ECON 216:Economy of Ghana II
Lecture 3: The Financial Sector &
Monetary Policy I
Outline
• Concepts and Structure
• Functions of the Financial System
• Role of the Financial System in Economic
Development
• Objectives of a Central Bank
• Financial Sector in the Pre-reform (ERP) Era
• Financial Sector in the Post-reform (ERP) Era
Structure of the Financial System
• Financial system/sector - financial institutions,
markets, instruments and infrastructure
(payment/ settlement systems).
• Financial Intermediary - organizations or firms
that accept deposits/ loans and lends funds to
economic units. intermediate between lenders
and borrowers due to possible complications that
could arise from direct interaction between the
two.
• Financial intermediation/ dis-intermediation
Definitions
• Financial Institutions - profit maximizing firms
that transform monies people are willing to
lend into loans for people who are desirous of
borrowing. There are the deposit taking and
the non-deposit taking institutions. Under the
deposit taking institutions, there are the bank
and non-bank financial institutions
Functions of the Financial System
• Creates money and facilitates liquidity (DTI)
• Provides a payments mechanism
• provides financial services such as insurance
and pension (insurance and pension houses)
• Channel funds from lenders to borrowers (DTI)
• Offers portfolio adjustment facilities.
Role of Financial Sector in Economic
Development
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•
•
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Promote savings and investment
Pooling of financial resources
Risk reduction
Maturity transformation
The Structure of Ghana's Financial
Sector
Central Banking in Ghana
• The Bank of Ghana was established on March
4th, 1957, just on the eve of independence.
• Go to www.bog.gov.gh, and from the heading.
“About the Bank”, get information about the
Historical Background, Establishment of the
Bank of Ghana, and Functions of the CB.
Objectives of the Central Bank
• Under the BoG Ordinance (No. 34) of 1957 which set
up the bank, the primary objectives of the bank were;
– to issue and redeem bank notes and coins;
– keep and use reserves and to influence the credit situation
with a view to maintaining monetary stability in Ghana
and the external value of the Ghana pound;
– and to act as banker and financial adviser to the
Government.
• Following a no. of legislative changes, the Bank
currently operates under the Bank of Ghana Act 2002
(Act 618) which outlines the objectives of the Bank as
follows;
Objectives of the Central Bank
– Maintain stability in the general level of prices
– Support the general economic policy of the
government and promote economic growth
– Ensure effective and efficient operation of banking
and credit systems in the country, independent of
instruction from the government or any other
authority.
Banking in Ghana – Pre Reform (ERP)
Era
• Banking activities in Ghana predate independence. Two
foreign owned banks, Barclays Bank (Dominion, Colonial
and Overseas established 1917) and Standard Chartered
Bank (formerly known as the British Bank of Wes Africa,
established in 1897) were operating in the then Gold Coast
before independence.
• They were accused of largely serving the needs of
expatriates to the exclusion of local indigenous population.
• Before the British bank for West Africa was established,
the Post Office Savings Bank was established in 1887
(Became the National Savings and Credit Bank – NSCB)
which largely served the local indigenes. Much later, a
cooperative bank was set up in 1946 to provide services for
cooperatives in cocoa growing areas (It was closed down in
1961 for political reasons). These were to provide
consumer loans & credit for small industries.
Banking in Ghana – Pre Reform (ERP)
Era
• In 1953, the Bank of the Gold Coast (Ghana
Commercial Bank) was established primarily to
improve access to credit by indigenous farmers and
entrepreneurs. It was mandated to extended its branch
network to rural areas to provide rural folk with credit
facilities.
• Between the 1950 – 1980, there was a deliberate
policy to use the banking system to drive the
development agenda in the post-independent Ghana.
• The government through the BoG saw to the
establishment of a number of development banks,
each setup for a specific purpose;
Banking in Ghana – Pre Reform (ERP)
Era
– National Investment Bank (1963) to provide long term
investment finance for business
– Agricultural Credit and Cooperative Bank (now Agricultural
Development Bank) in 1965 to help agricultural sector
– Merchant Bank Ghana (1972) to finance production and
trade.
– Bank for Housing and Construction (1974)to finance
housing, industrial construction and companies producing
building materials.
• NIB, ADB and BHC were development finance
institutions (DFI) which provided long term loans. They
sourced for funds either from abroad or through credit
guarantees from the Bank of Ghana.
Banking in Ghana – Post Reform (ERP)
Era
• With support from the IMF and World Bank, financial
market liberalization began in the late 1980s as part of
broad macroeconomic reforms in Ghana.
• The Financial Sector Adjustment Program (FINSAP)
aimed at;
– Restructuring distressed banks
– Reform the regulatory and supervisory framework of the
BoG
– Open up the financial Sector in which government was
dominant to private ownership
– Develop the monetary and capital market
Banking in Ghana – Post Reform (ERP)
Era
• The program helped to set prices right within the
sector i.e. the liberalization of interest rates through
the removal of interest rate controls and sectoral credit
allocations.
• A number of state owned banks were privatized in the
1990s, including SSB, which merged with the NSCB.
• Opening up the financial sector to private sector
participation has led to a significant increase in the
number of privately owned financial institutions
operating in the sector today; 26 banks as at March
2012, and ARP Apex Bank, which oversees the
operations of Rural/ Community Banks in Ghana.
Questions
• Provide a List of licensed commercial banks and other
financial institutions licensed by the Bank of Ghana
http://www.bog.gov.gh/index.php?option=com_content&vie
w=article&id=110&Itemid=123
• In 2008, BoG increased the minimum capital requirement
of Banks from Ghc7 Million to million. What is the rational
for this?
http://business.myjoyonline.com/pages/news/201210/961
74.php
http://www.modernghana.com/news/364009/1/recapitalisati
on-will-not-lead-to-takeovers-bog.html