Ghana's Reforms Transform its Financial Sector

• Author: Mahamadu Bawumia and Theresa Owusu-Danso
• Position: Bank of Ghana and Arnold McIntyre IMF African Department
• Pages: 94

Page 94

Ghana's macroeconomic stabilization has allowed it to achieve remarkable success in developing its financial sector. The development has been driven by well-sequenced financial sector liberalization policies, enhanced competition (including from abroad), and gradual capital account liberalization. The success of Ghana's reforms can be attributed largely to solid "buy-in" from key stakeholders-especially the private sector-and coordinated donor assistance.

But Ghana still has much to do. It needs to deepen its secondary capital markets; reform small and medium-sized enterprise finance, microfinance, and rural banking; and increase the private sector role in the pension and insurance systems. It must also expand its equity market and ensure careful supervision of the rapidly evolving financial system.

The Ghanaian financial system has been profoundly transformed since the IMF- World Bank Financial Sector Assessment Program (FSAP) assessments in 2000 and 2003:

* Financial sector development has had a notable impact on growth, which rose to 6.3 percent in 2007 from 4.5 percent in 2002.

* The ratio of money (M2) to GDP, the traditional measure of financial deepening, doubled after 2004, reaching 43 percent of GDP by the end of 2007. Much of the increase was funded by an increase in demand and savings deposits.

* The banking system has grown, fueled by credit expansion. Banks now account for about 70 percent of the financial sector.

* Financial sector vulnerabilities have been reduced. Improved banking supervision now gives priority to capital adequacy, bank risk management, and more on-site supervision.

* The government has passed most of the bills recommended by the 2003 FSAP to improve prudential supervision and financial intermediation.

Ghana's financial sector development has been guided by the government's Financial Sector Strategic Plan. The plan spells out policy and legislative reforms to deepen the financial sector and build capital markets while keeping the economy stable. It also aims to increase outreach and access to financial services.

The reforms have benefited from ownership by government and key stakeholders. Coordinated donor assistance has been vital to the institutional development and training programs that are key to Ghana's strategy.

Reduced direct involvement of the state has unleashed the dynamism of the financial sector. The government expects to complete...