Transcript econ 216 – lecture 4

ECON 216:Economy of Ghana II
Lecture 4: The Financial Sector &
Monetary Policy II
Functions of Commercial Banks
The Banking Act, 2002 (ACT 673) lists the following as the
“Permissible Activities of Banks”;
• acceptance of deposits and other repayable funds from
the public:
• lending;
• financial leasing;
• investment in financial securities:
• money transmission services;
• issuing and administering means of payment including
credit cards,
• travellers cheques and bankers’ drafts;
Functions of Commercial Banks
• guarantees and commitments;
• trading for own account or for account of customers in,(i) money
market, (ii) instruments, (iii) foreign exchange, (iv) transferable
securities;
• participation in securities issues and provision of services related to
those
• issues;
• advice to undertakings on capital structure, acquisition and merger
of undertaking;
• portfolio management and advice;
• the keeping and administration of securities;
• credit reference services;
• safe custody of valuables;
• electronic banking; and
• any other services as the Bank of Ghana may determine.
Rural Banking in Ghana
• The government of Ghana through the Central Bank
introduced rural banking in 1976 . The first established was
the Agona Nyakrom Rural Bank in a farming community in
the Central Region.
• Rural banks are fully owned by individual shareholders who
tend to be residents of the community within which they
operate.
• The essence of rural/ community banking was to bring the
rural population into the banking system to ensure growth
in an economy that is largely agrarian.
• The believe also is that there is the need to mobilise
resources are locked up the rural economy, while providing
support for viable industry within the respective
communities.
• These banks operate taking into consideration the
occupation of the rural folk.
Rural Banking in Ghana
• Rural banks usually undertake a mix of micro-finance and
commercial banking activities within their communities;
they mobilise funds in the form of savings/current
accounts, susu deposits and fixed/time deposits, and
provide credit facilities different categories of people,
including salaried workers, cottage industry and traders.
• These banks are involved in providing credit for the
payment of school fees, meeting medical expenses,
purchasing of land/ houses, etc.
• Rural banks also undertake a number of CSR by channelling
part of their profits intervention programs in health,
education, the vulnerable in the their areas and supporting
the traditional authority. Others have gender-based
programs that focus on providing support for women
involved in small business.
Rural Banking in Ghana
• Prior to their establishment in Ghana, access to credit for
farm and non-farm activities in rural communities were
limited to money lenders and traders who charged usurious
interest rates. Many rural folk had to travel long distances
to receive salaries, pensions and cash checks for
agricultural produce since there was no safe, secure, and
convenient financial facilities.
• Government in an attempt to resolve some of these set up
the ADB in 1965 with a mandate to extend credit to
agriculture and allied industries. Branches of ADB and other
commercial banks were later opened in rural areas, but
were concentrated in cocoa-growing areas. More so, they
demanded higher deposit accounts and stronger collateral
requirements, which many rural folk could not meet.
• Government therefore supported the establishment of
rural/ community banks that will be committed to
providing financial services in these areas.
Rural Banking in Ghana
• By 1980, rural /community banks numbering 20
formed the Association of Rural Banks (ARB), which
promoted and represented the Banks, as well as
provided training services to members. Their numbers
continued to grow sturdily.
• By 1983, the performance of the rural / community
banks declined for a number of reasons, including the
drought that hit the agricultural sector leading to
many loan defaults, internal managerial conflicts,
inefficiencies, and weak regulation.
• Following the implementation of financial reforms in
the 1980s, in recognition of the importance of these
institutions, rural and community banks were allowed
to operate, but under rules designed to suit their socioeconomic circumstances.
Rural Banking in Ghana
• Despite the reforms, Rural/ Community banks have not
always performed well; in 1998, the BoG liquidated 23
rural banks. In a 2008 International Fund for
Agricultural Development (IFAD) report, the BoG
described 17 of the 127 rural banks at the time as
mediocre (6 of which had negative net worth) based on
capital adequacy, and categorised 5 banks as mediocre.
• The ARB Apex Bank was granted a banking license in
2001 and commenced commercial operations in 2002
with significant financial support from the Rural
Financial Service Project, which was funded by the
World Bank, the International Fund for Agricultural
Development, and the African Development Bank.
Rural Banking in Ghana
• The Apex Bank provides specialized services essential
to improving the quality and scope of products
offered by RCBs and also performs important
supervisory functions delegated by the BoG.
• Check clearing, treasury management, loan fund
mobilization, domestic and international money
transfers, information and communication
technology, training, and inspection and audit are
among the main services offered by the Apex Bank.
• The Apex Bank provides most of the services on a fee
basis.
Rural Banking in Ghana
• See the following for more information about
the ARB Apex Bank:
www.arbapexbank.com/aboutus.php
www.arbapexbank.com/function.php
• See the list of registered Rural & Community
Banks from the BoG as at March 2012;
• http://www.bog.gov.gh/index.php?option=co
m_content&view=article&id=83:rural-andcommunity-banks&catid=72&Itemid=125
Non-Bank Financial Institutions in
Ghana
• These formerly operated under the Non-Banking
Financial Institutions (NBFIs) Act in 1993 (P.N.D.C.
Law 328).
• The new Non-bank Financial Institutions Act,
2008 (Act 774) and the Banking Act, 2004 (Act
673) as amended by Act 738 has changed the
structure of Ghana’s financial sector with regard
to NBFIs.
• Categorization under the Non-bank Financial
Institutions Act 2008 has increased from a single
tier to four tiers, to include susu companies, susu
collectors, money lenders and financial NGOs.
Non-Bank Financial Institutions in
Ghana
• Credit unions fall under the second tier, but the Bank of
Ghana is yet to pass a Legislative Instrument to
regulate activities in the sector.
• The third tier of money lenders and non-deposit taking
financial
• Activities under the fourth tier include the operations
of individual susu collectors, susu enterprises,
individual money lenders and money lending
enterprises.
• Operators under this tier belong to an umbrella body
like the Ghana Cooperative Susu Collectors Association
(GCSCA).
Non-Bank Financial Institutions in
Ghana
• Meanwhile, regulation under the first tier,
including rural and community banks, savings and
loans companies and other financial
intermediaries already regulated under the
Banking Act, remains unchanged.
• NBFIs in Ghana now include (53);
–
–
–
–
–
–
Finance Houses
Leasing
Finance and Leasing
Mortgage Finance Companies
Savings and Loans Companies
Credit Reference Bureau
- 25
-2
-3
-1
- 19
-3
Non-Bank Financial Institutions in
Ghana
• NB the following NBFIs;
– Credit Unions ( an interesting history of credit unions
in Ghana)
http://www.cuagh.com/cua/about-us/history
http://www.cuagh.com/cua/about-us/cuas-role-inghana
The Credit Union Association (CUA) serves as a selfregulatory apex body for the credit unions. CUA applies
prudential norms that are similar to the operating and
financial standards of the World Council of Credit
Unions (WOCCU). BOG has desisted from extending its
regulatory activities to Credit Unions.
Non-Bank Financial Institutions in
Ghana
– Forex bureaux
– Insurance Companies
– SEC & GSE
• Q: What are the functions of the different
NBFIs?
Monetary Policy in Ghana
Outline
• What monetary policy
• Objectives of monetary policy
• Instruments of Monetary Policy
• Inflation Targeting in Ghana (A second look)
What is monetary policy
• MP – the management of money ss and interest rates in
order to achieve the objectives of stability and growth of an
economy.
• To maintain output near full employment whilst ensuring
price stability using various tools such as OMO, reserve
requirements, discount rate, moral suasion, prime rate, etc.
• Expansionary Monetary Policy – where there is an increase
in money ss, lowering of policy rate to increase output and
employment esp. during recessions
• Contractionary Monetary Policy – reduction in money ss,
increase in policy rate to bring about stability in general
price level.
• The stance of monetary policy could be accommodative,
neutral or tight, depending on the general economic
conditions prevalent in a nation.
Objectives/ Goals of Monetary Policy
•
•
•
•
Price Stability
Economic Growth
High Employment
Balance of payments and exchange rate
stabilization
• Maintaining stability of financial markets
Tools of Monetary Policy in Ghana
• Direct tools of monetary policy – One-to-one
correspondence between the instrument and
policy objective
– Selective credit controls; determining the amount and
direction of credit to perceived critical sectors of the
economy. Achieved via credit ceilings and lending
directives. For instance, in Ghana between 1970 –
1982, commercial banks were directed by BoG to
channel 20-30% of loans to agriculture sector.
Following reforms in the financial sector which begun
during the late 1980s, direct tools of monetary policy
were abandoned.
Tools of Monetary Policy in Ghana
• Following the liberalisation of the financial sector
Indirect/ market based tools of monetary policy
were adopted;
– Open Market Operations; the sale and purchase of
government securities by the central bank as a means
of indirectly influencing the general price level /
growth in the economy. Sale/purchase is to
commercial banks, insurance companies, business
houses and individuals. Instruments include treasury
bills, central bank bills, or prime commercial paper.
Tools of Monetary Policy in Ghana
• Repurchase Agreements/ REPOS; The Central bank
purchases government securities from commercial
banks with an agreement that the seller will
repurchase them in a short period of time, usually from
overnight to 14 days. Effects on bank reserves are
reversed on day agreement matures, thus acting like
temporary market purchase.
• Reserve requirements; Proportion of deposits
commercial banks are required by law to keep as
reserves with Central Bank. This attracts no interest. Its
effect tend to be immediate.
• Bank Rate/ discount rate/ Prime rate; minimum lending
rate of Central bank at which it rediscounts first class
bills of exchange and government securities held by
commercial banks. An increase in this rate increases
the cost of borrowing.
Tools of Monetary Policy
• The Bank rate has in Ghana been replaced by a policy
variable called the Prime rate (overnight funds rate). It
gives the market an indication of the monetary policy
stance of the Central bank, and thus is expected to
influence the behaviour economic agents.
• Question: How are these indirect tools used by the
Bank of Ghana to achieve the objectives of price
stability and economic growth in an economy (or
during periods of high inflation and periods of
recession)?
Inflation Targeting and Monetary
Policy Committee
• A monetary policy framework within which policy
decisions and actions are guided by the expected path
of future inflation relative to an announced inflation
target.
• In Ghana, this is done through periodic adjustments to
the prime rate. The review may be done on a monthly
or quarterly basis by the Monetary Policy Committee.
• These adjustments are made based on market
indicators and surveys, in an attempt to forecast
economic trends.
• All efforts are directed at keeping inflation within the
desired range of single digit.
Inflation Targeting and Monetary
Policy Committee
• In order to track the underlying inflation, the BoG uses
core CPI which excludes energy and utility prices (the
GSS usually reports the headline CPI).
• A critical element to the process has to do with
transparency; economic reports, press conferences
after MPC meetings, publication of inflation reports.
• Increased communication with the public about the
monetary plicy decision making process keeps the
public well informed and anchors their expectation
• Due to increased transparency, the framework
improves the accountability of the Central Bank.
• The framework was first used in New Zealand. Ghana
and South Africa are the only two African countries to
have adopted the policy framework.
The Monetary Policy Committee
• The Bank of Ghana 2002 (Act 612) established the
Monetary Policy Committee.
• This was in recognition of the need for clarity, transparency
and specificity in communicating with the public on policy,
which has become recognised as crucial globally.
• Transparency promotes credibility, as information supplied
to the public helps to shape expectations.
• The 7 member Policy Committee is responsible for initiating
monetary policy.
• It meets every other month (or six times a year), for a
period of three days; the first two are spent analysing a
wide range of indicators and conditional forecasts of
inflation. The decision on the policy rate is taken on the
third day by consensus.