1. ECON 216:Economy of Ghana II Lecture 3: The Financial Sector & Monetary Policy I

2. 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

3. 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

4. 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

5. 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.

6. Role of Financial Sector in Economic Development Promote savings and investment Pooling of financial resources Risk reduction Maturity transformation

7. The Structure of Ghana's Financial Sector

8. Central Banking in Ghana The Bank of Ghana was established on March 4 th, 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.www.bog.gov.gh

9. 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;

10. 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.

11. 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.

12. 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;

13. 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.

14. 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

15. 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.

16. 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://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