Mr. Chairman, Leaders and Owners of Savings and loans Companies in Ghana, The Media, Distinguished Ladies and Gentlemen. I find myself this morning in the midst of Professionals and Business people I usually feel very comfortable with. I have a soft spot and passion for all Ghanaians who have had the courage and drive to establish their own businesses and are giving employment to the young men and women of this country.
I say this knowing that most of the 29 Savings and loans companies in this Country are local and private. Despite the power, might and resources of the Government of Ghana, the public sector employs less than 6% of the working population. Having been a leader in the private sector most of my working life and being fortunate to be President of the Private Enterprise Federation for 4 years (2010-2015), my passion has increased on account of the glaring lack of support from the Government and specifically the high handedness and misguided policies of Regulators.
In a Republic such as ours, the whole purpose of Government is to serve the people, and what better way to serve the people than to serve their business interest. This country by the provisions in our CONSTITUTION has adopted the market economy and private ownership as our path of development. Hence we should expect that laws, Regulations, Rules and Policies must all pass the important test of serving the interest of the citizens of Ghana first. Alas this hasn’t been so. Policies are being pursued that have and are making local businessmen more and more frustrated. And the local players in the sensitive financial sector are most at risk.
Since the year 2006, there has been this strange obsession about creating large Institutions in the financial sector. We need big banks and insurance companies to finance the emerging oil industry they said. An unscientific ill-advised recapitalization of the financial sector was being pursued which is pushing local ownership out of the sector. For example in the Insurance law, the minimum capital for Insurance companies in Ghana was stated in United States Dollars. So, as the economy continued to be poorly managed and the cedi continued to lose value, the poor insurance companies were expected to inject more capital into their businesses. One wonders why a regulator will want to treat citizens this way. What wrong have they committed to suffer double jeopardy resulting from a deteriorating economy?
I have raised this issue here because if this wrong recapitalization mind set of our regulators is not checked, sooner than later, savings and loans companies will suffer the same fate of banks and insurance companies. Nearly 10 years after the blanket policy of recapitalization of banks there are more foreign than local banks. Foreign banks now hold more of the banking assets than local banks. The largest bank in Ghana now is foreign. Our GCB Bank, which is the only local bank in the top 4, is a distant second.
Our neighbor, Nigeria, went through a similar exercise with the clear aim of cleaning up the banking industry of insolvent institutions but at the same time they ensured that control remained Nigerian.
The financial sector is peculiar. It operates at a high gearing. Approximately 85% of the assets of banks are deposits of local individuals and institutions. The investors’ ownership on average represents just 15% of the bank’s assets. All serious countries that desire control of their economies whiles welcoming foreign participation ensure that local banks dominate. If there is a financial crisis in Ghana who will you trust more to sacrifice?
Let me say that the current Governor has shown that he appreciates the situation and correctly he has announced new minimum capital for new entrants into the industry. Existing banks will continue to adhere to the strict capital ratios specified in the banking regulations. Hopefully other regulators will learn from him.
Another development of serious concern to me is the number of diverse financial institutions licensed to operate in this country. Unlike other African countries, Ghana had systematically expanded the frontiers of access to finance through the licensing of Rural and Community banks and later on Savings and Loans companies which had effective supervision and regulation. Was there a necessity to license 468 Microfinance companies(MFIs)? when we have 137 Rural and Community Banks and 29 Savings and Loans companies spread across the country? Who are the owners of these companies and what are their backgrounds? Do they have sufficient integrity and expertise to take deposits from the public? I doubt if the Central Bank has the capacity to supervise all these Institutions, and even if they can I don’t believe that costs of supervision will be justified by the benefits. Fact is these institutions have created unhealthy competition for deposits for the well regulated financial sector players like Banks, Rural Banks and Savings and loans Companies. The frequent failures of licensed and Unlicensed MFIs could lead to long term loss of confidence in the financial system as a whole.
The macroeconomic uncertainties caused by high inflation and exchange rate volatility, the informal nature of the society plus our geographical limitations already makes systemic risk very high in the financial sector. We must not copy blindly. Other countries needed to welcome Micro finance institutions. Not Ghana; we were far ahead of the game. I hold the view that to expand the frontiers of finance we should ride on our well tried and tested network of Rural Banks and Savings and Loans Institutions. Micro credit is a financial product or service. We don’t necessarily have to establish new institutions to offer it to those who need it. If we must have them then lets restrict them, as much as possible, to micro credit and keep them out of the very sensitive area of deposit taking. Financial inclusion must not be at the expense of financial stability.
Ladies and Gentlemen, the theme for this AGM “Inclusive Financing: A tool to strengthening the Savings and loans sector in Ghana” is therefore most appropriate. You must reengineer to become attractive to the large population at the base of the economy. Your future survival depends on your ability to achieve economies of scale through the attraction of loyal customers. This you have to do actively whilst patiently creating assets of acceptable quality. Your motivation is this; A Gallup survey conducted in 2009 in 18 African countries, including Ghana, showed that 81% of respondents in our country said they had no bank account. The Finscope survey done in Ghana in 2010 established that 15% of the population use informal financial services and 44% are totally excluded from financial services (formal or informal). We must caution ourselves, however, that most of the unbanked simply lack stable, regular income.
Down scaling your operations to cover more of the low income earners in urban and rural areas are required but it has its implications. Finance service provision outside urban centers is generally not cost effective. But technology can help you overcome the fixed cost recovery challenge. You need to embrace the mobile phone technology now because it will help you overcome diseconomies of scale and reduce your transaction costs significantly.
As you endeavor to address the so called unbanked, you must be aware therefore that transaction costs matter much at this level, especially as these are people who have stayed away from Banks. It has been estimated, for example that in the developing world, the level of fees charged for checking accounts is enough to put off 80% of the population.
Another important challenge is the request for documentation. Only a limited number of those at the base of the pyramid have formal identity documents and few have formal residential addresses or utility bills. I know that the bank of Ghana is flexible with documentation for low income earners. Your Association should work with the Banking Supervision Department to have acceptable Know Your Customer requirements that will not constrain growth of your business.
Members of the Ghana Association of Savings and Loans Companies, you must be aware that new laws are in the pipeline for the financial sector. A major change expected is the introduction of deposit Insurance. Deposit Insurance is meant to protect depositors’ funds up to a certain level if a deposit taking institution fails. Ghana like most African countries hasn’t fared too badly without deposit insurance. The alternative Central Bank policy of high cash reserves and statutory reserves for financial institutions seem to have served the country well. Bank of Ghana must have very good reasons for this move. I entreat you not to be passive but to study its implications on the industry in terms of costs and benefits.
I want to wish your relatively young Association well and recommend that you join Ghana’s private sector advocacy body, the Private Enterprise Federation. The business community that is providing employment opportunities and pays the taxes that run the public service must unite and be more confident. The public service is not doing you a favor. They are to serve your interest. As citizens in democratic dispensation, let us demand that public institutions serve our interest first before others.
In conclusion, and in support of your future advocacy efforts, I give you this quotation from the book, Financing Africa: Through the crisis and beyond (Thorsten Beck and others)
“Unless policy makers and the development partners who work with them deliberately redefine progress in financial sector development to suit local African conditions, the modernist agenda will continue to overreach Africa in Africa. We neglect Africa’s real local constraints at our own peril. It is not enough that we continue to tweak overambitious structures imported from advanced countries. The evidence of this overreach is clear in the design of African stock markets, in capital regulatory standards for banks, in collateral requirements and the requirements for opening accounts and in the exclusive nature of payment systems, which are influenced by what is held to be best practice in advanced economies.”
In short “All financial sector policy is local.” All financial policy must depend on the context and circumstances of Ghana.
Author: Dr. Asare Akuffo
