Ghana - Policy-driven convergence

Author: Emily Jones


Ghana has exhibited a stop-start dynamic with regard to Basel implementation, a pattern that reflects party politics. Moves to implement Basel and other international standards have coincided with periods when the New Patriotic Party (NPP) has been in office. The NPP has a vision for positioning Ghana as a financial services hub for West Africa and strong ideological and material connections to international finance. In 2017, the NPP government embarked on a radical reform of the banking sector, implementing major elements of Basel II and III and catapulting Ghana to among the most ambitious implementers of Basel standards among our case study countries. In contrast, the National Democratic Congress (NDC) focused on directing finance to the productive sectors of the economy and supporting indigenous banks and the implementation of international standards was not a policy priority during their periods in office. Ghana thus exemplifies policy-driven convergence, the adoption of international standards being championed by politicians.

Ghana Basel II and III adoption

Political economy background

Ghana is a mid-sized economy relative to others in sub-Saharan Africa and is renowned within the region for is vibrant democracy. Though Ghana underwent a structural adjustment programme in the 1980s, it experienced high growth rates in the 2000s because of the worldwide commodity boom and achieved one of the best records of poverty reduction in sub-Saharan Africa. Despite high growth rates, there has been little structural transformation of the economy, which remains heavily reliant on the export of primary commodities including gold and cocoa. Ghana’s government has recently struggled with rising indebtedness, mainly issued through local currency-dominated domestic securities.

GDP per capita (current USD) 1,641
Bank assets (current USD) 10.17bn
Bank assets (% of GDP) 27.3
Stock market capitalisation (% of GDP) 11.7
Credit allocation to private sector (% of GDP) 19.17
Credit allocation to government (% of GDP) 10.4
Polity IV score (2017) 8

Note: All data is from 2017 unless otherwise indicated

Sources: FSI Database, IMF (2018); GDI Database, World Bank (2017); Polity IV (2014)

Basel implementation to date

In 2010, Financial Sectoral Assessment Program of the World Bank and the IMF found Ghana to be non-compliant, or materially non-compliant, with 14 of the 25 Basel Core Principles, well below the average in the sub-region. Neither of the two main political parties appeared to be eager to improve compliance with them. This is due to a deep mutual dependence between the government and banks, which results in a fairly stable equilibrium of relatively lax regulation and supervision.

While Ghana’s implementation of Basel I emerged from externally driven financial sector reforms in the early 1990s, the drive for Basel II adoption was domestic and came from NPP politicians pursuing a vision of turning Ghana into an international financial services centre. Basel II implementation began in 2004, but it was only in January 2019 that elements of Basel II and III came into force.

Politics of Basel implementation

The Bank of Ghana is internationally oriented, with particularly strong links to the policy community of the international financial institutions. There has been a steady flow of technical advice and training from international organisations into the Bank. Furthermore, there is a ‘revolving door’ between the international financial institutions and the Bank of Ghana, with all five central bank governors that have been in office since 2000 previously working for the IMF, World Bank, or African Development Bank.

While the international orientation of the Bank of Ghana technocrats means they are generally receptive of international banking standards, the regulatory and supervisory capacity of the Bank of Ghana is limited. Since the 1990s, there has been mutual dependence between the banks and the government. The issuance of short-term securities has been key to the government’s financing strategy and highly profitable for banks, resulting in a lax regulatory environment. Ghanaian banks are domestically oriented, with domestic assets accounting for more than 90% of the sector’s assets. There was little appetite among either domestic or foreign banks to adopt Basel II and III.

Sustained efforts to implement Basel standards have only been made when the NPP has been in office (from 2001–2008 and again from 2016–present). In the early 2000s, a small group of NPP politicians and senior officials in the Bank of Ghana championed the creation of a financial services hub, including an offshore banking facility, as a central plank of their development strategy. The NPP has close links with international finance. The current Minister of Finance, for instance, has a background in US investment banking and co-founded Ghana’s leading investment bank.

The NDC was in office from 2009–2016 and has a very different policy agenda. The NDC is a social democratic party and the party’s elite have a much stronger nationalist tradition and, unlike the NPP, did not prioritise the creation of a financial services hub. The NDC was also less connected to international policy circles and the international investment community. With the change of government, the governors and several senior officials who had championed Basel II implementation left the Bank of Ghana, so there was little impetus for implementation from the regulator. Moreover, key international actors criticised the financial sector policies of the previous NPP government. The OECD argued that the creation of an offshore banking facility opened Ghana up to money laundering, while the IMF argued that moves to implement Basel II were premature. Without the political impetus for reform, the implementation of Basel II stalled.

It was only after the NPP regained power at the end of 2016 that the implementation of Basel standards resumed in earnest. NPP prioritised repositioning Ghana as an international financial services centre, and appointed Ken Ofori-Atta, a former investment banker, as the new Minister for Finance. International standards were introduced as part of the banking sector reforms; the Capital Requirements Directive (June 2018) incorporated major elements of Basel II and capital-related elements of Basel II, and banks were given only six months to comply. The implementation of the regulatory reforms is expected to be challenging, especially for domestic banks, and there is a concern that some of the sectors of the real economy might be negatively affected by the implementation of Basel standards.