Ghana: Financial System Stability Assessment Update

Abstract

This Financial System Stability Assessment (FSSA) Update is based on the work of a joint IMF-World Bank Financial Sector Assessment Program (FSAP) Update mission that visited Accra from July 21–August 5, 2010. Subsequently, a small team visited Accra to update developments through March 2011. The team comprised of Messrs. Inutu Lukonga (Co-Mission Chief, IMF), Pierre Laurent Chatain (Co-Mission Chief, World Bank), Arto Kovanen, Kalin Tintchev (all IMF), Levent Deveci, Adrian Armas, and Moses Pelaelo (consultants to the IMF); Erik Feyen, Joaquim Gutierrez, Evans Osano, Antony Randle, Alice Zanza, Katia D’Hulster, Friedman Roy, Jose Garrido Garcia, and Yesha Yadav (all World Bank). The mission’s principal findings and recommendations are:  Ghana’s financial system has undergone rapid growth and major structural transformation over the last decade, which has brought new opportunities and risks. The authorities have been implementing reforms to strengthen the regulatory and supervisory framework and financial infrastructures.  Nevertheless, the mission found that stability risks had heightened considerably, with high nonperforming loans (NPLs) and undercapitalized banks. The nonbanking sector also faced several constraints, including a scarcity of long-term finance, limited access to financial services, and high intermediation costs. The vulnerabilities in the banking sector largely reflect pervasive state involvement and deficiencies in risk management, supervision, and the insolvency regime.  Against this backdrop, the mission recommended addressing stability risks while sustaining the momentum on broader reforms. It suggested giving priority to repaying government arrears, resolving problem banks, closing regulatory gaps, strengthening supervisory capacity and the insolvency regime, reducing state involvement in banks, and enhancing systemic risk analysis.  More recent developments, based on a staff visit that took place in March 2011, suggest that immediate stability risks have been reduced, but underlying vulnerabilities remain. The authorities have made significant progress in implementing recommendations of the FSAP team, but a comprehensive and sustained reform effort will be needed to achieve long-term stability.