Keywords

9.1 Introduction

9.1.1 Background

A pathway to achieving growth in any economy is through access to finance, either for businesses or for consumers. In many Sub-Saharan African countries, the lack of adequate legal and institutional framework impedes securing credit financing for Micro, Small and Medium Enterprises (MSMEs). According to the International Monetary Fund (IMF) (2016), improved financial sector efficiency is considered critical for sustainable growth in Sub-Saharan Africa. It is noted to assist in mobilising deposits and source funding into productive sectors; for example, by providing start-up funds for prospective MSMEs (IMF, 2016). However, many developing economies are yet to realise the importance of, and contribution of MSMEs to the growth and development of an economy (Korankye-Sakyi, 2019). Literature is replete with banking reforms and implications for finance in particular and economies in general, however, there is a dearth of scholarly dimension to MSMEs which presents a lacuna that this chapter attempts to fill. It is observed that, by way of policy, there is little to account for as deliberate mechanisms to safeguard MSMEs at such critical times during banking reforms in the past. We highlight the substantial gap between the banking reform policies in Ghana from 1953 to 2016, and how they have reached the plights of MSMEs in accessing sustainable financing. It is against this backdrop that this chapter examines the institutional and regulatory framework underpinning Ghana’s banking reforms and its impacts on access to credit by MSMEs. It seeks to give an up-to-date account of various facets of banking reforms and how they have evolved over the past decades under Ghana’s financial development. The study used a qualitative desktop approach to assess how Ghana’s banking reforms have been managed, with a comparative analysis of Nigeria and South Africa’s successful reforms of their banking industries.Footnote 1 The analysis of the literature and data highlights how Ghana is performing compared with its neighbours in the sub-region in the areas of past reforms and impacts on financing MSMEs.

9.1.2 Banks and Banking Reforms

Banks are institutions that serve as intermediaries to advance idle surpluses as a credit to businesses for economic growth. The banking sector, according to Akpansung and Gidgbi (2014) is traditionally regarded as an intermediary architecture through which transactions of deposits and payments for productive investments are routed. Likewise, Ojukwu-Ogba (2009) states that “the banking system in any given society is the artery through which the economic lifeblood of the nation runs”. The consensus is that there is a direct correlation between banking sector reform and economic growth. It is therefore for no reason that the economic, social and human resource development agenda of any country is tied to the financial structure of that economy and its efficiency (Antwi-Asare & Addison, 2000).

According to Akpansung and Gidigbi (2014, p. 94), banking reform has been defined “as regular or irregular interception in rules and regulations guiding the operation of the financial institution, towards attainment of the international best standard, and sufficient backing of economic growth and development in a country”. This confirms the theory and practices of those institutional reforms as an embedded administrative imperative to any progressive commercial jurisprudence (Yu et al., 2014). It also buttresses the assumption that commercial practices are associated with a high degree of risks as a result of the unpredictable trends in the world economic order, human factor errors and mismanagement (Lomnicka et al., 2005). Lomnicka et al., (2005, p. 26) argue that some of the pitfalls which confront banks in their paths are “unwise investments in questionable industrial projects, lending to countries with unstable economies, hazardous dealings in foreign currencies, and the investment of money received on short deposits in long-term transactions”. These scholars, however, conclude that failures in the banking sector globally are not novel.

This backdrop, fundamentally, informs States to consistently engage in the reform of their banking laws in line with global best practices and as a means of fostering economic growth. Banking reforms become necessary, that is if need to keep in touch with economic reality. When a bank is managed unwisely or it naturally falls into unforeseen circumstances, crises arise (Lomnicka et al., 2005). Such unforeseen circumstances occurred during the financial crisis of 2008 (Ivashina & Scharfstein, 2010). The failure of the financial institutions in 2008 resulted in a freeze of global credit markets that required government interventions worldwideFootnote 2 (Ahamed & Mallick, 2019; Anginer et al., 2018; Berger et al., 2016; Ellul & Yerramilli, 2013). The effects of crashing of stock markets, capital squeeze, shrinking investment, decrease in income, loss of jobs, loss of homes, starvation and hunger culminating in economic meltdown were equally anticipated (Essien, 2011). Global South economies including Ghana were profoundly impacted and this was reflected in the financial and general economic growth in subsequent years.

Kayanula and Quartey (2000) have noted that “the dynamic role of small and medium enterprises (SMEs) in developing countries as engines through which the growth objectives of developing countries can be achieved has long been recognised”. MSMEs are the livewire of the Ghanaian economy constituting approximately 85% of all registered businesses (International Trade Centre, 2016, p. ix). They contribute 70% and 49% to GDP and employment respectively (Muriithi, 2017; International Trade Centre, 2016, p. ix). Again, 85% of the MSMEs in Ghana offer employment in the manufacturing sector alone (Akorsu et al., 2012). This is a significant contribution from the sector that requires some deliberate protection and oiling to promote its further growth through effective government policy and legal frameworks. As would be discussed later in this chapter, the informal mobilisation of excess money in a form of cooperative organisations amongst the ordinary market vendors, artisans, farmers, casual labourers and individuals was given an impetus under the Financial Institution (Non-Banking) Law 1993 (PNDCL 328).

The remaining sections of the chapter are as follows: Section two discusses unsecured transactional financing and dangers to MSMEs in Ghana. Section three looks at the evolution of the legal regimes for banking reforms and application. Section four concentrates on the banking sector reforms in Nigeria and South Africa to underscore the comparative effects of banking sector reforms in other economies in Sub-Saharan Africa. Section five focuses on the current banking reforms and implications for access to credit by MSMEs. Section six concludes the chapter with a rehash of the objectives, findings and recommendations.

9.2 Unsecured Transactional Financing and Dangers to MSMEs in Ghana

‘Small Money Collection and Credit Agencies’ (locally known as ‘Susu’Footnote 3 operators) served as a useful avenue for mobilisation of capital and for advancing small credit facilities to households and family businesses. As financial reforms broadened and the frontiers of banking and technology opened up the spheres of savings and credit, this practice has largely been extinct. This is also due to the spread of banking and savings houses reaching almost every corner of the country through the liberalisation and formalisation of the sector. Today, the core functions of these ‘susu’ entrepreneurs and cooperatives are performed under the purview of the microfinance, savings and loans companies regulated under the Banks and Specialised Deposit-Taking Institution Act, 2016 (Act 930). These non-banking and deposit-taking institutions have played critical roles in the socio-economic stories of Ghana as their activities are mainly centred in rural and urban poor areas where the commercial banks have refused to establish there. Entrepreneurs in these institutions are themselves by definition MSME operators as indicated by their capital, number of employees and profit margins. To this end, ordinary citizens have had the faith to deal with them to start up or grow their businesses. These microfinance institutions (MFIs) have served as the retail financial sector of the economy. To many Ghanaians who constitute the 60% unbanked population (World Bank, 2018), their first-time experience in any formal banking setting is through these institutions.

In recent times, many cases of fraud have emerged in the industry. This has called for the whip of the Regulator to implement stringent regulatory and supervisory measures to curtail further illegalities to save depositors and customers from losing out their capital and economic wherewithal. In 2015, a major fraudulent cartel visited mayhem on their unsuspecting customers thereby causing a loss of billions of Ghana cedis to customers who kept their monies with these companies. In these fraudulent schemes, DKM Diamond microfinance alone was estimated to have misappropriated about GH₡115 million of depositors’ money (Oxford Business Group, 2019). The obvious action from the BoG was to close it down with 70 other microfinance companies which were involved in the same or similar financial offences. Again, the BoG was largely faulted for this national catastrophe for reneging on its governance functions; licensing, monitoring, supervision and sanctioning for non-compliance. To streamline the microfinance operations, the Central Bank increased the minimum paid-up capital for MFIs from GH₡500,000 to GH₡2 million whiles the Savings and Loans companies also saw a rise from GH₡300,000 to GH₡2 million. It was therefore not surprising that in the current reforms underway, over 400 such institutions have had their licences revoked as they failed to meet the minimum capital requirement deadline of 31 December 2018.

The overarching effects of this are the public's repulsion developed towards such institutions; and the subsequent negative incursions into the financial inclusion strides of government in the short and medium-term. The impacts of these revocations can only be felt much more by MSMEs than any other section of the economy. The apprehension is that the current situation may force small business owners to go back into the informal ‘susu’ era; which was considered unsafe, highly irregular and too risky. This will thwart the effort of the government at formalising the financial sector. Hopefully, if the ‘susu’ enterprise is reconsidered as part of future reforms and regulated properly, it may offer convenient avenues for MSMEs to have access to financial services. ‘Susu’ has more positive to offer especially to the large number of people who cannot afford or go through the official banking channels.

9.3 The Evolution of Legal Regimes for Banking Reforms and Application in Ghana

9.3.1 Phase One: 1953–1983

Since the Bank of Ghana (as it came to be known after independence) was established as the Central Bank of the nation in 1953, it has supervised phases of transitions and reforms of the banking sector till today under different institutional and legal frameworks. Between 1920 and 1950, the only banks that were in the Gold Coast (Ghana) were the Bank of British West Africa and Barclays Banks. The Bank of Gold Coast was established by the colonial administration as a bank of issue, personal banking and business. The first reform was to split the bank into the Bank of Ghana (BoG) and the Ghana Commercial Bank (GCB). This afforded the BoG a focus as an independent central bank to operate as a bank of issue of currency whiles the GCB as the first indigenous commercial bank was to manage the public corporate accounts and curtail the dominance of the two foreign banks in the sector (International Institute for the Advanced Study of Cultures, Institutions and Enterprises, 2014).

By 1958, the Bank of Ghana supervised the issuing and management of the Cedi as the national currency of the country. In the same vein, the GCB was redirected to take up additional functions as government bankers; managing the accounts of all state agencies and departments. The BoG opened its first branches in the regions of Ashanti and Northern. The Agricultural Development Bank, the Merchant Bank and the Ghana Investment Bank were established between 1957 and 1965 as state-owned banksFootnote 4 to take care of agricultural growth, trade and mercantile banking and investment promotion respectively. The government of the First Republic had an overarching control in the financial sector with wholly or majority shares in the sector. This first phase of “reforms” was successfully managed and positioned the BoG to focus on its core mandate but little is recorded about the impact of the regime on the activities of MSMEs for policy decisions on financing.

Ghana’s economic philosophy, however, started shifting towards a liberal market economy led by the private sector after the overthrow of Dr. Kwame Nkrumah’s government in 1966. This truncated the monopolisation of trade, investment, service sectors, as well as the financial sector by the ubiquitous state.

9.3.2 Phase Two: 1983–2000 Reforms

Under the Provisional National Defence Council (P.N.D.C.) regime, the economic troubles at the time, beginning in December 1983, prompted the regime to succumb to the Economic Recovery Programme (ERP) of the International Monetary Fund (IMF) for economic assistance. As part of the package that impacted the financial sector considerably, two key legislations were enacted; (1) the Investment Code of 1985(PNDCL 116) and (2) the Banking Law of 1989 (PNDC Law 225). The Investment Code supported the liberal school of thought that advanced the position to relax the restrictions on private investors’ involvement in finance, trade and investment in the economy. To advance this course and provide the conduit for such investments, the Banking Law of 1989 was enacted to provide the milieu for effective and efficient banking, non-banking, securities and financial services. The PNDC Law 225 facilitated the involvement of local financial entrepreneurs to acquire operating licences to own and operate private banks in the country. In furtherance of the financial sector liberalisation, the government introduced both the Financial Sector Adjustment Programme (FINSAP) and the Financial Sector Strategic Plan (FINSSIP) which hiked savings and deposit trends culminating in deepening financial outlook and competition amongst the banking services providers (International Institute for the Advanced Study of Cultures, Institutions and Enterprises, 2014).

A major breakthrough in this phase was the passage of the Financial Institution (Non-Banking) Law 1993(PNDCL 328). The law was enacted for finance houses, building societies, discount companies, leasing and hire-purchase companies to be licensed to operate as non-banking financial operators. The advent of ‘Susu’ which mobilised sums of money from market women, artisans and individuals daily as savings; and offered credit packages gained impetus under this legal regime. This provided an informal banking avenue and enhanced the financial inclusion profile of the masses for short- and medium-term financing of MSMEs.

In 1991, the government established the First Finance Company (a partnership between the Bank of Ghana and the Social Security and National Insurance Trust) with the mandate to help recapitalise ailing but viable companies in the financial sector. This was a specific state intervention to afford reliable and easier reach to credit by enterprises that suffered distress as a result of the ERP. As anticipated, these reforms helped to grow the banking sector of Ghana in the early 1990s with the surge in the rates of deposits by the citizens. The financial sector was largely deregulated. To a large extent, this phase brought along significant improvement in the banking industry, especially with the entry of the private sector into the business.

9.3.3 Phase Three: 2004–2015

In 2004, a new phase of the banking sector reforms was ushered in with the enactment of new banking legislation, Banking Act, 2004 (Act 673) (as amended by Banking Act, 2007 (Act 738). Act 673 (as amended) was passed to amend and consolidate the laws relating to banking, regulate institutions that carry on banking business and provide for other related matters (Banking Act, 2004 (Act 673) of Ghana). The provisions in the Act were to strengthen the licensing procedure, regulations, processes and sanctions regime in the banking industry (Part II, Act 673 2004). For example, to police the banks from deviating from their core businesses and avoid venturing into subsidiaries that will encourage capital diversion, the Act disallowed any bank from undertaking any commercial, agricultural or industrial venture unless it did that with such subsidiary of the bank explicitly registered for such other business. Before this law was the enactment of the Bank of Ghana Act (2002) Act 612 established as the central bank of Ghana (Section 3(2), Act 612) to help stabilise the general level of prices and support the general economic policy of government through effective and efficient operation of banking and credit systems in the country (Sect. 3(1), Act 612).

The essence of these legal regimes was to continue the reform process to streamline the industry and strengthen the banks to offer proper and secured financial services to the public and customers. Act 673 eliminated the phenomenon of secondary reserves and increased the minimum capital requirements of the banks with a capital adequacy ratio of 10%.Footnote 5 From an initial GH₡60 million in 2007, the threshold increased to GH₡100 million by 2013. Universal banking licences which allowed a bank to offer various banking products were issued for the first time to banks in Ghana under this law. Due to increased minimum capital requirements and the profitability of providing universal banking services, some banks went into mergers and acquisitions to stay in business and maximise profits. The various regulatory and legislative steps taken during this phase are considered key to making it a period that saw the banking sector interfacing with the general public more than any period of Ghana’s history.

9.3.4 The Present Phase: 2016-Date

The 2015 Bank of Ghana report indicated that at the end of December 2015 before the present reforms began, there were 29 commercial banks comprising 12 indigenous Ghanaian banks and 17 expatriate banks. These banks operated in 1173 branches across the country with 62 non-banking financial institutions (NBFIs), 139 rural and community banks as well as 546 microfinance institutions. To bring the sector up to speed and redirect its mandate to avoid a financial meltdown in the economy, the current regime of reforms began with the enactment of the Banks and Specialised Deposit-Taking Institution Act, 2016 (Act 930). In line with the general mandate of the BoG, the recent normalisation exercise of the bank to sanitise the industry is deemed well-grounded and comes within the dictates of the law. The BoG is seen as revisiting its regulatory and supervisory framework to re-align the banking industry to be solvent with adequate capitalisation to achieve a strong and resilient base for the industry (Moody’s Analytics, 2019). Even though the nature and manner of the programme have come under scrutiny, it has been embraced generally as timely and respected by the players and stakeholders in the sector.

With the coming into force of Act 930, every financial or banking practitioner was to anticipate a new paradigm to regularise the sector and prune it from excesses that were making the economic anchor fragile and precipitous to financial crises. Banking crises come along with collateral damages with locked-up investments; with dire rippling effects on sensitive economic actors and vulnerable agencies.

In 2018, the BoG undertook some regulatory and supervisory measures within the scope of its mandate, pursuant to Section 123 of Act 930 of 2016. By Directive (BG/GOV/SEC/2017/19) issued on 11 September 2017, a new minimum capital requirement for the commercial and universal banks at GH₡400 million from GH₡120 million was announced to be met by the close of 31 December 2018. Upon the failure to comply with this policy among other reasons,Footnote 6 five banks (Unibank, the Royal Bank, Sovereign Bank, Beige Bank and Construction Bank) were closed down on insolvency grounds and consolidated to form a national bank known as the Consolidated Bank of Ghana Ltd. About GH₡450 million was allocated out of an issued bond of GH₡5.76 billion by the government to capitalise on the CBG (Price Waterhouse Coopers, 2018). A year before the merger of the five banks, the UT and Capital Banks were liquidated, placed under receivership and eventually taken over by the GCB bank, which also has the government as the majority shareholder. It must be suggested that the government’s hold on commercial banks should not be the desired preference of a market economy and the government must be keen to dilute its shares in these banks for effective private sector participation when the process has been stabilised in the shortest possible time.

In October 2018, the BoG released the names of 30 banks plus the ARB Apex bank,Footnote 7 with 1,546 branches in April 2018 as licensed banks in good standing to operate in the country. In its first-quarter report for 2019, which spells out developments and performance of the banking sector, BoG revealed that the number of licensed banks in good standing had reduced to 23 with 1.225 branches nationwide as of April 2019 (Bank of Ghana, 2019). This reduction is, again, due to the fact that the banking institutions have been affected by the ongoing reforms by way of receivership and liquidation, consolidation or closure; regrettably comprising mostly of indigenous banks, microfinance institutions and savings and loans entities. Again, in line with Section 11 of the Non-Bank Financial Institution Act, 2008 (Act 774), rural and community banks which fall under the ARB Apex Bank were given the final notice to recapitalise to meet the required minimum capital of GH1 million by end of February 2020 to stay in business. To this day, this directive to the rural banks has not seen its fullest implementation. Three (3) new banks have come up as a result of various mergers and acquisitions; Omni Bank and Bank Sahel Sahara have merged, First National Bank and GHL Bank have merged and the First Atlantic Merchant Bank Limited and Energy Commercial Bank have merged, after meeting the new minimum capital requirement. To resuscitate distressed indigenous banks, the government of Ghana has given sovereign guarantees through the Parliament of Ghana to the Ghana Amalgamated Trust Limited (GAT), a special purpose holding company financed through private pension funds in Ghana to inject fresh equity capital in five indigenous banks. Consequently, the ADB Bank, the NIB Bank, the merged Omni/Bank Sahel Sahara, the Universal Merchant Bank and the Prudential Bank have benefitted from this vehicle after proven solvent with satisfactory corporate governance practices.

Alagidede et al. (2013) posit that the structure of any financial system determines how its monetary administration is carried through. Experts have alluded that in most emerging economies, where there are weak financial systems, MSMEs are confronted with significant hurdles in accessing capital from financial institutions (Chardon, 2014). It is found that the lapses in good corporate governance, the challenges of insolvency and insider trading among the failed banks leading to the revocation of their licences were real. By far, the current ongoing reforms becomes the most comprehensive and far-reaching in the history of the banking sector in Ghana. To support this position is to emphasise that the reform exercise was fundamental. From the evidence, it appears the BoG seems to be undertaking this process in good faith, having the good of the economy and its drivers (the businesses) in mind.

It must be noted that the implications of such reforms are hydra-headed and must be managed effectively with some reasonable level of caution. Recent developments, as a result of the reforms and ‘normalisation’ exercise in the sector, have given room for concerns leading to the expressions of fears about; the sustainability of the sector, the competent management of the rippling effects of the exercise, the erosion of the citizens’ confidence in banking and savings, the further ramifications on MSMEs to access deposits and credit, and the ability of the Central Bank to hold on to its monetary role without succumbing to political dictates in order not to dislocate the economy. Clearly, effectively managed banking reforms under the suitable legal arrangement(s) tend to bring more positive outcomes than negatives. Many have argued that Ghana has a plethora of laws to govern its banking sector, but there is a lack of institutional structure to effectively implement these laws. There is the absence of clear, adequate and efficient legal provisions in the laws to regulate the banking sector. For a long time, this has been the quagmire often exploited by the players leading to the abuse and misapplication of the legal framework. A single, comprehensive banking law that will effectively and sustainably address the identified problems is a panacea to the uncertainties under the current Ghanaian banking laws.

9.4 Banking Sector Reforms in Nigeria and South Africa

The Nigerian banking sector has seen tremendous reform strategies, even though recent volatility affecting its entire financial sector tends to affect the industry in the long run. The structural reforms of the banking industry in Nigeria began almost in the same period as in Ghana. (Iganiga, 2010). The reforms in Nigeria’s banking sector formed part of the total financial sector package undertaken under the 1986 Structural Adjustment Programme (SAP) (Akpansung & Gidgbi, 2014). The deregulation of the banking sector under the SAP in the 1990s served as a motivation for a relaxed regime that saw a record high licensing of more banks in Nigeria causing banking misfortunes in Nigeria (Ojukwu-Ogba, 2009).

Before the passage of the Banking Ordinance Act of 1952 that created the Central Bank of Nigeria (CBN) in 1958, unethical and banking irregularities malpractices characterised the sector affecting the performance of the sector for a long time. The Central Bank Act of 1958 gave the CBN supervisory and regulatory control over banks and other financial institutions.

Subsequently, the autonomous status of the CBN was strengthened with a wider mandate by the passage of the Banks and Other Financial Institutions Act 1991 (As amended in 1997, 1998 and 1999). In July 2004, the CBN announced a ‘13-point reform agenda’ to regulate and streamline the banking sector as part of the process to reform the industry (Ojukwu-Ogba, 2009). The Banks and Other Financial Institutions Act, (Cap B3 Laws of the Federation of Nigeria, 2004) and the Central Bank of Nigeria Act, (Cap C4 Laws of the Federation of Nigeria, 2004) constitute the two principal laws regulating banking business in Nigeria among other laws were passed. Additionally, the CBN Act, of 2007 has come to repeal the CBN Act of 1958 and Banking Act of 1969 as further reform measures. Before this period, state-owned banks were dominant in the sector.

As part of the robust reforms in the Nigerian banking sector, the Price Waterhouse Coopers (2018) reports that the key measures implemented included the following: First, the CBN in 2005 specifically caused the banks to recapitalise which resulted in the rise of the minimum capital requirement from ₦1 billion to ₦25 billion for existing banks whiles the new banks were required of ₦2 billion. As a result, there has been a significant increase in the capital base of the local banks, a deepening in financial undertakings and propelling positive financial development indicators, which are inspiring confidence in the public leading to a 3.4% growth in savings (Akpansung & Gidgbi, 2014). The banks in Nigeria over the period have the capital base to finance huge capital-intensive projects and investments. This is attributed to the sector’s increase in total assets from ₦3,753.3 billion in December 2004 to ₦4,515.1 billion in December 2005 (Price Waterhouse Coopers, 2018). Second, the CBN took legitimate steps to reduce the number of banks to 25 from a total of 89. Studies have found that this measure of a significant reduction in the numbers has accounted for the improvement in the credit extension to productive sectors of the Nigerian economy with a significant portion going to the MSMEs (Akpansung & Gidgbi, 2014). The credit support emanating from that windfall to the MSMEs is worth noting.

Following these measures, there is no doubt that the Nigerian banking sector was transformed and its banks compete on the continent as some of the stronger banks provide viable and efficient services beyond their territory. The so-called 25 megabanks now extend their operations beyond Nigeria into countries such as South Africa, Ghana, the UK, the USA, Benin and others (Ojukwu-Ogba, 2009).

Following the Nigerian experience, the likely future can be envisioned after the process is completed in Ghana. The likelihood of having an otherwise stronger banking sector running into a serious financial downturn can never be ruled out as long as strong institutional and regulatory frameworks are not promulgated to forecast, address and mitigate threats in time. It can be deduced that Ghana's recent reforms are akin to the Nigerian exercise and the logical expectation is that institutional limps would not be weakened by unforeseen hands to drop the process down along the way.

South Africa’s banking sector is considered the most robust in Sub-Saharan Africa with significant market capitalisation. Apart from key sectors such as agriculture, mining, manufacturing and other financial services, the banking sector plays a key role in contributing to the growth of its GDP. The South African Reserve Bank (SARB) has oversight responsibility for the regulation and prudential management of the banks and allows the Financial Sector Conduct Authority (formerly, Financial Services Board [FSB]) to regulate the market conduct of financial service providers.

South African banks remained resilient in the face of the global economic crisis of 2008. Despite this fact, the SARB continued to comply with the Basel Capital Accord III to sustain the requirements for capital adequacy on the banks, provide an enduring regulatory regime, provide risk management policies, equip the sector against liquidity challenges and curtail financial malfeasance.

After 2008, various banking regulatory reforms started aimed at financial stability, consumer protection, managing credit exposure, financial inclusion and prudent banking operations. First, as part of the regulatory reforms, the National Credit Act (2005), Act 35 targeted at reforming the credit system was enacted. Again, the Financial Advisory and Intermediary Services Act (2002), Act 37 was also enacted to regulate the matters and operations of financial institutions.

The South African banking sector operates on the “Twin Peaks” model of banking and financial market regulation which discourages a sectoral approach to managing financial institutions in favour of legislative harmonisation to coordinate the overlapping activities of financial institutions (Global Legal Insight, 2021, p. 2). This system has been given legal backing with the coming into force of the Financial Sector Regulation, 2017 (Act 9) which also gives additional power to the SARB by the establishment of the Financial Stability Oversight Committee. Unlike Ghana, there are no fully fledged state-owned commercial banks in South Africa. The Postbank and the Land Bank for example are not registered to operate fully as operational banks. The Banks Act currently allows the Postbank and the Land Bank to operate under some exemptions which do not give them banking licences to operate as fully fledged Banks (van Zyl & Lopes, 2018).

The natural consequences of the deregulated sector have propelled takeovers and mergers resulting in large banks with varied interests in portfolios and financial services. The Standard Bank, Nedbank, First National Bank and ABSA with over 95% of domestic banking assets constitute the four major banks in the country. It is the regulatory structure in South Africa's banking system that will inform the basis for our policy recommendation to move Ghana away from the currently fragmented structure in banking governance. Due to the structure of the banking system of South Africa, it has over the years supported its MSMEs with a range of financial services.

9.5 Current Banking Reforms and Implications for Access to Credit by MSMEs

The obvious consequences of the banking reforms in Ghana over the years and their impacts on credit flow to the productive sectors of the economy cannot be overemphasised. The surge in competition in the sector is a result of the influx of foreign banks as well as the increase in the indigenous banks. The competition has mainly been keen on the size of deposits as well as the volume of shares of these banks on the market. The ultimate beneficiaries of the expansion are the MSMEs which have the option to select competitive bankers and negotiate for affordable credit conditionalities. The International Institute for the Advanced Study of Cultures, Institutions and Enterprises (IIASCIE) (2014) shares that competition is a catalyst to efficiency. This has manifested among the banks with significant improvement in service delivery to the banking population. Benefits of technological innovation in the areas of e-banking, telephone banking, SMS banking and the operation of automated teller machines (ATMs) have seen remarkable efficiency.

Liquidity in the financial sector has relatively been guaranteed with the support from offshore funds of expatriate banks to cushion and sustain the credit demand on the sector efficiency (IIASCIE, 2014). In effect, capital for investments has been relatively fluid while dependence on domestic capital mobilisation has been relaxed to cater for infrastructure development. With the availability of loans with competitive terms, MSMEs have the urge to take credit and structure their portfolios to ease their businesses. The majority of the banks have adopted business-friendly approaches to woe MSMEs into savings and access loans due to the competition in the industry.Footnote 8 This gesture has not been fully appreciated by the MSMEs because no significant impacts have been made concerning the increase in the volumes of credit needed as the lifeblood of these businesses. Again, mergers and acquisitions in the industry occasioned by the requirement for increased minimum capital have led to the creation of larger banking institutions with substantial capital bases and better balance sheets that can be relied upon to provide funding for major investments and support for economic growth.

Banking reforms, as noted throughout the various key reform phases in the country, are associated with an increase in the minimum capital of the institutions which is critical to the extent that banks are risk-averse and need better insulation during unexpected periods of liquidity challenges (Price Waterhouse Coopers, 2019; Bank for International Settlements, 2010). Generally, larger banks can mobilise and absorb the shocks within this period while many smaller and usually indigenous banks liquidate or close down. The swift responses by the government from 2016 to 2018 to the vulnerabilities in the financial sector are therefore necessary and may have to continue to sanitise the sector.

In contrast to the above positives, the negative impacts of the banking reforms on smaller banks and non-banking institutions present major challenges to MSMEs. The primary business of banks is to take deposits from the public and invest them in ventures to accrue profits to reimburse the customers with interest on demand according to the terms of deposits (Joachimson v Swiss Bank, 1921). The dissolution of a bank, therefore, comes with a great cost to such depositors and customers of the bank (Lomnicka et al., 2005). The eventual victims of such collapse are the individual account holders and the business community which is largely made up of MSMEs in Ghana. The fall of banks prompts financial panic in the system which instigates a run on the banks with the pressure no bank can mitigate. Panic situations have been identified as the effect of waning trust and confidence in the banking industry borne out of the information and experiences encountered by the banking public (Joachimson v Swiss Bank, 1921).

These ramifications have led to job losses as a result of the inability of MSMEs to expand and grow arising out of the financial challenges. We anticipate the likelihood of more businesses folding up due to the inflexibility of credit conditionalities that come with the few surviving banking institutions that may offer little credit to be accessed among competing industries including larger multinational companies (MNCs).

Ghana’s bankable adult population stood at only 40% in 2014, while less than 20% had a formal savings account (World Bank, 2018). This is expected to reduce woefully due to the recent happenings in the sector which has forced citizens out of the banks by default of the process or by voluntary closure and withdrawal of accounts. The fear of losing capital or the sheer panic created by the incessant rumours of liquidation of these financial houses partly account for these panic withdrawals and closure of accounts.

Finally, we noted that the critical issue of credit to MSMEs which is the major theme for this chapter has been the worst affected under the current reforms. According to the BoG’s own credit conditions survey in May 2020, the overall credit disbursement to enterprises (comprising mainly of MSMEs) has declined against projection. This development was attributed inter alia to the resultant closure of some banks and projected credit repayment challenges (BoG, 2020, p. 13). Instructively, data from the BoG suggests that the decline in credit to businesses has adversely impacted economic activities over the period (BoG, 2020, p. 13). Given this, it is expected that the BoG will in the future put adequate measures in place to streamline its policies to avert further credit tightening to MSMEs due to the impacts of its banking reforms.

9.6 Conclusion

The objective of this chapter is to discuss the institutional and regulatory framework underpinning Ghana’s banking reforms and its impacts on access to credit by MSMEs. It also examines the various banking reforms introduced by the BoG since 1953. It aims at a comparative analysis of Nigeria and South Africa’s successful banking reforms with Ghana to draw useful policy lessons.

9.6.1 Findings

This chapter finds that, first, the economic engine of every country is its MSMEs through which jobs are created, wealth distributed to the very commoner of the society, and to eradicate financial inequality. MSMEs also afford an economy the conduit to grow its GDP sustainably and fortified. Notwithstanding, MSMEs suffered the dire effects of the banking reforms that have ever taken place in the country; predominantly with liquidity constraints to finance their operations.

The deregulation of the banking sector in Ghana has not yielded the desired outcome to benefit the growing but struggling MSMEs population as was also in the case of Nigeria until strict liquidity measures were instituted. Banks willing to enter into the sector must be certified to have the requisite liquidity and the technical expertise to be licensed.

It is also noted that unlike in Nigeria and South Africa, the banking reforms in Ghana over the years and their impacts on credit flow to the productive sectors of the economy have not been significant. The surge in competition in terms of the size of deposits and shares of these banks on the market has lent little to the financing of MSMEs.

Additionally, the ineffective legal framework is noted as constituting a major avenue for banking sector mismanagement or irregularities due to the sophisticated and diverse players in the industry.

9.6.2 Recommendations

First, a good policy direction must anticipate a constant revision of regulations and updating of existing legislation to address emerging changes. Considering the changing nature of the economy, a constant revision and harmonisation of regulations and legislation in the banking sector are recommended.

Second, the banking sector policy of the country must focus on effective mechanisms and infrastructure for proper monitoring, supervision and compliance to keep growth balanced to play a critical role in supporting the MSMEs. This must be anchored on strong institutions, promulgating sound legal and regulatory frameworks, and widening financial inclusion mechanisms to reach more MSMEs. It is commendable that the Corporate Insolvency and Reconstruction Act, 2020 (Act 1015) has been promulgated which has repealed the Bodies Corporate (Official Liquidations) Act, 1963 (Act 180). Act 1015 is to provide a proper legal milieu to manage the administration and official winding-up of insolvent companies, including banking institutions and for related matters. It is one legislation resulting from the pitfalls identified with the recent banking reforms which have rather compromised many MSMEs negatively as against forecast and anticipation. However, the realisation of the new law’s objects will depend largely on the key issues of monitoring, supervision and compliance.

Third, the imposition of strict regulations to check the entry of new institutions into the sector must be a key institutional policy approach. There is the need to evolve and apply measures that monitor banks to meet their liabilities to ensure the stability of the banks. A sound banking institution is theorised to be constituted the one that has the required liquidity and has readily funds to pay for current demands (Ellinger et al., 2005). By sound inference, a bank without adequate margins cannot be allowed to operate in a sound banking environment.

Fourth, legal certainty is considered an essential tool for fostering a conducive and efficient financial milieu for sustainable socioeconomic development via formidable and sound MSMEs. To achieve this as part of a long-term financial sector policy development, it is expected that a single regulatory entity is established as the ‘Financial Services Authority of Ghana’ and empowered by transferring all regulatory authority concerning banking, investment business and insurance from the BoG to it. This will end the regime of having different regulatory agencies with separate legal regimes overseeing separate financial services entities in Ghana. This must be backed by a legal arrangement under a financial service and market regulatory law. It is suggested that a consolidated legal framework of all banking and related activities’ laws is promulgated to be under the authority of a separate statutory body to oversee its compliance and implementation. This “Financial Services Act”Footnote 9 must look at prudential rules, financial stability, consumer finance and rights under retail banking, market efficiency, competition and compensation rules, international banking standards, compliance and enforcement among other far-sighted provisions for a stabilised financial market.