Cosmovisión andina

Ghanaian state-owned banks were historically set up by the government to invest in developmental and commercial projects that will otherwise not be financed by private enterprises. It is also asserted, “Without big banks, socialism would be impossible. The big banks are the ‘state apparatus’ which we need to bring about socialism, and which we take ready-made from capitalism. …” (Garvy, 1977, p. 21). The notion of socialism related to banks was accepted globally, particularly in the 1960s and the 1970s when governments nationalised the existing commercial banks and established new banks in Africa, Asia, and

43 Latin America (La Porta et al., 2002). The socialistic idea of banks emanates from the economic theory of organisations where state organisations are established to address the problem of market failures provided the social benefits exceed the social cost (Atkinson and Stiglitz, 1980; Stiglitz, 1993). Similar to the social theory is the agency theory that provides the reasons for the establishment of state banks. The agency theory argues that banks may be set up to maximise social welfare, albeit, their establishment could lead to resource misallocation and malfeasance (Banerjee, 1997; Hart et al., 1997).

The Ghanaian state banks operated quite well for some time until in the 1980s when this began to alter. As part of the liberalisation process, some state-owned banks, which used to dominate the banking industry, were privatised. For instance, part of the equity of the Ghana Commercial Bank (GCB) was privatised when the bank’s 100% shares were traded on the GSE in 1996 (Brownbridge and Gockel, 1996). As of 2009, the Government of Ghana (GOG) owned only 21.36% of GCB whereas institutions and individuals owned 78.64% (GCB, 2009). Also, in 1994, two of the state-owned banks - Social Security Bank Limited (SSB) and National Savings and Credit Bank – were merged and privatised under the auspices of a World Bank programme. In 1995, the GOG divested its 21% shareholding of this merged bank, after which the bank’s shares were floated on the GSE and subsequently renamed Société Générale - Social Security Bank (SGSSB) in 2003 (Gatsi and Agbenu, 2006). Privatisation was meant to address the problem of substantial non- performing loans and governmental bureaucracies within state banking practices and to increase banking sector competition. Indeed, the private banks would be strictly profit

44 maximising compared to the state banks due to the considerable social dimension of the latter.

Over the years, foreign banks have played crucial roles in the Ghanaian banking industry. For decades, the industry was dominated by Standard Chartered Bank Ghana, SCB (formerly called British Bank of West Africa) and the Barclays Bank Ghana, BBG (formerly called the Colonial Bank) both of which are foreign-owned. As at May 2009, there were 13 foreign-owned banks and 12 domestic-owned banks in the industry (PwC and GAB, 2009). Given the growth in the entry of both private-domestic and foreign banks, it is of policy concern for BOG and bank managers to assess the efficiency of publicly-owned banks (state banks), private-domestic-owned banks (private-domestic banks) and private- foreign-owned banks (foreign banks) in the Ghanaian banking sector in order to identify the sources of their inefficiencies and to address them.

One major regulatory factor that altered the scene of the banking industry was the introduction of the Universal Banking Business Licence (UBBL) in 2003. ‘Universal banking’ is a corporate structure where banks, in addition to their traditional banking operations, are allowed to offer financial service such as selling insurance, underwriting securities and engaging in portfolio management, equity investments, bond trading and financial advice (Benston, 1994; Vander Vennet, 2002). Universal banking has existed in U.S. following the Glass-Stegall Act in 1933 and Gramm-Leach-Bliley Act in 1999 and in Japan following the Financial System Reform Act of 1992 in Japan. Germany is also well- known for this banking type. Universal banking is permitted in the European Union (EU)

45 by the Second Banking Coordination Directive (1989) under the Single Market Programme (Berger et al., 2001). In Ghana, universal banking became a policy concern from 2003. Before examining the historical characteristics of universal and focus banks, it is important to show the classifications of the Ghanaian banking structure.

Figure 2.3 depicts the classification of banks under the auspices of the BOG for the period under study, i.e. from 2006 to 2008. There were 25 banks operating in the country by the end of 2008. However, data unavailability prevents the inclusion of all the banks in the empirical analysis of the study. Figure 2.3 builds the profile of the banks based on whether they are universal banks or focus banks. In total, there were 2 commercial banks, 3 development banks and 16 universal banks. Six of the banks are listed on the Ghana Stock Exchange and they are denoted by asterisks. Some of the banks were state-owned (labelled with superscript 1) whilst others were private-domestic-owned (labelled with superscript 2) and foreign-owned (no superscript).

The ARB Apex Bank is one regulatory body (acting as a central bank) that provides banking and non-banking support to rural and community banks, which are usually located in the villages and the hinterlands of the country. There were 122 of these rural and community banks in 2006. They are not included in the final empirical analysis because the majority of them do not have available and reliable data.

46 BANK OF GHANA

Development banks (3) Universal banks (16) Commercial banks (2) ARB APEX banks

NBFIs  ADB1  NIB1  PBL2  AMAL2  BBG  CAL*2  EBG*  FAMB2  FB2  GCB*1  GTB  HFC*2  IBG  ICB  MBG2  SCB*  SG-SSB*  STANB  UBA (before STB)  TTB2  UGL2 Rural banks (122)  Finance companies

 Savings & Loans Companies

 Leasing companies

 Discount houses

 Mortgage finance companies

*Banks listed on the Ghana Stock Exchange (GSE)

1 In Ghana, the ‘focus’ banks - commercial banks, development banks and merchant banks - were historically established with the purpose of serving the financial needs of specific sectors of the economy and providing specialised funds to the needy and small and medium-scale enterprises (Addison, 2003). Focus banks should be distinguished from universal banks in that the former specialise in one thing at a time. Ghanaian commercial banks were created because it was believed that the existing foreign banks concentrated on foreign business activities without generating enough funds to small-scale businesses and households (Brownbridge and Gockel, 1996). In line with this objective, GCB was created in 1953 to improve credit to indigenous businesses and farmers, to provide loans to households in a socially responsible way and to engage in import and export financing (Aryeetey, 1993). Similarly, SSB began operation in 1977 to provide credit to consumers and businesses. Another group of focus banks that became operative from the 1960s were three government-owned development banks that were created by statute with the objective of satisfying the gaps which the commercial banks were expected to fulfil, such as channelling medium-term and long-term financial resources to specific sectors of the economy. In particular, NIB was established in 1963 to promote and strengthen rapid industrialisation in all sectors of the economy through long-term financing (Gockel and Akoena, 2002). The ADB was established in 1965 to provide and administer credit and other banking facilities to the agricultural sector as part of contributing to social welfare and later to accept deposits on current and savings accounts. The Bank for Housing and Construction was launched in 1974 to generate loans for housing and industrial construction (Brownbridge and

2 Gockel, 1996). Over the years, the development banks broadened their activities and operated mainly as commercial banks. The final group of focus banks were

merchant banks, which included MBG that was set up in 1971 in Ghana to offer

one-stop corporate banking services (Mensah, 1997). In 1990, CAL Merchant Bank was created to mobilise resources in world financial markets and channel them to the Ghanaian market. Other merchant banks included Ecobank Ghana Limited (ECB) and First Atlantic Bank (FAMB) both of which arranged loan syndications, operated brokerage subsidiaries and participated actively in the stock market as Licensed Dealing Members of the Ghana Stock Exchange (Morse et al., 1996). Generally, the institutional characteristics of focus banks show that they were created with the aim of facilitating the growth of the overall economy and the social well-being of small businesses and households.

Nonetheless, the liberalisation of the financial sector gave some of the focus banks opportunities to go beyond the historical banking activities (Addison, 2003). Attempts were made to engage in other financial goings-on such as portfolio management, brokerage and underwriting (Steel and Webster, 1991). The concept of universal banking became a policy debate where it was argued that universal banking would be a multi-faceted solution to address the constraints of development financing, reduce risk and borrowing costs, and stimulate further competition and efficiency in the banking industry (Addison, 2003). The BOG introduced the Universal Banking Business License (UBBL) policy in 2003 and that same year, granted universal banking licences to three banks - ECB, MBG and HFC Ltd.

3 Converting to universal banking required a minimum capital of 7 million Ghanaian cedis (GH¢) for new and existing Ghanaian banks and GH¢ 60 million for foreign banks (BOG, 2008a, b). The policy was aimed at increasing the capital base of banks in order to accept greater levels of risk, ensure technological innovation and position them to support the oil industry (BOG, 2008a). A question remains though. Has the adoption of universal banking by made Ghanaian focus banks perform better than the remaining specialized banks? The present study will investigate whether universal banks outperform focus banks in terms efficiency and productivity change and hence, whether the UBBL have had a positive impact on banks. It may be that universal banks can add value by taking advantage of cost and revenue scope economies or it may be that focus banks can increase shareholder value by specialising on core businesses and core competencies (Berger et al., 2000a).

Ghana makes a useful case study to examine the achievements of far-reaching financial sector reforms to draw policy implications for the banking sector not only for Ghana but also for developing economies at large. The findings from such a study may be used to inform government policy decisions, improve managerial efficiency and address research issues. Again, Ghana has been well noted to contribute to the cocoa production in the world. Lynn (1998), for instance, indicated that Ghana contributed 36.5% to the world production of cocoa in 1962-1963 and contributed 10% of the world cocoa output in 1983-1984. Ghana was the second world producer of cocoa in 2006-2007 after Côte d’Ivoire, producing 720 thousand

4 tones of cocoa (Ruf, 2007; ICCO, 2007). Ghana is also rich in other natural resources. The revenues generated from the cocoa industry and natural resources must be well intermediated by banks. To ensure that the banking sector carries on its intermediation role efficiently, the performance of banks must be assessed periodically in order to determine areas of performance improvements. In summary, managerial performance evaluation of banks should be of interest not only to academic researchers but also to bank regulators and managers (Fethi and Pasiouras, 2010).

2.6 Conclusion

This chapter has set the stage for the understanding of the financial and the banking system of Ghana. It has been discussed that the historical objectives of the banks were to improve specific sectors of the economy by channelling funds to households and small and medium scale enterprises thereby fulfilling their conventional aim of maximising shareholder value whilst engaging in socially responsible activities. The chapter has also examined the historical characteristics of different banking subgroups, which emanate from the various banking reforms set up to ensure prudence and efficiency. The build up of the profiles of the banks will help in the empirical sections as we examine the performance differences between different banking subgroups.

5

Chapter 3