1. ELEMENTS OF BANKING: PBBF 201

2. WEEK1 Overview of financial SYSTEM
HISTORICAL DEVELOPMENT OF BANKS IN GHANA
The first commercial bank to be established in Ghana was the Standard Chartered Bank of Ghana formally known as British Bank of West Africa (1896).
In 1917 Colonial Bank (later Barclays Bank of Ghana) began operations.
Activity was trade finance- towards expatriate community.

3. In 1953 the first indigenous commercial bank now called Ghana Commercial Bank, started work to provide credit services to the local population.
Bank of Ghana was established on 4th March, 1957 formally called The BANK of the Gold coast.
It is to serve as the Central Bank in the economy.
Took over some of the activities formerly carried out by West Africa Currency Board.

4. Between , three state owned development banks were established :the National investment Bank (NIB), the Agricultural Development Bank (ADB), and the then bank for Housing and Construction (BHC).
In 1983 after the launching of the Economic Recovery Program, financial sector reforms were initiated, and with the passage of the 1989 banking Law, private commercial banks were allowed to operate.
Promulgation of PNDC Law 328 in 1993 allowed the establishment of different categories of non-bank financial institutions, including savings and loans companies, and credit unions.

5. The sector has further been improved by the introduction of the Universal banking concept that removed restrictions on banks.
It means that banks that meet the minimum capital required can engage in more financial services/ products in addition to services registered for.
Another Act worth mentioning is the Banking Act of 2004, Act 673-
Banking Act of 2007,An amendment act to Act

6. The structure of the financial system.
Financial system acts as a mechanism that transfers fund from the party with excess fund to the party that needs the fund. In general, financial system facilitates financial transactions that generate economic growth.
The financial system structure is divided into two broad categories i.e. Financial institutions and financial markets
A) The financial institutions are further grouped into two:
Banking institutions
- Nonbank financial intermediaries
B) Financial market is also sub- grouped as follows:
Money market
Capital market
Derivative market

8. THE BANKING INSTITUTIONS
Banking system is one of the financial system intermediaries linking financial institutions and individuals with excess funds, and financial institutions and individuals with shortage of funds.
In Ghana, Bank Of Ghana (BOG) regulates and control banking institutions.
They comprise commercial banks, Development Banks and merchant banks in general.

9. Definition of Bank: Status definitions:
i. Bill of Exchange Act 1961, Defines bank as a body of persons whether incorporated or not who carry on the business of banking.
ii. Banking Act 2007, Act738 defines bank as :
-a company incorporated under the laws of Ghana or a branch of a company abroad
-issued with a licence
-to carry on the business of banking in or from within Ghana. Business of banking includes:
i. acceptance of deposits and other repayable funds from the public, repayment on demand.
ii. Lending
iii. Other permitted activities

10. Case law definition: United dominion Trust v Kirkwood (1966)
The case defined a bank as an organization which:
Accepts deposit from, and collects for customers
Honour cheques or other withdrawals authorities given by the customers
Maintains current account or accounts of similar nature
Had the reputation of being a bank within the financial community

11. A bank customer is usually considered as the one who maintains an account with a bank.
However from the ruling over the case Wood v Martins Bank Ltd(1959) a bank customer is anyone a bank establishes any business relationship with.

12. THE STRUCTURE OF THE BANKING SYSTEM IN GHANA
THE CENTRAL BANK- BANK OF GHANA
The main objectives of the establishment of BOG are to:
Supplies currency and controls the value of nation’s currency
act as custodian of banks’ reserves
Act as the government’s banker and financial adviser in the following ways:
-has the responsibility to represent the government in the civil loan programs and manage the government’s civil debts.
Keeps government’s account
Lend to the government
Administer the sale and purchase of government’s securities

13. Act as commercial banks’ banker:
keeps accounts of the banks
operate clearing house for them
Enables banks to manage their liquidity positions
Lender of last resort
And Control and influence the country’s credit situation to ensure financial stability and a stable economic growth rate/ monetary policy
Definition of monetary policy: Monetary policy involves changes in the interest rate. It affects companies cost of servicing debt, investment decisions etc.

14. How the Central Bank Controls and influence the country’s credit situation/ monetary policies
Reserves ratios: liquidity ratio- 9% of all deposits collected by each bank must be deposited at BOG as statutory reserves without interest payment as a measure to safeguard the interest of the depositors. and capital- adequacy ratio - banks are to keep 10% of their risk weighted assets.
They influence supply of money.

15. Open-market Operation
Open-market Operation (OMO) involves the buying and selling of government securities in the open market by the central bank with the objective to directly influence the supply of money in the economic system.
When BOG decides to buy government securities, it injects money into the banking system.
If it sells government securities, it is considered practising contractionary monetary policy as
money is withdrawn from the banking system.

16. Discount Operation: Commercial banks can borrow funds from BoG through discount window at the central bank.
Interest Rate Control. Use the base rate to influence supply of money.
Moral Persuasion/ special directives

17. Other banks Commercial Banks- aimed at making profit
Universal banks-activities not limited to one specialized area of banking.
Development banks- providing long term funds for development of particular sector of the economy.E.G ADB,NIB
Merchant Banks-they accumulate funds with the aim of lending to companies and corporations
Rural banks- mobilize funds from rural areas.

18. The main functions of commercial banks:
Creating money: commercial banks create money in the form of
deposits. Every bank creates deposits and a portion of the new deposits can be refinanced to create more deposits. This process continues until the new deposits are a few times more than the original amount. Please refer to
Example 1.1 for illustration.
Example 1.1
(a) Bank X gives Mr. A an overdraft of GHc200 to purchase a radio. Mr. A pays the
radio vendor by cheque.
(b) When the radio vendor deposits the cheque into his current account in Bank Y, a new deposit of Ghc200 is created.
Bank Y keeps 9% of the deposits in its reserves and lends the balance totaling
Ghc182 (i.e. 91% x Ghc200) to Mr. B to purchase office furniture. Mr. B pays the furniture vendor by cheque.

19. (c) When the furniture vendor deposits the cheque into his current account in Bank Z, a new deposit of Ghc182 is created.
Subsequently Bank Z keeps 9% of the deposits in its reserves and lends the balance totaling GHc (i.e. 80% x GHc182) to Mr. C to purchase car spare parts. Mr. C pays by cheque.

20. When the car spare part vendor deposits the cheque into his current account in a bank, new deposits of Ghc are created.
(d)The creation process (b to c) continues and will only cease if the car spare parts vendor spends or hides away all the Ghc165.62earned from the sale.
From the above example, the creation process continues and will only stop if the car spare part vendor spends or hides away all GHc128 earned from the sale.
If the creation process takes place continuously, the original overdraft of Ghc200 can create deposits amounting to GHc This is shown using the formula below:
Total Deposit =Px(1/r)
Where p is the initial deposit; r is the Ratio of cash needed by the bank
Total deposit = Ghc200x(1/9%)
= 200 (11.11)
=Ghc

21. Providing payment mechanism;
Collect savings
Providing credit;
Financing international trades.

22. Non- banking financial intermediaries
Like banking financial institutions, non-bank financial intermediaries also play the role of matching the parties with excess funds with the parties with shortage of funds. They are not regulated by the banking acts or laws but by the non- bank financial institution acts.

23. Savings and loan companies
Credit unions
Discount Houses- devote to trading in money market securities in the secondary market.
Pension/ trust funds/Provident funds: Provident and pension funds are financial intermediaries that collect funds from workers and providing funds during a worker’s old age.
Insurance companies: Insurance funds are funds collected in the form of insurance premiums paid by insurance policy holders for protection against calamities such as loss of working capability, illness, fire, accident and theft.
Finance companies: supply finance in the form of hire purchase, leasing and other forms of instalment credit. e.g home and export finance companies
Savings and loan companies: Largely mobilised funds from the urban poor.
Microfinancial institutions: mobilise funds from the poor through special methods.

24. Financial markets Financial markets can be divided into two, i.e.:
Money market and foreign exchange market; and
Capital market.
Money market:
-Money market involves the trading of short term financial instruments.
It is the trading ground between banks and those with short term money. Transactions in this market involve discount houses, money brokers, commercial banks, finance companies and merchant banks. Money market is more used by financial institutions than individuals.

25. Financial Instruments in the Money Market
(i) Treasury Bills
Treasury Bills are government debts with maturity of 91, 182 or 364 days (3, 6 or 12 months). They are issued by Central Bank in its capacity as the debt manager’s agent of the country. Funds collected are used to finance annual (current) operating expenditure of the government.

26. Treasury Bill - T-Bill
A short-term debt obligation backed by the government with a maturity of less than one year.
Repurchase agreement
A repurchase agreement, also known as a repo or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate.

27. Bankers acceptance
A banker's acceptance is a promised future payment, or time draft, which is accepted and guaranteed by a bank and drawn on a deposit at the bank. The banker's acceptance specifies the amount of money, the date, and the person to which the payment is due. After acceptance, the draft becomes an unconditional liability of the bank. But the holder of the draft can sell (exchange) it for cash at a discount to a buyer who is willing to wait until the maturity date for the funds in the deposit.

28. Commercial paper
A commercial paper is an unsecured promissory note with a fixed maturity of no more than 270 days. Commercial paper is a money-market security issued (sold) by large corporations to get money to meet short term debt obligations (for example, payroll and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price.

29. Capital market
Financial instruments in capital market have maturity periods of more than one year. These instruments are usually less liquid because of their long maturity.
Capital market is divided into primary market and secondary market.
Primary market involves buying and selling of new securities.
If a company wants to finance its expansion with equities, it sells new shares in the primary capital market.
Secondary market involves buying and selling of existing securities.

30. The role of the capital market
Capital market helps the country’s economic development process by mobilising long term funds to finance public development and private investment initiatives.
Capital market also encourages the development of private enterprises by providing access to funds required for investment and corporate expansion activities.

31. The roles played by the secondary market In promoting the development of the primary market.
i) they provide liquidity to investors who acquire securities from the primary market. This is because they provide means for the investors to obtain cash when the need arises. This encourages investors to participate in the primary market.
ii) Help issuers raise needed funds in the primary market. The existence of the secondary market guarantees liquidity to the investors in the primary market. This creates ready market for the issuers of securities in the primary market thereby creating investor confidences in the primary market.
iii) Help to determine market price for the new issues. The trend of prices of securities in the same industry or with similar risk serves as a guide for the pricing of new issues.
Iv) A vigorous secondary market is an incentive for companies not yet listed on the secondary market to issue initial public offers (primary market activity) so they can get listed on the secondary market for their stocks to be traded. Thus, a vigorous activity in the secondary market fuels development of primary market

32. The role of financial institutions as intermediaries
major roles played by the financial intermediaries.
a. Transaction cost and economies of scale: -time and money spent in carrying out financial transactions are reduced.
b. Risk sharing and diversification: - By taking on a large number of different assets and liabilities issued by or to a wide range of excess and deficit funds holders financial intermediaries are able to reduce risk.
c. Adverse selection and moral hazard: - Financial intermediaries also use their expertise to screen out bad credit risks and monitor borrowers.
d. Mobilizes fund from surplus spending unit and make it available to the deficit spending unit who have business opportunity but do not have the fund.
Mobilizes small funds into large pools .

33. OFFSHORE BANKING OVERVIEW OF OFFSHORE BANKING
Offshore banking centre is an international market where foreign currencies are deposited and lent but are not subject to normal regulations. It is an attempt to bypass domestic regulation controls and take advantages of more liberal banking supervisory regimes. It emerged as a result of the anomalies that exist from the regulations of domestic markets.

34. There is no standard definition for offshore banking, but is often used to mean having a banking transactions in a location outside the country one is residing in. This location is usually a low tax jurisdiction - and a place where ones money will be secured.
An offshore bank is therefore a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages.

35. legal frameworks of offshore banking
They guarantee greater privacy or bank secrecy, a principle born with the 1934 Swiss Banking Act.
They are tax heavens -places that create legislation designed to assist persons – real or legal – to avoid the regulatory obligations imposed upon them in the place where they undertake the substance of their economic transactions.
Flexible transfer of assets
Their orientation is towards non- residence.