Ghana’s secondary banking services stretch commercial banks for resource space

by Justice Lee Adoboe ACCRA, Nov. 13-- The advent of Non-Bank Financial Services (NBFSs) is seen as a sign of expanding avenues of financial intermediation, especially for Small and Medium-Scale Enterprises in Ghana. But the growth of the subsector also means a lot more competition for the traditional commercial universal banks. The NBFSs are stretching commercial banks for deposit mobilization, senior banking executives disclosed recently. They however noted that a lot more hard work and innovation needed to be put in by the commercial banks to survive the stiff competition. Frank Brako Adu, Managing Director (MD) of CAL Bank, Ghana, one of the listed financial institutions on the Ghana Stock Exchange (GSE), said in November 2014 the high interest rates these services paid to their clients made them highly attractive, compared with the traditional banking institutions. There are 200 NBFS’s licensed by the Bank of Ghana against 28 commercial banks in the West African country. “There is keen competition from NBFSs. They do the same business as we do, although they are not banks,” Adu said during the bank’s “Facts Behind the Figures” presentation at the GSE early November. He said some established institutions were migrating financing from traditional banks to NBFS, while the 28 banks also competed for resource space. “The situation is creating a tough liquidity crunch, which is compounded by the era of high inflation, causing the central bank to introduce necessary tough liquidity measures,” Adu explained. In vogue in the Ghanaian banking and financial services industry is the use of raffles and other similar promotions to attract deposits from existing and prospective customers. For all these, the banks have resorted to making mouth-watering rewards to customers who do such and such within a specific time frame. These are promoted employing marketing, advertising and public relations gimmicks to woo clients. The MD dismissed the assertion that some banks were “too big” to engage in such promotions and raffles geared towards deposit mobilization since there was no single bank in Ghana which was not feeling the pinch from the high competition. Another development which impacts negatively on deposit mobilization by banks in the country is the advent of mobile telephony-based money transfer. “The challenge of deposit mobilization by commercial banks is real in the face of the growing competition from the NBFSs and mobile phone money transfers,” said Kweku Bedu-Addo, Managing Director of Standard Chartered Bank, Ghana. In spite of the stiff competition among the financial service providers, only 30 percent of Ghanaians use some banking or financial services, as 17.7 of the total 25 million people or 70 percent of Ghanaians do not bank. The advent of the NBFSs and micro-finance institutions, notwithstanding, financial intermediation is still a worry in the country, as even SMEs still struggle to survive in the absence of adequate financing. Meanwhile, payment of salaries is still done over the counter by most employers to their employees in the informal sector which boasts of over 50 percent of economic activity in the country. Bank charges, including lending rates, are still punitive, at an average of 30 percent, thanks to the high borrowing rates of government through Treasury Bills (TBs) and Bonds. These high interest rates were in the past rationalized by the banks using the Collateral Registry and Credit Rating systems, a clear regulation compelling borrowers to pay or be made to make good their indebtedness to lenders. The central bank responded by introducing the Borrowers and Lenders Act, Act 773 (2008), and established the Collateral Registry as well as licensing of Credit Reference Bureaus to regulate lending. This has however had very little impact on the high interest rates. Not even the lower inflation of around 8.2 percent between 2010 and 2013, or the lower TB rates which came down to below 9.0 percent in 2011, or the Base Rate of Bank of Ghana which came down to as low as 13 percent could compel local banks to bring down interests on borrowing. “Policy wise, commercial banks have failed to build bigger balance sheets and to get closer to SMEs, and at the same time the concept of regional banking (sub-national) banking is not fully developed, which gap the NBFIs are filling,” Economist, Sampson Akligoh MD of InvestCorp, an investment banking firm in the capital, explained in a mailed message. He therefore saw the proliferation of NBFIs as mainly due to the inability of traditional banks to mobilize deposits effectively and also be innovative in dealing with the large SME sector. In his estimation, commercial banks are really keeping to a model that makes them uncompetitive but very profitable on short-term basis. Akligoh disagreed with the assertion that 28 banks were too many for a country with a population of 25 million, saying the kind of products the banks offered to the general public was the problem. “Really, l do not think it is about the number of banks – we have 28 banks, but the total size of their balance sheets is very small. “Also, it is clear that most of these banks are not specialized, which is reflective of how our political economy is specialized. It would have been great to have specialization by geography and industry,” the economist asserted. He conceded that NBFIs were unfortunately promising very high yields to attract deposits, which was starving the traditional banks. “While it is not unusual for NBFIs to compete with commercial banks, it must be clear to the market that this whole intake of deposit by NBFIs at unusually high interest rates is not sustainable,” the economist cautioned. Enditem Justice Lee Adoboe