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Economic recovery program of Ghana

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1.0 Introduction

This chapter attempts to provide an overview on the problem statement of the entire research work, objectives of the study, relevance of the study, methodology applied as the research unfolds and the organization of the study.

1.1 Background

Ghana is one of the fast emerging developing countries in West Africa with twice the per capita output of the poorer countries in West Africa. With well endowed natural resources, Ghana still relies heavily on international financial and technical assistance. Gold, cocoa and timber are the major sources of foreign exchange. The introduction of Ghanas Economic Recovery Program (ERP) in 1983 to recover the initially very weak private sector participation did improve consistently but although still levels were modest during 1987-91.

Over the past years Ghana has witnessed dynamic changes in its private Sector. The number of banks has increased from 9 in 1989 to 21 at May 2006 (www.bog.gov.gh). These banks serve a prominent role as corporate entities that provide investment capital in the economy to support employment opportunities, human resources development and contribute towards national and community development programmes (Aryeetey, E. & Gockel, F. 1990). They primarily furnish loans to individuals and companies to finance various projects which lead to economic and private sector development.

Brownbridge, M., & Gockel, A.F. (1997) are also of the view that these financial institutions support savings and investment in the economy, which plays a major role in the overall development in terms of increasing productivity of resources in the economy. They further highlighted that this role of banks in the Ghanaian economy is crucial, in that shortcomings in the industry directly affect the trend of economic growth.

In recent times Ghana has discovered crude oil, which is expected to boost the economic growth by bigger margins. Ghana has a unique welcoming attitude towards foreign investors; the long political stability of the country has attracted a lot of business investors to establish businesses in the country. The rate of foreign investors has not reduced as better prospects in doing business in Ghana are yielded in the long-run. The political state of the country has also been very peaceful with a vibrant atmosphere to establish businesses.

During the fifth banking awards ceremony in Accra, Dr. Paul Acquah (Governor of Bank of Ghana) revealed that the banking industry in Ghana has become highly competitive due to the increased sophistication of customer needs coupled with tremendous global competition. He further stated that these reasons over the years have been the driving force for banks, in particular private owned banks, to focus on increasing shareholders value, delivering superior services aimed at achieving over all customer satisfaction and value.

The concept of competition has introduced an overwhelming challenge among organisations worldwide. Most organisations are forced to compete by promptly responding to changes in national and world economies, technological changes, new business environments, cultural diversity and deregulation in emerging capital markets to improve overall organisational performance. Privately owned businesses in Ghana are constantly entwined in this fierce battle of global competition and the pressing need to sustain its existence in the growing rate of change in its environment.

Recent trends in the Ghanaian economy have revealed that keen competition in the business sector has been as a result of an open market which promotes private sector participation. Though most private owned organisations have managed to survived, a considerable number of them do fail due to reasons not limited to economical and financial factors.

A study conducted by Dun and Bradstreet (cited by Gaughan Patrick A. 1999, pp. 432) reveals that there are three most common factors that cause business failure such as economic, financial and experience factors (refer to Table 1).

In some developing countries market forces are completely eliminated as a result of controls imposed by the ruling governments. These controls create adverse effects on the economy such as large fiscal deficits coupled with weak macroeconomic management leading to high inflation in the economy. The consequences are generally felt by banks and other non-banking institutions, in that, loans borrowed by individuals or organisations are not paid back due to economic hardship (Brownbridge M., & Gockel A.F., 1997).

According to Pfeffer J. (1994; p. 6), People and how organisations manage them are becoming more important because many other sources of competitive success are less powerful than they once were. He emphasises the fact that in recent times most organisations rely extensively on the traditional sources of competitive success such as product and process technology, regulated markets, access to capital resources, and economies of scale which provide an insignificant competitive influence as compared to the past. He further argues that organisational culture and potential employee contributions derived from managing employees in an organisation are crucial as compared to the traditional sources of competitive success. Employees have been referred to as assets to a firm or an organisation when they possess the right skills needed to work effectively and efficiently (Odiorne G. S, 1984). However, these employees may possess diverse capabilities that lead to various potential contributions to an organisation because of previous education, experience, or individual qualities. In view of the fact that employees contribution to the organisation determines extensively competitive success, their individual skills are considered vital (Pfeffer J. 1994).

1.2 Problem Statement

The gradual transformation of Ghana has had a lot of positive feedback from other nations, but will this transformation termed economic growth survive the long-term or would it collapse somewhere in the future?

What are the main strengths and weaknesses of the private sector?

Will the private sector support sustainable development?

Has Ghanas initiative to increase private sector participation been successful?

What measures has Ghana taken liberalize its economy to encourage private sector participation?

Recent discovery of crude oil (black gold) in Ghana has brought higher hopes to accelerating the countries development goals into reality. This is what the recent ex-president of Ghana, President John Kufuor had to say in an African programme with the BBCs Focus "We're going to really zoom, accelerate, and if everything works, which I pray will happen positively, you come back in five years, and you'll see that Ghana truly is the African tiger, in economic terms for development." Will this oil discovery further attract new entrants into the financial sector and in the affirmative will this promote a competitive private sector environment?

1.3 Objectives of the Study

The main objective of this thesis is to show the role of the private sector in contributing to business competitiveness and economic growth. The research limits its focus on the inflow of private non-financial and financial institutions in the Ghanaian economy as a result of the introduction of Financial Sector Adjustment Programme (FINSAP) in Ghana. The economy over the years has witnessed an increase in private sector participation, which has significantly promoted business competitiveness and contributed to a vibrant economy at large.

Table 2: SMART Objective of the Study

Strategic Operation Tactical

Specific Evaluate the role of the private sector (Privately owned financial institution) contributing to business competitiveness and economic growth. Present a platform for private sector participation in economic development. Provide a primary evaluation for developers and investors who aspire to do business in Ghana.

Measurable To fall within the framework of the private sector and factors leading to business competitiveness and economic growth. Increase real GDP. Impact of the private sector on economic growth. Note government policies that would prevent adverse effects on critical sectors of the economy.

Attainable To recommend effective and sustainable business development strategy and policies that will enhance more participation in the private sector. Increase economic growth and improve effective and efficient business plans.

Embark on comprehensive business competitiveness and productive performance within the various business sectors.

Realistic The research will look extensively into government development goals as well as the private sectors role in development. Access to economic reports surveys from IMF. Ghana Government reports on development projects. The IMF monitors on a yearly basis the economic situation in Ghana.

Time-Limited To complete the thesis within two months. This thesis expects to propose recommendation based on the information available at the time of writing. The recommendations and proposals are expected to be considered and if applicable implemented by other developing countries as well.

Source: Self-prepared.

Specifically, the thesis critically focuses on the following:

  • The role of the private sector (privately owned financial institutions) contributing to economic growth in Ghana.
  • To investigate the driving forces of Ghanas emerging markets.
  • The role of the government promoting the private sector.
  • The challenges and constraints facing the private sector.
  • To evaluate the strategies being employed by Ghana in the private sector and its impact on the economy.

1.4 Significance of the Study

The study will be beneficial in many respects:

  • To help identify the success and bottlenecks of the significant economic contributions from private sector with regards to its contribution to economic growth business competiveness.
  • It also reviews the strengths of the financial sector to support expansion of the private sector development and more importantly availability of credit facilities to promote businesses.
  • It will help investors to get a fair idea of business establishment opportunities.
  • To help formulate strategies to help implement better policies and promotions for the private sector development.

1.5 Methodology

This study uses secondary data and literature to evaluate the topic. It also uses SWOT analysis to examine the strategic position of Ghana in improving its economic and business areas.

The research will employ the use of CAMEL approach as the overall framework to evaluate the financial strength and stability of the Banking Industry in Ghana, where;

C Capital adequacy, A Asset quality, M Management capability,

E Quality and level of earnings, L Adequacy of liquidity

1.6 Organisation of the study

The paper is divided into five chapters. Chapter one presents the introduction, problem statement, objectives of the study, significance of the study, methodology and the organisation of the study. Chapter two gives an overview of the Ghanaian financial sector as well as reasons that led to the financial sector reforms. Chapter three gives an overview of the Ghanaian private sector. Chapter four uses CAMEL approach to analyse 4 major privately owned financial institutions. The final chapter looks at the overall findings, conclusions and recommendations.


2.0 Overview of the Ghanaian economy

This chapter provides an overview of the Ghanaian economy and the Ghanaian Financial System. The chapter also looks at reasons that led to the introduction of the financial sector reforms, a SWOT analysis of financial sector adjustment program (FINSAP I & II).

Ghana is one of the developing countries in sub-Saharan Africa that introduced structural and economic reforms to address its extensive macroeconomic shortcomings, reduce poverty and to liberalize the financial sector. The broad money/GDP ratio fell significantly to 12.5% in 1983 as compared to 29% in 1976, whiles currency/M2 ratio also decreased from 35% in 1970 to 50% in 1983. Bank deposits decreased from 19.5% of GDP in 1977 to 7.4% of GDP in 1984 because there was lack of confidence in the banking industry (Brownbridge, M., & Gockel, A. F. 1997).

During the 1980s the Ghanaian economy was hit by the most devastating economic crisis (www.bog.gov.gh). This gave rise to numerous extensive economic drawbacks in the Ghanaian economy. Leechor Chad reveals in an article published by the World Bank the following economic crisis that plagued the Ghanaian economy between the years 1982 to 1983:

  • The countrys power systems, communication, postal and railway services ceased to function properly and the whole country was in a state of chaos.
  • Tax collection had declined to about 5% to GDP, investment dropped drastically beyond the level required to maintain capital stock.
  • Real income per capita which was continuously diminishing for a decade was a third below the level reached in the early 70s as at 1983.
  • Foreign exchange reserves deteriorated considerably.

The Ghanaian economy was heavily controlled by the government in terms of setting unrealistic interest rates and sectoral credit ceilings; banks were forced to focus on lending to priority sectors (agriculture, export and manufacturing) regardless of the borrowers performance in terms of profitability and their capability to payback the loan. The economy was regulated to foreign investments and the strong existence of strict capital flow regulations (The Corporate Guardian, July-September 2006). Governments heavy intervention in the financial system set the stage for economic shortcomings a few such as lack of competition, high incidence of inefficiency, hardship and the escalating rate of non-performing loans (Leith, C. J., & Sderling, L. 2000).

Since the late 1980s, the government of Ghana continued to implement financial sector reforms as an integral part of its ongoing Economic Recovery Program (ERP) (Brownbridge, M., & Gockel, A. F. 1997). Ghanas enthusiasm to initiate the ERP with close collaboration with the International Monetary Fund (IMF) during the year 1983-85 was to liberalise the financial sector and establish an open market-based economy by eliminating price ceilings, reducing the influx of foreign imports, diversifying viable sectors of the economy and stabilizing fiscal deficit. Ghana in 1984 launched the Structural Adjustment Program (SAP) with the primary aim of reducing its involvement in the economy and allowing the free interaction of demand and supply (The Corporate Guardian, July-September 2006). However, during the period 1983-88 the performance of the banking industry deteriorated with high levels of non-performing assets (NPAs) and inefficient deposit mobilization which made most public banks insolvent (Leith, C. J., & Sderling, L. 2000). The government launched the first phase of the Financial Sector Adjustment Program (FINSAP) in 1988. This was to fully deregulate as well as liberalize the financial sector and improve resource allocation within the various sectors of the economy (www.oecd.org).

Since 1983, Ghana has attached great importance to its divestiture initiative program. About 200 stated-owned enterprises (SOEs) were being considered for diversification under governments ongoing privatization initiative. At the end of the last two years, government still owned 35 enterprises valued at more than 60% of GDP in 2003 (IMF Survey, 2005). Governments expenditure during 1986-1991 increased and this called for policy reforms to enable government to meet its high spending. Government depended on the tax system to support its high level of spending. The Parliament of Ghana in 1993 increased tax on petroleum. However, the tax system could not supplement its GDP share to match the expenditure. Consequently this brought about deficit financing. Government resorted to other forms of financing its expenditure such as extensive borrowing from the Central Bank (issuing new notes), public and foreign borrowing, and privatization of sate-owned enterprises (Leith, C. J., & Sderling, L. 2000).

Over the years, Ghana has witnessed a massive transformation in its economy as a result of continuous implementation of financial sector reforms to deregulate the economy and stimulate savings, investment and growth. The Central Bank is constantly implementing policies adopted under FINSAP to ensure the entrants of privately owned financial institutions, free interest rates, stabilize the cedi against foreign currencies, encourage the flow of foreign investment and allow easier access to credits (www.bog.gov.gh).

The Ghana Stock Exchange (GSE) was set up in 1989 as a private company limited under the Company code. The Stock Exchange act of 1971 (Act 384) allowed it to function as an authorized Stock Exchange. The Securities Industry Law PNDCL 333 (1993) as amended bestowed regulatory rights to the Security Regulatory Commission (SRC) with its main function to register, protect, assist and supervise all stakeholders in the securities market. In April 1994 the Ghana Stock Exchanges status became a public company limited (www.gse.co.gh). At the end of 2003, listed companies equity increased to 26 as compared to 22 in 2002 (www.gipc.org.gh). The performance of the Ghana Stock Exchange (GSE) has improved tremendously. All-share Index increased by 91.3% in 2005 as compared to 154.7% in 2003 (ISSER 2005).

Flow of foreign investment increased from $110.0 million in 2003 to $139.3 million in 2004. In 2004 the cedi depreciated by only 2.2% against the US dollar, 10.7% against the Euro and 12.1% against the pound sterling. There was quite an improvement in the value of the cedi as compared to the previous year (2003) when the cedi depreciated by 22.5% against the Euro and 13.0% against the pound sterling. Average inflation fell from 26.7% in 2003 to 12.6% as at December 2004 (ISSER 2005).

Ghana is the second largest producer and exporter of cocoa; the agriculture sector accounts for about 50% of GDP and is considered the backbone of economic development (www.ghanaweb.com). Real GDP growth in 2004 was 5.8% (www.gipc.gh). The tremendous performance of the Agricultural sector has supported Ghanas remarkable rate of economic growth over the years. The Agricultural sector contributes significantly to GDP growth. In 1990 GDP increased by only 3.3%, this was due to the negative 2% growth rate in the Agricultural sector that year. The year 1991 witnessed a GDP growth rate for the Agricultural sector by 5.8% which consequently increased the whole Ghanaian economy GDP by 5.3% in that year. The sector has also contributed immensely to the countrys foreign exchange earnings; 38.5% in 1999, 35.4% in 2000, 33.9% in 2001, 35.5% in 2002. (www.fao.org/es/esa). Other main exports are gold, timber, bauxite, manganese ore and diamond (BOG Quarterly Economic Bulletin, April June 2005).

The performance of the agriculture sector over the years has immensely improved with growth rate of 7.5% in 2004 as compared to 6.1% in 2003. The production of cocoa for export contributed 46.7% during the year 2004, a significant portion of over all growth (ISSER 2005). The crops and livestock contribution increased from 2.3% in 2003 to 5.4% in 2004, the largest contribution to the agricultural sectors GDP. The forestry and logging sub-sectors increased by 6.1% in 2003, but dropped with a growth rate of 5.8% in 2004. (www.gipc.org.gh).The elimination of maximum lending rates and minimum time deposit rates succeeded to some extent in the liberalization of interest rates in 1987. Direct controls in the form of credit ceilings were also abolished. During the 1990s banks were at liberty to price deposits and loans and to distribute loans accordingly; however the Bank of Ghanas high reserve requirement limited the funds available for allocation (Brownbridge M. & Gockel A. F 1997). These high reserve requirements prevented banks from developing their loan portfolios and consequently, most banks preferred to invest in attractive and somewhat risk-free government securities (strategis.ic.gc.ca)

Interest rate dropped steadily owing to the Monetary Policy Committee (set up by the Bank of Ghana in 2004) decreasing prime rate from 21.5% in 2003 to 18.5% in 2004. Consequently, the commercial banks base rate has decreased from 29% to 25.4%. Interest rate for 91-Treasury bill fell from 18.71% early part of the year to 17.08% at the end of 2004. Interest rates for the 182-Day Treasury bill dropped from 19.78% during the early part of the year to 17.85% at the end of 2004. Inter-Bank interest rate also fell from 17.12% in January to 16.23% at the close of the year 2004 (www.gipc.org.gh)

The Banks spread (21.3%) is still too high as compared to the other African countries (see table 3*). The banking industry has been structured in a way that banks are able to adjust their interest rates according to policy rates. Banks maintain a high spread to ensure that their profits are not significantly influenced by their interest margins (BOG financial stability report 2004). However, according to the BOG financial stability report 2006 the emergence of new banks will lead to an efficient financial sector which is expected to reduce the pressure on lending spread due to the fact that banks will continuously try to gain market share by competing for customers.

Table 3: Selected Commercial Bank Interest Rates, 2000 and 2004

Deposit Rate Lending Rate Spread

2000 2004 2000 2004 2000 2004

Gabon 5.0 5.0 22.0 18.0 17.0 13.0

Ghana 16.8 7.5 47.0 28.8 30.2 21.3*

Kenya 8.1 2.4 22.3 12.5 14.2 10.1

Mauritius 9.6 8.2 20.8 21.0 11.2 12.8

Mozambique 9.7 9.9 19.0 19.2 9.3 9.3

Nigeria 11.7 13.7 21.3 19.2 9.6 5.5

Tanzania 7.4 4.2 21.6 13.9 14.2 9.7

Uganda 9.8 7.7 22.9 20.6 13.1 12.9

Zambia 20.2 11.5 38.8 30.7 18.6 19.2

Source : International Financial Statistics, IMF

Fiscal and Monetary Policy

The financial policies implemented by monetary authorities in Ghana before the implementation of FINSAP were direct government controls on all sectors of the economy. Government excessive control in the economy by setting price and interest ceilings coupled with weak macroeconomic problems lead to a high level of inflation (Ziorklui, S. Q. 2001).

Ghanas fiscal policy primarily aims at decreasing domestic debt, ensuring economic stability, cutting down on the increasing level of interest payments to achieve the required real interest rates. Consequently, the Bank of Ghana has adopted numerous strategies to address fiscal deficit and governments borrowing (www.gipc.org). Budget deficit was 0.55% of GDP during the second quarter of the year 2005 as compared to 1.18% of GDP during the last quarter of 2004. This showed significant decrease in the overall budget balance (Bank of Ghana Quarterly economic bulletin, April-June 2005).

The Bank of Ghana in 2004 set up the Monetary Policy Committee (MPC) to mainly focus on formulating effective monetary policies, making available statistical data and providing necessary support in terms of advise for monetary policy formulation (www.bog.gov.gh). The MPC seeks to control inflation, stabilize price and exchange market, manage external debt and develop the capital market (www.gipc.org.gh).

2.1 The Ghanaian Financial System in Brief

Ghanas banking sector has evolved over the years. There are 23 major banks (refer to table 7) operating in the banking sector in Ghana as at 2006. The Ghanaian banking sector is made up of 19 universal banks, 2 Development Banks, 2 Commercial banks including Apex Bank and 121 Rural Banks (www.bog.gov.gh). The introduction of universal banking in Ghana is overwhelmingly changing the way banks function in the economy. Unfortunately, not all banks operating in Ghana are eligible to be universal banks. To be eligible for banks to operate as universal banks they are expected to have at least 70 billion as shareholders capital (www.agighana.org). According to the Bank of Ghana universal banking substitutes the famous three-pillar banking model, namely development, merchant and commercial.

Table 4: List of Major Banks in Ghana - 2006


ABL Amalgamated Bank 2000 Universal Bank

ADB Agricultural Development Bank 1965 Development Bank

BBG Barclays Bank Ghana 1918 Universal Bank

CAL CAL Merchant Bank 1991 Universal Bank

EBG Ecobank Ghana Limited 1990 Universal Bank

FAMBL First Atlantic Bank 1995 Universal Bank

FBL Fidelity Bank Limited 2006 Universal Bank

GCB Ghana Commercial Bank 1952 Universal Bank

GTB Guaranty Trust Bank 2006 Universal Bank

HFC HFC Bank Limited 2002 Universal Bank

ICB International Commercial Bank 1996 Universal Bank

INTER Intercontinental Bank Plc 2006 Universal Bank

MAB Metropolitan & Allied Bank 1995 Commercial Bank

MBG Merchant Bank Ghana Limited 1972 Universal Bank

NIB National Investment Bank 1963 Development Bank

PBL Prudential Bank Limited 1997 Commercial Bank

SBL Stabic Bank Ghana Limited 2000 Universal Bank

SCB Standard Chartered Bank 1896 Universal Bank

SG-SSB SG-SSB Bank Limited 1976 Universal Bank

TTB The Trust Bank 1994 Universal Bank

UBA United Bank for Africa 2005 Universal Bank

UNI Unibank Ghana Limited 1999 Universal Bank

Zenith Zenith Bank 2005 Universal Bank


Until 1957 the West African Currency Board (WACB) acted as the only board under the

Colonial regime conferred with the authority to exchange sterling to Gold Coast pound. Government of the then Gold Coast declared its intention to issue its own currency after independence. Politicians and economists were of the strong opinion that with the establishment of a Central Bank, Ghanas independence will have a significant meaning in political history. In view of this, preparations started which ended up in the establishment of the Bank of Ghana on the 4th of March 1957 under the Bank of Ghana Ordinance (No.34) of 1957 passed by the British Parliament. The whole idea for the establishment of a Central Bank was to meet the financial needs of vast indigenous sectors of the economy as well as the new independent Ghana government.

After the establishment of Bank of Ghana (replaced WACB) as the central bank, the 1957 ordinance empowered the bank to primarily assume the following role in Ghana when it first begun formal operations on 1st August 1957 (www.bog.gov.gh):

  • Printing out and redeeming bank notes and coins.
  • Lender of last resort for banks in Ghana.
  • Using fiscal and monetary policies to regulate money supply and maintaining monetary stability.
  • Advise the government and be the main source to finance to the government of Ghana.
  • Supervise and regulate all banks in Ghana.

The legal and regulatory frameworks in which financial intermediaries operate in Ghana are as follows (www.bog.gov.gh):

  • Bank of Ghana Act 2002, Act 612
  • Banking Act, 2004 (Act 673)
  • Financial Institutions (Non-Bank) Law 1993, PNDC Law 328
  • Companies Code Act 179, 1963
  • Bank of Ghana Notices /Directives / Circulars / Regulations

Non-Banking Financial Sector

Ghana has achieved significant success in the economy particularly in the non-banking sector as a result of initiating the structural adjustment program, liberalizing the economy and by passing the Banking law in 1989 and the Non-bank financial law in 1993. These initiatives embarked by the government of Ghana have paved way for new entrants in the private sector and also transformed the existing financial institutions to diversify into the financial system. Consequently, there has been a rapid growth of Non-Bank Financial Institutes (NBFIs) with the prime aim of providing financial services to potential target groups outside the banking system (Ziorklui, S. Q. 2001).

According to the Ghana Investment Promotion Centre the financial system in Ghana includes the following licensed non-Bank Financial Institutions:

  • Insurance companies
  • Stock exchange
  • Building Society
  • Mortgage Finance Co.
  • Venture Capital Funding Financing
  • Trust Company
  • Credit unions
  • Discount houses
  • Financial houses
  • Leasing companies
  • Savings and loans associations

2.2 Objectives of Financial Sector Adjustment Program (FINSAP)

According to Ziorklui S. Q. (2001), FINSAP was introduced and implemented in two phases. He further outlines the main objectives in both phases of the implementation. The first phase was implemented in 1988 with its main objectives as follows;


  • Embark on restructuring to address financially distressed banks.
  • Mobilize savings and strive to improve efficiency in the allocation of credit.
  • Establish an effective regulatory and supervision system to monitor and improve the banking sector.
  • Improve and strengthen the money and capital markets.
  • To establish a non- performing assets recovery trust. The second phase of FINSAP was implemented in 1990 with the following objectives;


  • Promote foreign investment and increase private participation in the banking sector in Ghana.
  • Continue the implementation of policies adopted under the first phase of the financial sector adjustment program (FINSAP 1) to restructure the financial sector.
  • Better manage the collection of non-performing loans by Non-Performing Assets Recovery Trust (NPART).
  • Promote and develop non-Bank financial Institutions (NBFIs) to be more effective and efficient in savings mobilization.

2.3 SWOT Analysis Financial Sector Adjustment Program (FINSAP)

This section seeks to determine whether the main objectives under the implementation of the financial sector reforms (FINSAP) are attainable with respect to the current economic situation. This study employs SWOT analysis to examine the major strategic position of the financial sector reforms (FINSAP) with reference to the above objectives. The analysis covers major key elements necessary to ensure macroeconomic stability, deposit mobilization, improvement in the financial sector in terms of credit facilities and to sustain substantial private sector participation.

Table 5: SWOT Analysis on FINSAP


  • Monetary authorities in Ghana have expressed excellent acceptance of FINSAP before and after years of implementation.
  • The Central Bank is fully committed to the dynamic policies being introduced and implemented under the financial sector reforms (FINSAP) to ensure growth and stability in the economy.
  • The existence of democratic political stability and good governance has exhibited positive signs of long-term business planning, conducive environment for investment and financial liberalization leading to economic development.
  • The availability of competent and skilled human resources.
  • Effective divestiture programme implementation which has improved the performance of the private sector management and capital.
  • Strategically, Ghana is located on the coast of West Africa which facilitates export and import.
  • The Ghanaian economy is characterized by output growth, increasing private sector activities and investment opportunities.


  • Concerns are being raised as to whether the current saturated state of the Ghanaian economy is buoyant enough to absorb or support the establishment of new Formal Financial Institutions.
  • The Agriculture sector is considered to be the backbone of country; however, this sector is perceived to be risky and has contributed adversely in credit allocation from Banks or credit groups, substantial bad debts and capitalization.
  • High interest rates coupled with excessive borrowing by the government from the banks consequently, limits the credit available for Banks to lend to businesses in the private sector.
  • The manufacturing sector in the economy has not been exploited to its full capacity. This has resulted in extremely low production capacity of some small and medium scale enterprises.
  • Low productivity of workforce which could be improved with the right kind of equipment and training.
  • Corruption in Ghana is one of the major setbacks in the development and growth of the country.
  • Lack of adequate infrastructure and social amenities. The standard of living is low and majority live below poverty line.
  • The Ghanaian economy lack essential institutional and legal framework to adopt effective prudential regulations.



  • The World Banks involvement financially in sponsoring the financial sector reforms (FINSAP) under the ongoing economic recovery programme.
  • Emergence of foreign investors into the Ghanaian financial market as a result of strict trade regulations in other Sub-African countries.
  • Ghana is perceived by its neighbouring countries to be economically stable and a peaceful country to support investment.
  • Greater focus on technology which plays a key role in the economic development.
  • Emerging foreign markets for agricultural products and consumer products from Ghana.
  • Leverage the image of its democratic and relatively stable political environment towards establishing itself as a regional hub for offshore services.
  • The structure of the Ghanaian economy is too dependent on foreign assistance which is mostly in the form of imports, funds, aids and investment.
  • The high influence of exchange rate on investment decisions turn to increase the share of foreign trade in the economy.
  • The free access of non-residents to domestic capital market.
  • Poor savings habit of potential investor.
  • Lack of development of necessary educational and training infrastructure resulting in limited scalability for the industry.


3.0 Overview of the Private Sector of Ghana

This sector can also be classified as the system of the operation of markets; also called business sector. The private sector of Ghana over the years has seen drastic development as a result of the governments initiative to improve the economy. The participation has been overwhelming including all the various sectors.

3.1 Characteristics of the Private Sector

The private sector is made up of all the non governmental organisations that are privately owned. Some private industries were once owned by government but through privatisation have established private partnerships.

It is estimated by the Ministry of Trade and Industry, Ghana (MOTI) that in 1998 the Ghanaian private sector consisted of approximately 80,000 registered limited companies and 220,000 registered partnerships.

The SME sector in Ghana is made up of this following target group:

  • Micro enterprises: made up of up to 5 employees with fixed assets valued at not more than $10,000.
  • Small enterprises: made up of between six and 29 employees with fixed assets valued up to at $100,000.
  • Medium enterprises: this group employs between thirty to 99 employees with fixed assets of up to$1,000,000.

This target group includes the highly trained and expertise in professions that require formal education and the use of new technologies in their everyday work. There also exists another target group which will be classified as the informal private sector.

They usually have the following qualities:

  • Personal capital, one person manager and owner of the business taking all the decisions.
  • Poor managerial skills due to limited or no formal education, thus inhabiting the development of business growth.
  • Lack of access to use of new technologies, market information and severe limits to credit from financial institutions.

Typical of this target group is lack of non-financial assistance and their unwillingness to discuss their business strategies with other people. The idea of introducing new technology, to manage procedure and strategy development models does not seem to be an option. Data on this target group is inaccurate but it is estimated that this group makes the majority of the private sector.

The government has been able to identify the informal private sector and has introduced sponsored business support services such as the National Board for Small Scale Industries (NBSSI). Their objectives include:

  • To contribute to the creation of an enabling environment for the development of small-scale enterprises.
  • To contribute to the development of an entrepreneurial culture in Ghana.
  • To facilitate access to credit for small enterprises.
  • To provide non-financial support for sustainable small-scale enterprise development.
  • To facilitate the growth of enterprise sector associations.

A 2005 Bank of Ghana survey on credit to SMEs found that:

The share of SMEs in total exposure of banks has increased from 0.95 percent of GDP in 2001 to 1.54 percent of GDP by 2004; whereas total credit to the private sector increased from 11.8 percent to 13.05 percent of GDP over the same period. This is an indication that these enterprises are sharing in the general growth in lending. The swings in lending in favor of SMEs are more pronounced in commerce, less so for agriculture, services and manufacturing, and weakest for the transport and other sectors. This sign shows positive improved access to financial credit and the participation of SMEs in the private sector development.

The informal private sector which provides more jobs for Ghanaians such as those who make a living from private transport services, farmers, traders (market women), artisans all of whom contribute to the economy. The problem with this sector is that although its a means of livelihood, their capital base is very small and there is a likelihood of their business collapsing.

3.2 Goals of the Private Sector

Private sector development is seen as an essential factor of sustaining and expanding businesses which stimulate economic growth and reduce poverty rate. Governments role is very necessary to be able to progress with any development strategy. The policies and initiatives must be effective and tailored to suit the economic environment. The government of Ghana has embarked on many initiatives to promote private sector development to supports its millennium goal aspirations of becoming a middle income country.

The private sector development project focuses on:

  • Assisting the Government in building on its investment liberalization by supporting its efforts to restructure, reform and commercialize its technical research and development establishment along competitive and demand driven principles.
  • Supporting efforts by the export industry to improve their design and the promotion of their products.
  • Providing to a broad segment of the private sector the necessary financial and technical assistance to support the development of commercially bankable projects by improving their feasibility and quality.
  • Assisting the Government in developing a program to upgrade the delivery of legal services to the commercial and manufacturing sectors.

3.3 The Impact of Private Sector Development

  • Promotes economic growth
  • Poverty reduction.
  • Create employment.
  • Promotes international trade
  • Promotes direct foreign investment
  • Promotes social responsibility

3.4 Benefits of Private Sector Development

Private sector development shapes the economy:

  • Improves the regulatory environment for business, including trade facilitation: markets often require regulation to protect consumers, workers and the environment; to ensure efficient markets and better balance the public interest with that of profit-seeking firms. Poorly designed regulation can undermine the benefits of free trade. Heavy regulation limits the flexibility of markets and there
  • Establishes credible market-supporting institutions to facilitate competition: the ability of markets to function soundly is the flow of financial credit. Trade is able to
  • Creates transparency and competition in business: introduction of more.
  • Farmers are able to get credit facilities to improve there crop production.
  • Direct financial assistance to take up rural development projects.
  • Scholarship scheme to support training and education of indigenous farmers as a way of social responsibility from established private companies.
  • Easy availability of credits and loans from financial institutions due to the competitive.

3.5 SWOT Analysis for Private Sector Development

Table 6: SWOT Analysis for Private Sector Development


  • Political stability to encourage investment and business establishment.
  • Easy business entry access.
  • Introduction of universal banking license.
  • Creates income and employment to improve the standard of living.
  • Reduce poverty most especially in the rural areas.


  • Ghana is a primary commodities producer with a narrow export base; this makes it very vulnerable to external shocks in the form of fluctuating commodity prices.
  • Reinforcement of government to provide services.


  • High competition among financial institutions leading to low interest rates on credit schemes.
  • Private financial institutions have well distributed branches in the countries to provide services to potential clients.
  • Creates an environment for doing business.
  • Creates a platform for Ghana to be able to achieve its millennium goals.


  • High reliance on foreign inflows to finance development projects due to low domestic savings and investments.
  • Stagnating government revenue and rapidly increasing government expenditure has resulted in huge fiscal deficits and domestic debt.
  • Lack of quality education in the rural areas which could be a strong force to improve the economy.
  • Lack of new technology and high cost of upgrading.
  • Lack of infrastructure to support the changing economy.


This chapter seek to analyse the financial strength and stability of 4 major privately owned banks by using the CAMEL approach as the overall framework to evaluate the performance of the banks in the financial sector of Ghana from the year 2000 to 2004. The chapter also makes use of SWOT analysis to examine the major strategic position of privately owned banks contributing to business competitiveness and economic growth in the Ghanaian economy.

4.0 CAMEL Approach

The CAMEL approach applied in this section analyses 4 major privately owned financial institutions Capitalization, Asset quality, Solvency, Profitability and Liquidity in the financial sector. The analysis makes a comparison over the years in order to examine the well being of privately owned financial institutions in Ghana. This well being is reflected in the role of the private sector in economic development. The financial soundness indicators shown below seek to illustrate the trend over the years.

4.1 Capital Adequacy Ratio (CAR)

The adequacy ratio for the 4 banks as shown in figure 1 below is well above the Bank of Ghana statutory requirement of 10%. However, due to adverse micro-economic development, Ecobanks CAR in 2004 was 9.93%. The overall performance in terms of capacity of the banks to meet their liabilities has been quite encouraging as compared to previous years. This establishes strong confidence in the banking system.

4.2 Asset Quality

The asset quality which is computed as provision ratio is used as a performance indicator to evaluate the well being of banking operations. The main primary function of banks as mentioned in section 1.1 is to mobilise savings and channel these funds in the form of loans to individuals and companies to finance various projects which lead to economic and private sector development. These loans must be serviced to make resources available for the bank to function. When loans are not paid back, this may result in the accumulation of non-performing loans which limits the banks loan portfolio and enables banks to meet their financial requirements when due.

Table 7: Asset Quality Ratio (2000 2004)

BANKS 2000 2001 2002 2003 2004

BBG 2.1 1.3 1.1 3.3 3.3

SCB 7.1 8.3 0.5 1.0 0.4

Ecobank 1.5 1.8 1.2 2.1 1.0

SG-SSB 3.6 7.4 6.4 7.5 3.0

The provision ratio of the 4 banks form 2000 to 2004. In 2000 the provision rate was as high as compared to that of 2004. This was a clear indication that the banks quality of loans and advances were deteriorating. There has been a consistent fall in the provision ratio in 2001 and 2002. This downward trend in the provision ratio is an indication of good asset quality.

4.3 Profitability

Profitability has been the hallmark of most businesses worldwide. In general banks in Ghana strive to sustain sound and profitable banking operations. The industry makes use of the ROA and ROE ratios in measuring the degree to which it efficiently allocates its resources to maximise shareholder value.

4.3.1 Return on Assets (ROA)

Highlights on the ROA trend over the period 2000 to 2004. This ratio is critical and as such is constantly monitored by bank authorities. This ratio throws more light on performances of the bank. It can be seen in figure 3 that the 4 banks have fluctuation results for the period; this signifies competition in the entire banking industry.

Table 8: Return on Assets (2000 2004)

BANKS 2000 2001 2002 2003 2004

BBG 0.7 0.7 0.6 0.6 0.9

SCB 0.4 0.5 0.4 0.5 0.7

Ecobank 0.5 0.4 0.4 0.4 0.6

SG-SSB 0.6 0.7 0.4 0.4 0.7

4.3.2 Return on Equity (ROE)

The downward trend in the ROE was also evident in the banking industry in Ghana during the year 2000 to 2004 as shown in figure 4 and table 9. This was due to very high operating cost of the 4 banks. Most of this cost was attributed to upgrading of technology and the establishment of new branches to reach other parts of the country.

Over the years the downward trends has been more evident as result of high operating cost of the 4 banks (refer to table 9 and figure 4).

Table 9: Return on Equity (2000 2004)

BANKS 2000 2001 2002 2003 2004

BBG 8.7 8.2 5.4 5.5 5.2

SCB 4.6 4.2 2.8 2.7 3.3

Ecobank 6.1 5.3 3.9 3.8 3.7

SG-SSB 4.6 4.2 2.8 2.7 3.3

4.4 Cost Efficiency

Figure 5 shows the cost efficiency trend over the period 2000 2004 of the 4 banks compared to the banking industry in Ghana. The cost efficiency of the bank is derived by computing the transaction cost ratio (see Appendix 1). As show in the table below most of the banks have not been that efficient with the exception of BBG. This fluctuating performance is due to early stages of keen competition in the banking industry. The downward trend can also be attributed to new branches in the County which are not yet making profit.

Table 10: Return on Cost Efficiency (2000 2004)

BANKS 2000 2001 2002 2003 2004

BBG 3.2 3.3 3.8 3.9 3.8

SCB 3.9 3.4 4.2 5.2 5.7

Ecobank 3.5 4.1 2.9 4.2 4.6

SG-SSB 3.9 3.4 4.2 5.2 5.7

In a nutshell, the CAMEL approach is used as the overall framework in analysing the financial strength and stability of the financial sector in Ghana. The participation of the private sector in the Ghanaian economy is due to the stability of the financial sector and as a result contributing to improve the economy. The government of Ghanas commitment to sustaining a vibrant economy has called the stage for improved policies to attract more private sector investment.


5.0 Summary and Conclusion

This study shows that the private sector over the years has played a major role in the contribution of business competitiveness and economic growth. Private financial institutions have successful managed to address important issues such as unemployment, building capacity to meet the needs of indigenous Ghanaians. Their participation has enhanced the quality of services and products provided by businesses and also have introduced high competition amongst businesses.

The literature review in this study highlights the importance of the private sectors commitment to innovate, promptly adapt to dynamic business environmental changes and implement measures to constantly improve its overall productivity to the economy. The literature seeks to substantiate the growing expectations of the research study. The growing Ghanaian economy has witnessed massive changes in its financial system. The findings reveal that the implementation of the FINSAP by the government and the prudent supervision and regulatory framework provided by the Central Bank has significantly improved Ghanas financial sector. These policies have deregulated and liberalized the economy and have lead to the entrance of many private banks and the influx of foreign investment. This has widened financial institutions in terms of providing wide range of services and product groups to its valued customers.

Fiscal and monetary policies introduced by the Central bank aimed at ensuring economic stability, reducing domestic debts, controlling inflation, stabilizing price and boosting the foreign exchange market all of which have supported the success of the private sector. The introduction of Universal banking in Ghana by the Central Bank has also paved the way for the privately owned financial institutions to focus on providing high quality services and product groups to its banking segments namely retail, corporate and investment banking customer.

The CAMEL analytical framework used for the study has confirmed that the improvement of the financial sector has paved the potential role of the private sector to contribute to business competitiveness and economic growth. The private sector could not have had such a positive effect on the economy without the intervention of FINSAP.

The main conclusion that can be drawn from the study is that the success of the private sector has significantly improved the Ghanaian economy. However, the main challenge of the private sectors role is how to improve upon its success to ensure sustainable growth, competition and economic growth.

With the current performance of the Ghanaian economy is it ready to support new private businesses?

5.1 Recommendations

To enable the private sector capitalize on its current success and still maintain a leading role in contributing to economic growth the following recommendation are offered.

  • The government should create more attractive policies aimed at attracting foreign investors into the private sector.
  • The government of Ghana should introduce effective policies to address the current global economic crisis. These policies should serve as a cushion for the private sectors continuous development.
  • Development of key institutions including codes and standards of private sector governance.
  • Government should properly address the SMEs development sector because it holds majority of low skilled group which is a potential driver to economic growth.

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