banking in Ghana. Per Section 2, “…no person shall carry on the business of banking (whether as a principal or agent except by or under the authority of a licence issued in accordance with this Act.” Section 3 provided that an application for a license shall be made in writing to the Bank of Ghana. To qualify for a licence, the body corporate had to have a paid-up capital of not less than seven hundred and fifty thousand new cedis if it was a Ghanaian banking business, and an amount of two million new cedis if it was a foreign banking business. Section 4 empowered the Bank of Ghana to issue licences.

3. Economic Recovery Programme Era (1983–2000)

According to the IMF [5], in the period before the economic recovery programme,

…public confidence in the banking system was badly shaken by decisions taken in 1979 and 1982 to confiscate private deposits as part of currency conversion exercises. As a result, the currency/deposit ratio rose to 90 percent in 1983 and banks found it increasingly difficult to mobilize deposits.

According to the World Bank Report No. p-5659-Gh,

Ghana once enjoyed a relatively high standard of living compared with other West African countries, but poor economic management during the 1970s and the early 1980s led to protracted economic decline. Expansionary fiscal and monetary policies, high inflation, and an overvalued nominal exchange rate, caused a substantial real appreciation of the currency, leading to external payments imbalances. Policymakers imposed a range of administrative controls on prices, imports, foreign exchange use and the distribution of goods and services. This policy mix contributed to a downward economic spiral from 1970 to 1982.<

In 1983, Ghana adopted an Economic Recovery Programme (ERP). Per the World Bank’s report (supra), the ERP was focused on ensuring macroeconomic stability and was supported by

1. The Financial Sector Adjustment Credit (FINSAC I) from 1988–1991, And
2. The Financial Sector Adjustment Credit (FINSAC II) from 1992–1994.

The effects of these on the banking sector are now briefly discussed.

FINSAC I (1988–1991)

Per the World Bank’s report (supra),

The main objectives of FINSAC I were to

• Enhance the soundness of banking institutions by improving the regulatory framework and strengthening bank supervision by the BOG [Bank of Ghana];
• Restructure financially distressed banks following the formulation of specific restructuring plans; and
• Improve resource mobilisation and increase the efficiency of credit allocation by the banking system.

To achieve the above objectives of FINSAC I, the following were done:

1. New Banking Act to Replace the Banking Act, 1970 (Act 339): It was realised that the Banking Act, 1970 (Act 339), did not contain sufficient guidelines on minimum capital requirements, risk exposure and prudential lending limits for banks, provisions for possible loan losses and methods of interest accrual on non-performing loans. This realisation led to the enactment of BANKING LAW, 1989 (PNDCL 225). PNDCL 225 repealed Act 339.
2. Improved Banking Supervision: Under PNDCL 225, Section 28(1) provided that “The Head of Banking Supervision or a person duly authorised by him in writing shall have power to examine the affairs of any bank or any branch or agency thereof.” In Section 28(3), it was provided that “The Head of Banking Supervision shall not less frequently than once in every year examine the affairs of every bank to ascertain whether the provisions of this Law or regulations made thereunder or notices issued by the Bank of Ghana or any other relevant enactment are being duly complied with and whether the financial standing of the bank is sound.” Under Act 339, Section 26(3) had a similar provision. However, that provision only enjoined a Chief Examiner to examine the affairs of every bank to ascertain whether the bank is complying with the provisions of Act 339. That is, it did not empower the Chief Examiner (the equivalent of the Head of Banking Supervision) to ascertain whether there was compliance with notices issued by the Bank of Ghana or with any other enactment.
3. Bank restructuring: In July 1989, a General Framework document was approved by Government, the broad guidelines of which included a financial package to restore the solvency of seven distressed banks (Ghana Commercial Bank, Social Security Bank, National Savings and Credit Bank, National Investment Bank, Bank for Housing and Construction, Agricultural Development Bank, and Cooperative Bank), which were either partly or wholly owned by government. Under the General Framework, there was the injection of new capital into the banks and the setting up of the Non-Performing Assets Recovery Trust (NPART) with a mandate to realise all non-performing assets to the extent possible within a 6-year time frame. Also, the banks were made to reduce their staff, close unprofitable branches, and cut down on operating costs.

FINSAC II (1992–1994):

This was a second financial sector adjustment programme. Per a letter written by the Ministry of Finance on 15th November 1991 to the President of the International Bank for Reconstruction, the objectives of FINSAC II were

• to continue the ongoing bank restructuring begun in 1988 [under FINSAC I];
• to reduce public sector shareholding in Ghanaian banks in line with our policy of liberalising the financial sector and increasing competition in the banking system;
• to intensify the recovery of non-performing loans by NPART;
• to strengthen the capacity of Bank of Ghana to discharge more effectively its functions particularly in monetary and supervisory areas, policy formulation and implementation, as well as its operational capabilities in other related central banking activities, while shedding Its involvement in non-traditional, quasi-fiscal functions;
• to correct remaining structural imbalances in the financial system;
• to enhance the effectiveness of non-bank financial institutions in playing their role as an integral part of the emerging more dynamic financial system, with the establishment of an appropriate regulatory framework including prudential regulations;
• to assist in the development of a programme to restructure potentially viable but temporarily distressed enterprises;
• to undertake a study of the informal financial sector with a view to exploring prospects for strengthening Its linkages with the formal sector.

It was also proposed that under FINSAC II, the government would implement a programme for the phased divestiture of public sector ownership in the seven distressed banks mentioned above. Per the Ministry of Finance, it was expected that “greater private sector ownership, control and management in banks will promote greater competition among them, thus enhancing their efficiency and lowering their intermediation costs.” In addition, FINSAC II was to support capacity building in the areas of credit analysis and risk management, financial and institutional management, money and capital markets, foreign exchange marketing and basic management skills.

To support the privatisation and divestiture process, the Divestiture of State Interests (Implementation) Act, 1993 (PNDCL 326) was passed. In 1995, the process to divest the government’s interests in the Ghana Commercial Bank, the National Investment Bank, and the Social Security Bank began. In March 1995, 30 per cent of the shares of the Social Security Bank were placed in the Ghana Stock Exchange, and 21 per cent were sold [6]. The shares of the Ghana Commercial Bank were also offered in February 1996, and about 42 percent of shares were sold [6].

4. Era of Globalisation and Intense Competition (2000–Present)

According to Djokoto, Ghana is currently in the era of globalisation and intense competition. Among others, this era is characterised by

1. Introduction of several laws to regulate banking and the financial system.
2. The introduction of major technological innovations into the banking space such as electronic banking, mobile money platforms, and Automated Teller Machines.
3. influx of foreign banks such as Zenith Bank, United Bank of Africa, First Atlantic Bank, among others.

References

[1] Djokoto. G., 60 Years of Banking in Ghana: Landmarks of the Past and Lessons for the Future in Christine Dowuona-Hammond et al “Mobilising the Law for Ghana’s Future-Appraising to Revolutionise, 203 (2020).

[2] Uche Chibuike, 'Credit for Africans; the demand for a ‘national bank’ in the Gold Coast colony' [2003] 10(1) Financial History Review 75–90.

[3] Antwi-Asare, T. O., and E. K. Y. Addison. "Financial sector reforms and bank performance in Ghana." (2000).

[4] Report on the Gold Coast for the Year 1953

[5] https://www.bog.gov.gh/about-the-bank/

[6] https://www.elibrary.imf.org/downloadpdf/view/journals/002/1996/069/article-A002-en.pdf