Owusu Achiaw Kwasi's Research on the Regulation of the Banking Industry in Ghana

UNIVERSITY OF GHANA, BUSINESS SCHOOL (UGBS)
(DEPARTMENT OF FINANCE)
REGULATION OF THE BANKING INDUSTRY:
ITS EFFECTIVENESS IN GHANA.
QUAYE, SAMUEL ANKAMAH 10239770
BADONG, FLORENCE N. 10232888
ARMIYAW, JALAL DEEN 10231668
OWUSU, ACHIAW KWASI 10227236
SUPERVISOR
CHARLES ANDOH, PhD.
LONG ESSAY SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT
FOR THE AWARD OF BACHELOR OF SCIENCE IN ADMINISTRATION
(BANKING AND FINANCE OPTION) DEGREE.
MAY 2010.

ii
REGULATION OF THE BANKING INDUSTRY:
ITS EFFECTIVENESS IN GHANA

iii
DECLARATION
We, the authors of this study done under the supervision of Dr. Charles Andoh, hereby declare
that this Essay is our original work with the exception of references, quotes and ideas borrowed
from acknowledged authors. We fully assume responsibility for any mistakes that may be
detected in this essay. We undertake that this work has not been submitted by any other person(s)
to this or any other institution as a research work.
..................................................
Charles Andoh, PhD
(Supervisor)
27th
May, 2010.
................................................. .................................................
Quaye, Samuel Ankamah Badong, Florence N.
(Student) (Student)
27th
May, 2010. 27th
May, 2010.
................................................. .................................................
Armiyaw, Jalal Deen Owusu, Achiaw Kwasi
(Student) (Student)
27th
May, 2010. 27th
May, 2010.

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DEDICATION
“To whom much is given, much is expected”. You have given enough of your love, money and
time. To you all – Mad. Monica (Mother); Mad. Elizabeth (Mother); Mad. Victoria (Mother);
Afia Bredwa (Grand-Mother); Baffour (Brother); Gyebuah (Sister); Priscilla (Sister); Dennis
(Brother) and Beatrice (Sister) – for the love, joy and vitality that you have given to my life.
– Owusu, Achiaw Kwasi.
I will like to first of all thank the Almighty God for His benevolence and for seeing me through
four years of education. My second thanks go to my parents and siblings for giving me all the
love, support and care anyone could ever ask for.
- Badong, Florence N.
In the name of Allah, Most Gracious, Most Merciful. I thank You Almighty God for everything.
My gratitude goes to my mother Hajia Habiba, my father Alhaji Armiyaw, and entire family, for
believing in me and standing by my side throughout my life.
- Armiyaw, Jalal-Deen.
I wish to first of all thank the almighty God for making it possible for me to finish my degree
work successfully. Secondly, to my wife Cynthia Quartey, my children Richard, Brenda, Eugene
and all those who have contributed in diverse ways for me to finish my academic work
successfully.
- Quaye, Samuel Ankamah

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ACKNOWLEDGEMENT
We thank God for his guidance throughout the period of the study and throughout the entire
period of our lives.
We extend our sincere and heartfelt gratitude to our most wonderful supervisor, Dr. Charles
Andoh, for the right directions he gave us and for mentoring us in this study. His dedication to us
was absolute and unconditional. We really cherish the time we shared with him on this project.
We also acknowledge Sefakor, Dr. Andoh’s secretary, for her immense help and her cheerful
reception.
Lastly, we acknowledge the help of all our respondents, as few as they were, for their warm
reception.

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ABSTRACT
The banking industry has been vehemently criticized for its role in fueling the global financial
crisis which recently hit the world. This has made it necessary for us to rethink the effectiveness
of the existing banking regulation. Banking regulation typically refers to the rules that govern
the behaviour of banks.
The questions that we sought to find answers to were; whether or not the present regulations in
the banking sector are adequate and effective. We also sought to find out if our regulations are
tight enough to insulate the banking industry from external financial shocks.
An extensive review of the available literature revealed that there is a knowledge gap on the
studies done on banking regulations. Whilst discussions centered on the role of central banks and
the methods used in regulations, actual studies done on the effectiveness of existing regulations
in Ghana is insufficient.
This study therefore set out to measure the effectiveness of regulations using certain parameters
developed by Neyapti and Dincer (2005) and Tadros (2009). Neyapti and Dincer’s (2005) study
enumerated eight (8) main areas for regulations to tackle – capital requirements; lending;
ownership structure; directors and managers; reporting/recording; corrective actions,
supervision; and deposit insurance. If the regulations succeed in ensuring that all these eight
areas are properly catered for, then it can be said to be a well functioning regulation.
We chose five (5) of these parameters in our measurements. We also elicited the opinion of the
stakeholders in the banking industry, particularly the senior management staff, on the
effectiveness of the banking regulations in Ghana.

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The originality of this work lies in the inclusion of opinions of senior management staff of the
banks. Thus our approach was more comprehensive as well as inclusive.
Drawing on Neyapti and Dincer (2005) framework, and applying their regulatory indices to
Ghana, the measurement reveals that, the regulations are intensive. A measure of the
performance of the banks, relative to the intensity of the regulations indicates that the banks are
performing better. Thus the regulations can be said to be effective.

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CONTENT
Title page ......…………..…………………………………………………….. ii
Declaration ……........……..…………………………………………………… iii
Dedication …………..........…………………………………………………… iv
Acknowledgement …………..…………………………………………………. v
Abstract …………..……………………………………………………........ vi
Contents …………..……………………………………………………........ viii
List of tables …………..………………………………………………………… x
Chapter Page Number
CHAPTER 1: INTRODUCTION ……………………………… 1
1.1 Background ............……………………………………………………... 1
1.1.1 Background of Study …………………………………………….... 1
1.1.2 Overview and Outlook of the Ghanaian Banking Industry ………….. 3
1.1.3 The Regulatory Framework of the Ghanaian Banking Industry …. 4
1.2 Problem Statement ............……………………………………………… 5
1.3 Objectives of Study ............………………………………………………. 7
1.4 Hypotheses ............………………………………………………………. 8
1.5 Research Questions ............………………………………………………. 8
1.6 Importance of Study ............………………………………………………. 9
1.7 Scope and Limitations ……............………………………………………… 10
1.8 Chapter Disposition ...................…………………………………………… 11
CHAPTER 2: LITERATURE REVIEW ………………………….. 12

ix
CHAPTER 3: METHODOLOGY ….….. ………………………….. 21
3.1 Introductions .………..………………………………………………… 21
3.2 Data and Data Instrument ………..……………………………………… 23
3.3 Justification ..........………..………………………………………............. 25
3.4 Sampling Procedure ....…………………………………………………… 29
3.5 Data Analysis and Measurement ……………………………………….…. 29
3.6 Limitations of methodology ……………………………………………… 30
CHAPTER 4: RESULTS AND DISCUSSION ………………..….. 31
4.1 Results and discussion of Measurement of the Indices ……………. 31
4.2 Results of the Opinion Poll …………………………………….…....... 38
CHAPTER 5: SUMMARY, CONCLUSION AND
RECOMMENDATION ……………………………….. 40
5.1 Summary ...………..……………………………………….................. 40
5.2 Conclusion .....………..………………………………………................ 40
5.3 Recommendation ...………..………………………………………...... 41
5.4 Directions for further research ………..……………………………. 42
REFERENCES..........………..……………………………………………........ 41
APPENDICES .............……..………………………………………………… 45
Appendix 1: Questionnaire 1: Regulatory Indices for Ghana ………….……......... 45
Appendix 2: Questionnaire 2: Opinion Poll on the Effectiveness of the Ghanaian
Banking Regulations ……………………………………………………… 48

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LIST OF TABLES
Table 1: Criteria of input and output based indices……………………………… 23
Table 2: List of Banks Surveyed ……………………………………….…..... 25
Table 3: Regulatory Input Index for Ghana………………………………………. 31
Table 4: Regulatory Output Index for Ghana…………………………………….. 32
Table 5: Benchmarks of weights ………………………............……………….… 35
Table 6: Figures …………………………………………………………………... 37

1
CHAPTER 1
INTRODUCTION
1.1 Background
1.1.1 Background of Study
August 2008 ushered in the first global financial crisis of the 21st
century, which experts describe
as the most severe financial crisis since the great depression of the 1930’s. This crisis led to the
overwhelming contraction of most economies.
This financial meltdown, from which the world is yet to fully recover, gives the strongest
indication of the need to rethink the whole idea of regulating the world financial system in
general, and the banking system in particular. This is because the banking industry is inextricably
bound to the entire economy.
On the global stage, the banking industry has been severely criticized for being solely
responsible for starting the crisis. This criticism has led to the realization by most governments
of the potential threat banks pose to the entire financial system if they are not monitored and
regulated. An ongoing example of such a threat becoming a reality is the financial distress in
which Greece finds itself, where because of the collapse of the banking industry, the whole
nation is now in dire financial crises.
In our African sub-region, the situation is not any different. For example, in Nigeria, which is a
more close-to-home situation, an investigation is on-going (as of October, 2009), by the
Economic and Financial Crimes Commission (EFCC) into the suspicious activities of some
banks. This action by the EFCC became necessary when it came to light that, some senior

2
executives of the banks disregarded the procedure laid down in the regulation for the granting of
loans. This saw lots of non-performing assets, such as bad loans, weighing heavily on their
balance sheets.
In Ghana, a few banks have come up for examination. In Amalgamated bank, a managing
director was allegedly caught dealing in fake US dollars. The Managing Director of National
Investment Bank (NIB), whilst dealing unilaterally for his own benefit entered into agreements
using the bank as a guarantor to issue promissory notes. The report of the Public Accounts
Committee of the Parliament of Ghana on the “Ghana @ 50” celebrations also startled many
analysts, when it was revealed that, some banks contravened the Foreign Exchange Act, 2006
(Act 723) in their foreign exchange transaction dealings.
These distressing revelations have shaken all stakeholders in the industry out of their stupor. It is
against the backdrop of these revelations that a study into the effectiveness of the banking
regulations has become necessary.
Bank regulations are a form of governmental supervision which subject banks to certain
requirements, restrictions and guidelines. The objectives of bank regulation, and their emphasis,
vary between jurisdictions. The most common objectives of regulating banks are for prudential
reasons, for systemic risk reduction, to avoid the misuse of banks for criminal acts, to protect
banking confidentiality and for favourable credit allocations. In this study, we will attempt to
assess how these objectives are effectively pursued by way of regulations.

3
1.1.2 Overview and Outlook of the Ghanaian Banking Industry
The Ghanaian banking industry has evolved from a highly regulated and administratively
controlled sector into a largely market-driven one. The change in policy was due to the
realization of the shortcomings of the ‘control policy’ which led to stagnation in the banking
sector.
But there is overwhelming evidence that this change has yielded positive results. Ghana has
witnessed an improved macro-economic environment and increased investment in the banking
industry over the last two decades. A robust banking system has emerged, with the number of
banks growing from 11 in 1988 to 26 in 2009. Currently, there are 129 rural banks in Ghana.
This has made the financial sector a very vibrant and competitive one. In addition, the banking
sector’s contribution to the gross domestic product (GDP) of the country has also increased
significantly. The banking sector’s assets as a ratio of GDP have been increasing steadily from
33.2% in 2000 to 65.6% in 2008. (The Bank of Ghana and the Ghana Statistical Service report,
cited in Fidelity Bank’s memorandum).1
Like other countries in the African sub-region, the Ghanaian banking industry, though it was not
entirely immune to the financial meltdown, did not experience the full severity of the crisis. This
may be attributed to the fact that, the African economy is not fully connected to the world
economy.
It should be mentioned at this stage that, although most of these statistics are encouraging, there
remains a huge un-banked and underserved banking public, estimated at about 60% - 70% of the

1
Fidelity Bank’s Memorandum for Rights Issue and Private Placement, dated 21th September, 2009. This document
is accessible at the headquarters of Fidelity Bank, Accra.

4
adult population (Bank of Ghana and Ghana Statistical Service, cited in Ecobank’s Circular)2
.
Also, the banking sector continues to be dominated by the top five banks, who account for over
two-thirds of the total banking sector’s deposits, loans and profitability. This makes the industry
a concentrated one, and a crisis in even one of these banks will have a devastating effect on the
entire sector.
In spite of these challenges, the prospects for the banking industry remain very promising and
bright, with a number of untapped opportunities in areas such as consumer banking;
microfinance; and oil and gas. The recent Bank of Ghana directive to banks to increase their
capital bases is likely to lead to mergers and acquisitions within the industry. This will also make
a large amount of money available for lending. The increase in competition will see the
introduction of new products and improved services. Some Universal banks like Barclays Bank
Ghana Limited have been allowed to explore uncharted territories, such as offshore banking.
This deepens the prospect of a more buoyant banking service in the very near future.
1.1.3 The Regulatory Framework of the Ghanaian Banking Industry
The Bank of Ghana has overall supervisory and regulatory authority in all matters relating to
banks and non-bank financial institutions with the purpose of achieving a sound and efficient
banking system, Buabeng (2000). Unlike the United States where government supervision of
banks is split among several agencies, in the Ghanaian case, this role rests solely on the slender
shoulders of the Bank of Ghana.

2
Ecobank Limited’s Circular for Rights Issue, dated 3rd September, 2009. This document is also accessible at the
headquarters of Ecobank Ghana, Accra.

5
Historically, the regulatory framework has been improved in line with both local and global
developments in the banking sector. A new banking law (PNDC L225) was enacted in 1989 to
replace both the Banks Act of 1970 and 1979 Decree.
Currently in Ghana, the banking sector is regulated by the Companies Code, 1963 (Act 179);
Bank of Ghana Act, 2002, (Act 612); Banking Act, 2004, (Act 673); Banking (Amendment) Act,
2007, (Act 738) and the Credit Reporting Act, 2007, (Act 729). These regulations are regularly
supplemented with Bank of Ghana (BOG) Notices/Directives/Circulars and the Securities and
Exchange Commission (SEC) laws for those banks listed on Ghana Stock Exchange.
Most recently, various regulations have been passed, some specifically for the banking industry
and others for the entire financial sector. These include the Foreign Exchange Act, 2006 (Act
723); the Borrowers and Lenders Act, 2008 (Act 773); the introduction of the Biometric Swipe
Card, called the E-Zwich, meant to transfer the economy into a so called ‘cashless society’; the
Know Your Customer (KYC) policy which aims at reducing money laundering; and the Risk
Based Supervision introduced to comply with the Basel II objectives. All of these regulations
promise to rid the industry of poor practices and guarantee a more secured industry performance.
1.2 Problem Statement
There are conflicting views by stakeholders of the banking industry as to what stance the central
bank should take to achieve its aim of financial stability. It is feared that, a prevalence of poor
regulation of the banks will lead to a plummeting of the level of confidence of investors and
depositors, and ultimately impact negatively on the industry and the economy of Ghana as a
whole.

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Globally, there has been a wake-up call on regulators of the financial institutions in general, and
the banking industry in particular to tighten their grip on the banks. The proponents of this view
strongly contend that, if the banks are not too big to fail, then they are not too big to be regulated
as well. Thus, the incidence of having some banks becoming so big and powerful that regulators
are not able to supervise them properly will be eliminated. This argument seems to have gained a
lot of support. In Ghana for example, the Bank of Ghana has directed that, banks with local
majority share ownership will have to attain a capitalization of at least GH¢ 25 million by the
end of 2010 and GH¢60 million by 2012. Existing banks with foreign majority share ownership
are also required to attain a minimum capitalization of GH¢ 60 million by December, 2009
(Bank of Ghana Press Release, 2008).3
This is likely to increase the mergers and acquisition
activities within the industry. Since the banks will now have a large capital base, it will also
likely increase the lending activities of the industry.
The other side of the argument is that, the industry has to be deregulated to ensure that, fair
competition prevails. This means that, regulators should shift the burden of risk assessment to the
individual banks themselves. Banks will now have more room to exercise their discretion over
risk issues. Proof of deregulation in Ghana can be found in the scrapping of the secondary
deposit reserve by the Bank of Ghana some few years back. They also contend that, there may be
so many regulators and so many regulations that, they sometimes tend to overlap, and in extreme
cases, conflict with one another (Madura, 2001). So should the regulations be relaxed a little?

3
Accessible at the Bank of Ghana’s website : www.bog.org.gh

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A third opinion, which is too radical for us to accept is the controversial view that, the
regulations have failed in its entirety. Thus, they should be thrown overboard and replaced with a
new set of regulations. This “re-regulation” argument will not be entertained, considering the
fact that there is an appreciable amount of evidence of some of the successes that these existing
regulations have chalked.
The above mentioned problems are what we seek to find solutions to, through our study. The
confusion, thus, rests in finding answers to these controversial arguments. In order to prescribe
an antidote, the effectiveness of the regulations must first be assessed.
1.3 Objectives of Study
The main objective of the research was to measure the effectiveness and also seek the opinion of
industry experts on the effectiveness of the regulations in the banking industry. This was central
to the research agenda.
The specific objectives were to:
a. Measure the effectiveness of regulations using certain predetermined parameters.
b. Assess whether there should be deregulation, re-regulation or tighter regulation of the
banking industry.

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1.4 Hypotheses
The recent revelations in the banking industry give the indication that, the industry may be on the
wrong path.
The individual hypothesis that will be used to test the other objectives are enumerated below:
that,
a. The regulations in the banking industry are not effective.
b. The banking regulations in Ghana should be intensified to make it more effective.
1.5 Research Questions
The questions that we sought to find answers to were
a. Whether or not the present regulations in the sector are inadequate, or is it the case that
the regulations are adequate but insufficiently implemented?
b. Can our regulation help our banking industry to withstand any global or local financial
shock?
These were some of the research questions we sought to answer in this study.

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1.6 Importance of Study
Throwing the spotlight on the banking industry is very appropriate, especially at this moment of
great financial turmoil, where a lot of tax payers’ monies have been used to bail out most of
these banks.
Also, we know that the banking industry is at the heart of every economy, since almost all other
industries are linked to this industry in one way or the other.
We are confident that, this research will have a lot of significance to a number of beneficiaries.
a. Our findings will be made available to stakeholders in the industry – Bank of Ghana,
National Banking College, Ghana Association of Bankers, Chartered Institute of Bankers and
policy makers.
b. It will contribute to the existing literature on this area of study. The academic community
will benefit a lot from this research. Although a lot has been written about the banking
regulations, our approach of combining both the opinion of senior management staff of the
selected banks with the measurement criteria is unique.
c. It will serve as a whistle blower. The findings will call attention of regulators to existing
loopholes, if any, in our regulations. It will prompt the regulators to take a second look at
their job.
d. The research promises to bolster investors’ confidence in the industry. Investment, in the
form of Foreign Direct Investment (FDI) will be boosted by way of increased confidence of
investors in the banking system.

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1.7 Scope and Limitations
1.7.1 Scope
The study will basically be focused on the Ghanaian banking industry. We will narrow the study
down to only the Commercial and Universal banks in the country. This means the 129 rural
banks and the other investments banks were not considered.
The area of study will be the headquarters of the sampled banks, all in the central business
district of Accra. The research will engage 13 banks out of the 26 banks in the country.
The research will last for a period of eight (8) months, making it a cross-sectional research in
nature.
1.7.2 Limitations
The main limitation of the research is that, it excludes all the rural banks in the country. This
means that, generalizing for the entire banking industry will be less holistic.
Time is also a limitation to this research. This research spanned a period of 8 months. However,
a more in-depth analysis could have been made had the research been undertaken for a much
longer period.
Again, the financial support needed to embark on the research is woefully inadequate. It is
financed by four (4) non-working full-time students. The huge budget places a lot of strain on
our already lean pockets.
Notwithstanding the above limitations, the study will certainly generate interest and provide
further literature in the area for the benefit of the banking industry and the economy of Ghana.

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1.8 Chapter Disposition
The remaining part of the study is categorized as follows:
Chapter 2 reviews existing literature regarding banking regulation, both globally and locally. It
recaps and comments on the contributions others have made to the topic and how it relates to our
study.
Chapter 3 throws light on the methodology used in this study. It consists of the research design,
population, sample and sampling techniques, data collection procedures, data analysis and
software used in the analysis.
Chapter 4 comprises data presentation, analysis and discussion of the main findings; and finally,
chapter 5 concludes our study with summary, conclusion and recommendations.

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CHAPTER 2
LITERATURE REVIEW
Banking regulation typically refers to the rules that govern the behavior of banks. In this study,
regulations will refer to all laws on banking, the directives from the Bank of Ghana (or central
banks, as the case may be) or any unwritten ethical standard that must be observed in the banking
industry. Closely associated with banking regulations is banking supervision. Though sometimes
used interchangeably, there is a slight difference. Banking supervision is the enforcement
procedures and oversight that take place to ensure that banks are complying with the rules and
regulations. In this study, we simply use the term regulation as a generic description of banking
sector policies and compliance mechanisms.
Scholars have written a great deal about banking regulations. Anytime there is a shake up in the
financial industry, all fingers begin to point at the banks, the central bank especially. The finger
pointing becomes even more hostile in a time like this, when the whole world has been held
hostage, partly, because of the irresponsible activities of some banks.
The rationale for regulation may seem obvious and numerous. But Harring and Litan (1995)
summarized them thus: “three broad reasons appear to have motivated countries to subject their
financial institutions and markets to regulation and supervision; preventing disruptions in
financial markets…, protecting consumers…, and achieving various social objectives.”
Mayer (1997) brought a whole new perspective on board when he brought forward, the
unorthodox idea that the purpose of bank regulation is to protect the bankers from themselves.
For us, this fourth reason for regulation captures the main essence of regulation. This remark,

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though paradoxical, is true and timeless. Maybe, that was what Walter Bagehot, the first editor
of The Economist magazine meant when he declared in his most famous aphorism that, “money
does not control itself”. But can the bankers regulate themselves?
Perhaps, this was the same question that opened the Pandora’s Box and led to a lot of discussions
on who the rightful regulators should be.
One school of thought questions the role of the central bank as the regulator of the banks.
Although it may seem natural and a matter of common sense that the central bank should be the
one to regulate all other banks, this assumption has for some time now been challenged. In a
narrow sense, it will appear that, those who pose this question are only stretching academic
argument to the breaking point, but upon careful examination, one will find a grain of wisdom in
that challenge. This challenge invites justification and prompts reflection.
Barth, et al. (2006), in their legendary and pioneering work championed this stance, by arguing
that, the development of banking systems, especially in countries with weak political institutions
will be helped the most if private monitors are allowed to take over the reign of banking
supervision, rather than the conventional government regulation and supervision. They assert
that, most central banks may end up as puppets that always follow the dictates of the puppet
masters, in this case the political establishment. The independence of the central banks will
therefore be compromised.
So if the central banks are to be stripped of their supposedly divine role as regulators, who
should then assume that much cherished role as the new “Lord of the Manor”? Can the private
independent player do any better?

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Bernanke (2007), now the chairman of the USA Federal reserve, mocked this “private actors”
idea, by sarcastically calling the private actors “not sophisticated enough” to understand and
monitor the complexity of the banking system. He then compromised his stiff stance with a
suggestion that, “regulations that rely on the invisible hand (private actors) of market-based
incentives can complement direct government regulations” (emphasis supplied by us).
But this debate, which of course shakes the very foundations of central banking and central
bank’s role as the “divine” regulator has a long precedence. It must have been Bagehot (1873)
who laid the theoretical foundation for this debate in his acclaimed Lombard Street. He argued
that, eventually, the task of regulation may not be the central banks raison d’être, and could be
efficiently undertaken by others. The central bank may have to restrict itself to monetary and
fiscal policy matters, and would rather not meddle in the enforcement of regulations.
Perhaps, the most important event in banking in 1997 was the decision of the British Labour
government to take banking supervision away from the Bank of England and vest it in a new and
improved Securities and Investment Board. The opponents of the idea of the central bank as
regulator scored a point there. This debate, though as old as banking itself, has not yet been
resolved in the literature.
The discussions on banking regulations also extend to an argument on the methods by which the
financial intermediaries should be regulated. There are as many theories on regulations as there
are scholars. The mantra on financial regulation is the International Monetary Fund’s approach,
which calls for “Internal Governance, Official Oversight, and Market Incentives,” observed
Lindgren et al(1996). With this approach, the internal management is the first point of call, who

15
adopts its own risk control. The central bank then ensures monitoring and oversight, and then the
markets play the complementary role of watch dog.
A discussion of the banking regulation at the global level may start with the Basel Accords4
(I
and II). The Basel Committee on Banking Supervision (2006), established by the Central banks
of G10 countries in 1975 recommended 25 principles that will ensure effective regulation and
supervision in the industry. They tell us that, these principles, if precisely adhered to would
curtail malfeasance in the industry. The Basel Accords and their numerous amendments propose
very useful information about “how” regulations should be done.
The CAMELS5
models are also used extensively in modern banking regulation. Though very
useful in setting benchmarks for bank supervision, it has not always proved very effective. A
particular mention can be made of Indy Mac Bank, of California, where the Office of Thrift
Supervision (OTS) continued to give the bank high composite CAMELS ratings right up until
shortly before it failed in 2008 (Audit report of Indy Mac Bank).
Some researchers talk about “command-and-control” bank regulation, whilst others advocate
“market-based” regulations. The list of the theories and methods of regulations is endless. The
funny aspect is that, the researchers end up postulating a lot of theories of regulations than the
banks can possibly comply with. The sad aspect of this state of affairs is that, these good
regulations are actually not enforced.

4
The Basel Accords refers to the banking supervision recommendation on banking laws and regulations. Basel I and
II were issued by the Basel Committee on banking supervision. It aims to deliver capital requirements that are more
risk sensitive, giving the banks flexibility to calibrate capital levels so that they more accurately reflect their actual
level of risk.
5
The CAMELS framework is one of the main frameworks used internationally to regulate and supervise the
activities of banks. They are a set of parameters used to evaluate a bank’s performance. Under this framework,
banks are required to enhance Capital adequacy, strengthen Asset quality, improve Management, increase Earnings,
boost Liquidity and reduce its Sensitivity to various financial risks. The “CAMELS” is the acronym of the six
parameters.

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We argue that, the effectiveness of the regulation does not depend on who regulates – “not even
angels” can do it better, to borrow a metaphor from Barth (2006). We emphasize that, it does not
also matter “how” and “how not” the regulations should be, the concern that should engage our
attention is how effective the regulations are.
We take this standpoint, inspired by the axiom that, “A state is better governed which has but
few laws, and those laws are strictly observed”.
Central banks, and in this case, the Bank of Ghana, must prevent the occurrence of banking
crises, or at least deal with them when they occur. Sheng (1990), an International Monetary Fund
(IMF) advisor summarized the state of the present regulations perfectly when he said that, “it is
easy to say that prevention is better than the cure”. This statement seems to resonate in all the
works that have been done on Banking regulations and supervision. But how do we achieve this
“prevention”. Sheng goes on to suggest that, “the existence of efficient and competitive banking
systems, under strictly enforced banking regulation will help prevent crises, or at worst,
minimize financial disruption.” If we follow Sheng’s counsel, then there will be the need to
always appraise the effectiveness of the central bank in achieving financial stability.
As has already been articulated in our problem statement, opinions abound as to what stance the
central bank should take in playing its regulatory role. Should the regulators tighten their
regulations, or should they loosen their grip by deregulating?
Globally, there has been a wake-up call on regulators of the financial institutions in general, and
the banking industry in particular to tighten their grip on the banks. The proponents fiercely
contend that, if the banks are not too large to fail, then they are not too large to be regulated. This
argument seems to have gained a lot of impetus.

17
The other side of the argument is that, the industry has to be deregulated to ensure that, fair
competition prevails. This means that, regulators should shift the burden of risk assessment to the
individual banks themselves. Banks will now have more room to exercise their discretion over
risk issues. There may be so many regulators and so many regulations that, they sometimes tend
to overlap, and in extreme cases, conflict (Madura, 2001). In Ghana, for instance, there was once
a conflict between Bank of Ghana and the Securities and Exchange Commission (SEC), as to
who should take charge of a bank that was also trading on the stock exchange, and had to go into
liquidation. So should the regulations be relaxed a little?
Swary and Topf (1992) reported that, “the deregulation process has provided banks with the
opportunity to engage in activities related to investment banking”. They noted that, the level of
bank regulation in industrialized countries represent a fragile balance between protection and
intervention.
Chatterjee (2007) similarly noted that, deregulation is now practiced in most emerging
economies and it has come to promote growth of the banking sector since a strongly regulated
sector hardly provides any incentive for competition and change. But players in the industry
were unprepared by their past to cope with the competition, hence an increased risk for the
industry.
Evidence of this was experienced in Ghana, when the Bank of Ghana trod the path of
deregulation by scrapping the secondary reserve, which has increased the competition since
banks now have more money to lend. Whether the Bank of Ghana has put effective regulations
in place to contain any risk that might occur is yet to be assessed. We would also try to see if
Bank of Ghana is taking a cue from the Basel Accords amendments which provided explicit

18
cushion for the risks to which banks were exposed, particularly those arising from trading
activities.
Although there seems to be a lot of debate going on, we have discovered a neglected area, which
convinces us that, there is a vacuum. The “missing link” is that, very few researchers, if any at
all, are concerned about the effectiveness of the already existing regulations themselves.
In spite of the obvious significance of bank regulations’ effectiveness, it remains a relatively
neglected area of study, especially in Ghana. Measuring the quality of banking regulations is
generally difficult because it is a qualitative analysis and is arbitrary.
The few works that have been done on banking regulations in Ghana includes Quartey (2003)
and Frimpong (2010). Quartey’s work is a masterpiece of work on the Ghanaian banking
regulations, and Frimpong discussed how these regulations reflect on the efficiency of the banks
themselves. This obviously shows that, the regulation itself has not been seriously scrutinized.
This neglect of the assessment of the effectiveness of the regulation is the Darwinian “missing
link” that has informed this research. A discussion of the literature available on effectiveness of
bank regulations is therefore appropriate at this stage.
On the global stage, Neyapti and Dincer’s (2005) groundbreaking work deserves a lot of credit.
Their study provided a method to evaluate the quality of legal frameworks for bank regulation
and supervision by developing a comprehensive set of eight (8) measurement criteria. These
criteria were developed primarily to utilize the Basel core principles. They argued that, the
banking laws can only be said to be effective if they eventually lead to greater economic growth.
They therefore linked the laws themselves to economic growth criteria, with a particular

19
emphasis on twenty-three transition economies. They hinted that, it will be very appropriate to
use the parameters in jurisdictions where there have been fundamental institutional changes and
reforms. They also acknowledge the difficulties inherent in using such parameters, especially
when the research is not a comparative study. Their work may provide a very useful avenue to
begin measuring the effectiveness of banking regulations.
Their study enumerated eight (8) main areas for regulations to tackle – capital requirements;
lending; ownership structure; directors and managers; reporting/recording; corrective actions,
supervision; and deposit insurance. If the regulations succeed in ensuring that all these eight
areas are properly catered for, then it can be said to be a well functioning regulation.
Tadros (2009) recent work in Egypt sheds more light on how the quality of banking regulations
can actually be measured, especially in a place like Africa. She provided regulation index, a
model similar to the concept of cost-benefit analysis, naming them as input and output indices.
The input index, which shows the “cost” element, signifies the efforts made by the government
and supervisors, and gives an idea of the intensity of the regulations. The output index which
depicts the “benefit” element, shows the outcome of the government’s efforts and measures the
performance of the banking system. The output indices somewhat resembles the CAMELS
models. These indices are then given equal differentiated weights (details on the calculations and
analysis of the ratings are beyond the scope of this research). Tadros used this model to measure
the quality of banking regulations in Egypt. The output indices are also a measure of the
efficiency of the regulations, as exemplified in Frimpong’s (2010) work.
This cost-benefit model was developed with reference to the study of Neyapti and Dincer (2005).
The study used five (5) of the eight (8) criteria used by Neyapti and Dincer (2005).

20
Our research approach takes a cue from these two major works. The originality of our study is
that, it gives ear to what practitioners have actually got to say about the regulations. Our
emphasis on getting the views of “insiders” is appropriate, since no one knows better than those
who are regulated themselves. To use the tactics adopted by the police, “to catch a thief, you
have to think like a thief”. Using this maxim to suit our situation, we say that, “to know what
works, you have to ask those who are doing the work”. This justifies our choice of methodology,
making it the suitable one for the study.
This study also goes a step further than the others discussed above in several ways. It attempts to
broaden the scope of the investigations into banking regulation. In addition, it seeks to find out
not only what top managers describe as effective, but allows other stakeholders like researchers,
lecturers and financial analysts to express their concerns on the effectiveness of the banking
regulations.
Much of the available literature on the effectiveness of banking regulation presently comes from
the United State and the United Kingdom. This comprehensive work, which is based in Ghana,
will definitely fill the knowledge gap that exists here in Ghana.

21
CHAPTER 3
METHODOLOGY
3.1 Introduction
The pursuit of a free market economy (or a mixed economy, as is the case in Ghana) always
comes with some amount of governmental interventions. The actual measurement of such
abstract things as the effectiveness of these interventions is very difficult, and when it is even
done, it is at best arbitrary.
With this weakness in mind, we used a two-pronged approach in trying to find answers to our
research questions and hypotheses: by quantitatively measuring the indicators of effective
banking regulation and qualitatively seeking the opinions of senior managers (opinion polls).
The first approach to the study is by the measurement approach. We fashioned our measurement
indicators after that of Neyapti and Dincer (2005) and Tadros (2009). In their work, the eight (8)
criteria used are: capital requirements; lending; ownership structure; directors and managers;
reporting/recording; corrective actions; supervision; and deposit insurance. If the regulations
succeed in ensuring that all of these eight areas are properly catered for, then it can be said to be
a well-functioning regulation.
We have chosen five (5) of the eight (8) input parameters Neyapti and Dincer (2005) used,
namely: reporting/recording (transparency); supervision (cutting risky behaviours); deposit
insurance; ownership structure (licensing of banks); and directors and managers (establishment
of banks). Capital requirements; lending and corrective actions were those excluded from the
study. (A brief discussion of each of these variables will be given soon).

22
Individual sets of questions are asked under each variable, which will help reveal the degree to
which these five (5) variables are catered for by the Ghanaian banking regulations. This will
constitute the “input” indices.
To find out whether these input variables have achieved their intended purpose, three (3)
“output” indices are also adopted from Tadros (2009). They will include insolvency/bankruptcy;
amounts of deposits; and banks profitability and risk-based capital ratios.
Each criterion is further sub-divided into several questions that can be answered on a 0/1 scale
where 1 indicates the highest intensity of regulations and 0 indicates the lowest intensity of
regulations. After each input based criterion has been broken down into measurable standards,
we take an unweighted average of the responses to the questions under each criterion leading to
five (5) indices. We then get a weighted average of these indices based on a 20% weight for each
criterion and finally calculate an aggregate value for the input based index.
As has already been pointed out, this cost-benefit approach is very useful when the research is a
comparative analysis to show how the inputs and outputs have changed over the years. Although
there was a banking amendment in 2007 (Banking (Amendment) Act, 2007, (Act 738)) to the
Banking Act, 2004, (Act 673), a detailed reading of both acts shows that, the new act did not
completely overhaul the old law. This convinces us that, the differences in the input indices will
not be significant. We will, in effect downplay the need for comparison, and instead concentrate
on the current functionality of the regulations and how they reflect on the performance of the
banks themselves.

23
The input and output indices are summarized in table 1 below:
Table 1: Criteria of input and output based indices
Input-based criteria Output-based criteria
1) Regulations to enforce the transparency of
banks’ operations
2) Regulations to cut off risky behaviour by banks
3) Deposit insurance existence and implementation
4) Criteria for qualifications of bank managers
5) Criteria for licensing of banks
1) Amount / Value of deposits
2) Insolvency of banks / bankruptcy
3) Performance of the banks’ managers in
terms of profitability and amount of risk
taking
The second approach is an opinion poll. We are certain that, measuring the intensity and
performance outputs of the regulations will not be enough. Whether the regulations are effective
or not can also be determined from what the respondents think, though we believe this may not
be a very scientific way of drawing conclusions as compared to the first approach of using
indices.
3.2 Data Instrument and Data
In using the survey method, we combined both questionnaire and interviews. As opposed to
other methods, these methods were appropriate for seeking opinions. Combining both the
questionnaire and interviews helped ensure that, different shades of opinions were represented.
3.2.1 Questionnaire:
Two groups of questionnaire were designed to facilitate the research.
Questionnaire 1: Regulatory indices for Ghana (see appendix 1) was adopted from Tadros
(2009), it asks very specific questions relating to prudential and on-site regulations.

24
The questions asked here were factual questions, which should be answered either Yes or No.
They were answered by the researchers ourselves after a thorough study of the various banking
regulations, especially the Banking Act, 2004, (Act 673).
Questionnaire 2: Opinion poll of the Ghanaian banking regulation (see appendix 2) sought to
find the views of the respondents, and their general opinions of the effectiveness of banking
regulations. This gave the respondents the opportunity to volunteer other information which were
not asked of them and also to make useful recommendations. The questionnaire were
administered to three (3) senior management executives – the Managing directors, the Heads of
Legal Divisions and the Heads of Internal Supervision departments – of each of the respondent
banks.
Two sets of data were obtained and used in this research: primary data in the form of opinion
polls and an parametric study to be verified from the Banking Act, 2004 (Act 673) and from the
Bank of Ghana’s periodic report on the financial stability of the economy.
Opinion poll: The corporate sample for the opinion study was made up of 13 banks, out of the 26
banks in the country, representing a 50% response rate, a remarkable figure for such a study. The
thirteen (13) banks comprised of seven (7) foreign banks and six (6) domestic banks, a good
combination of both new and old banks. This ensured that, different shades of opinions were
captured.
These banks were selected based on how influential they are in the industry, in terms of their
market share of the industry. Some of the new banks were included to ensure that, the survey
was representative. The table below lists the individual banks that were surveyed.

25
Table 2: List of banks surveyed
Foreign Banks Domestic Banks
1. Barclays Bank Ltd. 1. Ghana Commercial Bank
2. Standard Chartered Bank 2. CAL Bank Ltd.
3. Ecobank Ghana Ltd. 3. Fidelity Bank Ltd.
4. SG – SSB 4. Prudential Bank Ltd.
5. Stanbic Bank Ltd. 5. HFC Bank Ltd.
6. Zenith Bank Ltd 6. UT Bank Ltd.
7. United Bank for Africa
3.3 Justification
As has already been discussed, Neyapti and Dincer’s (2005) study enumerated eight (8) main
pillars of effective regulations. According to them, every effective banking regulation must
tackle these areas: – capital requirements; lending; ownership structure; directors and managers;
reporting/recording; corrective actions; supervision; and deposit insurance. If the regulations
succeed in ensuring that all of these eight areas are properly catered for, then it can be said to be
a well-functioning regulation.
However, we decided to choose five (5) of these eight (8) criteria, namely: reporting/recording
(transparency); supervision (cutting risky behaviours); deposit insurance; ownership structure
(licensing of banks); and directors and managers (establishment of banks).
This means that, the other three (3) criteria – capital requirements; lending and corrective actions
– were excluded in this study. The reasoning behind their exclusion is this:

26
Capital requirement: The recent (as of 2009) Bank of Ghana announcement of increase in
capitalization of all banks gives the indication that, the bank of Ghana has taken or is taking
action on this aspect of regulation. The jury is still out on the effectiveness of this measure.
Lending: The Borrowers and Lenders Act, 2008 (Act 773) has been criticized for some
contradiction and inconsistencies. For example, regulations on the demand for collateral
securities have been chided for being too sketchy. These and other reasons convinced us of the
need to exclude it in our study.
Corrective action: Thorough reviews of all the eight criteria indicate that, this parameter is a
duplication of all the other criteria. For example, the corrective action criterion touched on
withdrawal of license of operation. This is adequately catered for by the ownership structure
(licensing of banks) which recommends the revoking of licenses on certain conditions.
A brief description of each of the five (5) criteria chosen and their significance in evaluating the
quality of bank regulation is now given here.
Input based index:
The input index, which shows the “cost” element, signifies the efforts made by the government
and supervisors, and gives an idea of the intensity of the regulations.
a. Regulations to enforce the transparency of banks’ operations
The first criterion relates to the third pillar of the New Basel Accord – Enhanced Disclosures.
This can be done by ensuring that banks publish their statements in national newspapers and
also, their statements conform to the international standards of accounting and auditing (The

27
individual questions asked under this and the other criteria are summarized in table 3 in chapter
four).
b. Regulations to cut off risky behaviour by banks
Risk taking by banks can either make or break banks in their pursuit to maximize their
shareholders wealth. Regulations should therefore emphasize a calculated, and not an arbitrary
risk taking. This relates to the first and second pillars of Basel II – minimum capital
requirements, which are measured by the risk based capital ratios.
c. Deposit insurance existence and implementation
Deposit insurance is the system which allows depositors to recoup their deposits when a bank
fails. The existence of deposit insurance is very critical in boosting confidence in the banking
industry, especially when this is done by the government, as opposed to the private institutions.
This may be explicit or implicit.
d. Criteria for qualifications of bank managers
A banks performance will be a good measure of the quality of its management. Their level of
experience and qualification comes into play here. Compliance with ethical standards will also
be a positive addition to the bank.
e. Criteria for licensing of banks
Regulation should actually begin with the granting of a bank license. Bank managers and owners
should be well screened, and the banks should be at least primarily concerned with its core
business, which is banking.

28
Output based index:
The output index which depicts the “benefit” element, shows the outcome of the government’s
efforts and measures the performance of the banking system.
Unlike the input indices which can be standardized, the output based index cannot. The
difference here which makes the output index more complicated is that many of the questions are
arbitrary, meaning that there are a continuous set of answers and are therefore not measurable on
a 0/1 scale.
To deal with this problem, a duration (such as how long or soon there has been bankruptcy) for
the application of this model has to be specified where the highest/lowest measures are used.
a. Amount / Value of deposits
If banks are really abiding by the regulations and operating with transparency, citizens would
have an increased confidence in the banking system. Although we accept that, there can be a
myriad of factors apart from depositors’ confidence, such as the level of income and the extent of
the formal and informal sector operation in the country, this can be a somewhat feasible measure
of confidence. This can be measured by the amount of deposits that people leave in the banks
relative to GDP. The higher this value, the better. The number of citizens served by each banks
branch can also be measured.
b. Insolvency of banks / bankruptcy
Bank runs and bankruptcies are the biggest threats to banks and therefore, preventing bank runs
and bankruptcies are top priorities for the regulatory and supervisory authorities of banks. The
occurrence of bankruptcies can signal a deficiency in the quality of regulation and should
therefore be considered in this output index

29
c. Performance of the banks’ managers and amount of risk taking
A good way to measure if the regulations on the choice of bank managers are of high quality is
to measure the performance of these managers in several aspects; profitability, risk and maturity
mismatch. A reasonable measure of profitability should be the return on equity (ROE).
3.4 Sampling procedure
The opinion poll respondents were selected using probability method, and were sampled using
the stratified sampling. The stratified sample was chosen since it helps minimize errors and
ensure that, the sample is representative.
Our target population was about 130 senior management executives, of which 45 were sampled.
This represents more than 30% of the entire senior executives in the targeted banks.
3 senior management executives – the Managing directors, the Head of Legal Division and the
Head of Internal Supervision department – were sampled respondents. We targeted these people
to utilize their expertise and practical experienced they have amassed over the years. All the
respondents have had at least 5 years of working experience in the banking industry.
3.4.1 Ethics
All respondents were informed that, participation was voluntary. Informed consent of all
respondents was sought, and we respected their right to refuse to answer any question they felt
strongly about. We also guaranteed their anonymity and confidentiality.

30
3.5 Data Analysis and Measurement.
After these two set of data were obtained, we will analyze and discuss their implication for the
regulations. In addition, extensive use was made of the narrative information obtained from the
open-ended questions and in-depth interview. In practice, the criteria of each index will all be
assigned equal weights; 20% each for the 5 input indices and 25% for each of the 4 input indices.
3.6 Limitations of methodology
a. It saddens us to state that, after administering about 40 questionnaire (see appendix 2), we
were able to take back only eight (8) of them, which even became possible after a long
and hard try.
b. Also, the banking industry’s legal and ethical provision of the duty of secrecy on the part
of the banks tempted some respondents to withhold certain information from us. The
bureaucracy involved in getting access to these top managers, who were our main target
in obtaining our information, was very frustrating.
c. Lastly, since we sought for opinions, we understand that, some of the opinions will be
subjective. However, we got around this problem by designing open-ended
questionnaires in a way that will reduce the subjectivity of the responses.

31
CHAPTER 4
RESULTS AND DISCUSSION
The results of our study is presented and discussed below. The chapter also presents the results in
a tabular form. All relevant information needed to understand the procedure used to arrive at the
various results and conclusions are given in detail.
4.1 Result of Measurement of the regulation indices.
Table 3: Regulatory Input Index for Ghana
Index
1) Regulations to enforce transparency
a) Are banks required by law6
to publish their balance sheet in a national newspaper on annual
basis?
b) Is it a requirement that external auditors revise the balance sheet?
c) Is the balance sheet checked for compliance with international accounting standards?
1
1
1
Total value of index component 1
a) Are there regulations by the Bank of Ghana to address the amount of risk7
banks are allowed
to take?
b) If regulations exist, is there supervision that they are being implemented?
c) Is the minimum reserve ratio stated in the law?
d) Is the liquidity ratio8
stated in the law?
1
1
1
0
Total value of index component 0.75
a) Is there a deposit insurance system in the country?
b) If yes to (a), is it mandatory for all banks to join?
0
-

6
Law in this context means any law on banking, regulation or directive from the Bank of Ghana or any
ethical standard that must be observed in the banking industry
7
Risks may include the use of hedging tools such as derivatives, interest rate hedging and any other type
of risk such as granting of loans without adequate due diligence.
8

"#$% %&'( #) *#+,
-.)#' (&/.$0)$

32
a) Is the number of years of experience of managers set in the law?
b) Is it a requirement that bank managers attend relevant course before their appointment
ethical standards considered when appointing the bank’s management?
0
1
1
Total value of index component 0.67
a) Are there specific regulations and criteria for the establishment of a new bank?
b) Are the bank’s owners and managers screened before the license is granted?
c) Are there specifications for the minimum capital requirements?
d) Are banks checked for having a reasonable business plan and financial projections?
1
1
1
1
Total value of input index (weighted average of various index components) 0.684
Table 4: Regulatory Output Index for Ghana (2007 versus 2009)
2008 2009
a) Deposits as a percentage of GDP
b) Number of citizens served by each bank branch
0.4260.370 0.415
0.340
Total value of index component 0.796 0.755
2) Risk based capital ratio
a) Is the minimum capital ratio relative to Basel’s (8%) achieve 1 1
Total value of index component 1 1
a) Were there bankruptcies in Ghana over the past five years? (No= 1,
Yes=0)
1 1
Total value of index component 1 1
Total value of output index (weighted average of index components) 0.932 0.918

33
Calculation of the Weights of the input indices
The input indices measure the intensity of the regulations. As has already been discussed, a
weight of “1” is assigned to any question answered “YES”. A weight of “0”is assigned to any
question answered “NO”.
For example, if the answer to the question “Is it a requirement that external auditors revise the
balance sheet?” is Yes, a point of 1 is given to it. But if the answer is No, it is assigned zero (0).
Thus, from the table, any question assigned a value of 1 means it was answered yes and vice-
versa.
In total, there are sixteen (16) individual questions. After all the 16 questions have been
answered, the weights under each category are summed up and reweighed.
For example, under the regulations to cut off the risky behaviour of banks, with four individual
questions, since there are four (4) questions and three (3) of these questions were given weights
of 1 and only one (1) was weighed zero (0), it means there is a 75% (0.75) of the questions under
that category were answered in the affirmative.
From the table, the intensity of the regulation concerning deposit insurance is 0% since there is
no insurance system in place.
Regulation to create and implement deposit insurance system does not exist in the regulations;
hence a score of zero was given. This implies that regulations does not cover this aspect, and can
be said to be ineffective in respect of this particular criterion.
For the criterion for qualifications of bank managers, there was an overall score of 0.67.
Question (a) under this criterion was not provided for in the regulations and hence the total score

34
was 0.67 out of 1. In this respect, the regulations can be said to be moderately effective under
this criterion and the Bank of Ghana has to do more in this criteria.
Under the criteria for licensing banks the total value of index component was 1 which indicates
that the regulation is effective in this respect.
The total value of input index was 0.684, which is a summation of the total values of index
components. Thus in totality, the effectiveness of the banking regulation can be said to be above
average but not completely effective
Now, a description of the total indices is given. Here, the total indices of the five main categories
are used. Since there are five (5) main criteria, all the five weights – 1, 0.75, 0, 0.67 and 1 – are
weighed again. That is,
1 + 0.75 + 0 + 0.67 + 1
5
=
3.42
5
= 0.684
Thus, the overall weight of the inputs indices is 0.684
Interpretation of the Weights (Benchmarks).
As a measure of intensity, an overall weight of 0 means the regulation is not intensive at all (very
sketchy). The other extreme is a weight of 1 which means that, the regulation is very intensive
and all encompassing.
Using a Likert measure as a benchmark, a weight of 0 to 0.25 means the regulations are not
intensive at all, 0.26 to 0.49 is an above average intensity, 0.5 is moderately intensive, 0.51 to
0.75 is highly intensive and a weight of 0.76 to 1 means the regulation is excessively intensive.

35
Table 5: Benchmark of weights
Weight Interpretation
0 - 0.24
0.25 - 0.49
0.5
0.51 - 0.74
0.75 - 1
Not intensive
Slightly intensive
Intensive
Highly intensive
Extremely intensive
Comparing the input index of Ghana, which is 0.684 with the benchmarks, it can be said that, our
regulations is highly intensive, although not extremely so.
Calculation of the weights of the Output indices
The output index depicts the outcomes of the governments’ effort and measures the performance
of the banking system. It must be reiterated that, the output indices can be arbitrary and
somewhat subjective depending on one’s definition of what constitutes a “good” performance.
This is because, we all have different standards of measurement.
However, we want to mitigate this subjectivity by using national figures such as GDP, amounts
of deposits, etc.
• Deposits to GDP figures in Ghana: 2008: 35.2% = 0.352, 2009: 41.5% = 0.415
(see table 6 for the figures of deposit to GDP for the past 8 years)
• Bank branches as a ratio of total population
=
=>?@A B>BCA@?D>E
=>?@A ECFGHI >J GI@EKℎHM
Number of Bank Branches: 2008: 639 2009: 698
(See table 6 for the figures of number of bank branches for the past 8 years)

36
It is on record that, the total bankable population is about 2 million, though the total Ghanaian
population is 23.8 million (World Bank estimates). Thus, the ratio of number of banks to total
population is:
2008 ∶
23.8 million
639
= 37,000.
2009 ∶
23.8 million
698
= 34,000
In terms of weight, this converts as 37000 per 1 million and 34000 per 1 million, giving ratios of
0.37 and 0.34 respectively.
This can give an indication of the service quality given to customers, as it can be rationalized
that, a bank can give much attention to their customers if they have to deal with a relative less
number. The lower this number, the better.
• Equity ratio=
-.)#'VWX0)Y
-.)#'Z.#+$
Total equity (shareholders’ funds) of the banking system amounted to GH¢1,762.8 million as of
December2009, an increase of 58.4 percent compared with 38.1percent a year earlier. Also, the
total loans for December 2008 are 4146.48 million Ghana cedis, compared to 6917.65 million
Ghana cedis in 2009. This means the equity ratio for 2008 is given as;
[.]
^_^`.^a
giving a figure of
0.18 and that of 2009 is given as
_[`].a
`b_[.`c
is equal to 0.26. This means that the equity ratio
increased significantly.

37
• Provisions for loan losses =
-.)#' de.f0$0.+$
-.)#' Z.#+$
The quality of the loan portfolio of the banking industry as measured by Non-Performing Loans
(NPL) ratio increased to 14.9 percent in December 2009 from 7.7 percent in 2008.
Similarly, loan loss provision to gross loans ratio also increased to 9.4 percent from 5.1 per cent
in 2008. This means that though the provisions for loan losses increased over the year under
review, the quality of the loan portfolio greatly improved. This shows that, bad debts have
decreased, probably due to prudent background checks on loan recipients and the toughness of
the regulations.
• Number of bankruptcies in Ghana for the past 5 years: None
There has not been any incidence of bankruptcy over the past decade. This gives credence to the
fact that, the regulations have been enough to forestall such unpleasant occurrences.
Table 6: Figures9
Year 00 03 04 05 06 07 08 09
Deposits to GDP 26.8 25.5 25.2 24.5 29.4 35.2 42.6 41.5
Bank Branches n/a 344 352 380 391 596 639 698

9
Bank of Ghana, Monetary Policy Report (Financial Stability Report), VOLUME 5 NO. 1/2010, February 2010

38
4.2 Results of Opinion Poll
The following recommendations were made by respondents:
a. All respondents indicated that the level of effectiveness of the regulations is effective, as
opposed to the other options of Very Effective, Not Sure, Not Effective or Very Ineffective.
b. When asked which areas of the banking regulation they would recommend that the Bank of
Ghana changes, these were their recommendations: That,
• the Bank of Ghana reduces the current reserve requirement of 9%
• the Borrowers and Lenders Act be seriously revised to correct contradictions.
c. When asked to make recommendations on what the Bank of Ghana should add to or
remove from regulations to increase the effectiveness of the regulations, these were what
they had to say: That,
• a Credit Rating system should be introduced
• a deposit insurance system should be considered
• issues relating to the realization of security that is registered with the collateral registry
should be addressed

39
Other useful recommendations included the following:
i. The borrowers and lenders act should be made more comprehensible and
understandable.
ii. Address the proper distinction between credit transactions, credit facility and definitions
of credit agreements.
iii. Address issues of conflict between priority of registration under the old system and also
under the new collateral registry.
iv. Address issue of when lender has to accept payment in a credit agreement from
borrower vis-à-vis agreement executed by the parties and the terms embodied therein.
v. Address issues of accepting collateral that may not necessarily be directly cash covered.
vi. Remove clause that requires and obliges a lender irrespective of whatever agreement
entered into with borrower to accept prepayment as prescribed under the law.
vii. The primary reserve requirement should be scrapped to make the banks more liquid and
thereby increase surplus funds.
viii. The introduction of a credit rating body.

40
CHAPTER 5
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
The global financial crisis necessitated a research into the effectiveness of the current existing
banking regulation. This research project sought to measure the effectiveness of banking
regulation, by adopting the regulation index developed by Neyapti and Dincer (2005), and
adopted and refined to suit the African banking environment by Tadros (2009). Regulatory
indices, which comprised input indices and output indices, were applied to the Ghanaian banking
industry. A survey in the form of an opinion poll was conducted in addition to the use of the
index. This poll targeted the senior management staff of the sampled banks in this study.
A computation of the indices revealed that the banking regulation of the country was sufficient
though certain policy initiatives like the inclusion of a government funded deposit insurance
system will be helpful.
Meanwhile, a collation of the responses we gathered from the respondents of the polls seems to
suggest that the regulations are sufficient and perhaps maybe even too sufficient.
5.2 Conclusion
Applying the Neyapti and Dincer (2005) framework of regulatory indices to Ghana, it reveals
that the intensity of the regulation in Ghana is somewhat effective.
The conclusions drawn are able to answer our research questions satisfactorily. For instance on
the issue of whether there is a need for tighter regulation or deregulation, it is evident from our
index that tighter regulations will not be necessary.

41
By way of answering our research questions:
The answer to the question as to whether there is the need for a tighter regulation or deregulation,
it becomes evident that, a tighter regulation will not be needed.
However, there is the need for the inclusion of a deposit insurance system financed by
government.
A measure of the intensity of the regulations and hence its effectiveness reveals that they are
very intensive. This debunks our hypothesis that the existing regulations are not intensive
enough.
Indeed, the respondents sampled, also believe the regulations are too tight, and generally seemed
to be calling for lesser regulation. This also proves our hypothesis that they are calling for more
intensive regulations wrong.
5.3 Recommendations
We recommend to the stakeholders in the industry that, a deposit insurance system be instituted
by government to make the industry safer and protect the depositor. This insurance system
should have the government as the executor, and must also provide cover for a specified amount
of funds for each depositor. As to the amount that will be appropriate to take the insurance, we
are not able to suggest in this study as we believe that decision will be better taken after a serious
research on the topic. We also entreat those in charge to take heed to the various calls made by
the managers we sampled as these calls will lead to a better, safer and more efficient banking
industry.

42
Lastly, we recommend to the authorities to resist calls by other stakeholders in the industry to
reduce the secondary reserve requirement of 9%, as such an action will not benefit the industry
in the long run.
5.4 Directions for further research
We advise that, any subsequent study on the effectiveness of banking regulation include the
other three (3) components of effective regulation that we excluded, namely: capital
requirements lending and corrective actions. This will make the approach and findings holistic.
A particular emphasis can also be given to the study of how effective the new capital
requirement has been in ensuring a very effective regulatory regime in Ghana.
A feasibility study of a possible deposit insurance system in the banking sector will also be a
very positive addition to this research in particular and the literature on banking regulations as a
whole. The areas that can be explored here are whether such a system should be mandatory or
not; the extent of coverage of the scheme (i.e. whether it should be partial or full coverage); and
who should finance such a scheme.

43
REFERENCES
1. Bagehot, W (1873). Lombard Street: A description of the money market. Lagen, Paul
and Co, London.
2. Barth J., Caprico, G and Lewin, R (2006), Rethinking Bank Regulation: Till Angels
Govern, Cambridge University Press.
3. Basel Committee on Banking Supervision (2006), Core Principles of Banking
Supervision. Bank for International Settlements.
4. Bernanke, B (2007). Financial Regulation and the Invisible hand - A speech at the New
York University Law School, New York.
5. Buabeng, P.H (2000). Fraud and Bank Failure in Ghana. (Unpublished MBA thesis,
University of Ghana Business School).
6. Chatterjee, D.P. (2007), Handbook on Risk Management. Indian Institute of Banking and
Finance, Module B, Macmillan.
7. Frimpong, J. M (2010). Investigating the Efficiency of Ghana Banks: A non-parametric
approach. American Journal of Scientific Research. Issue 1, pp. 64 – 76.
8. Harring, R.J and Litan, R.E (1995). Financial Regulation in the Global Economy.
Brookings, Washington D.C. pp.49-50.
9. Lindgren, Carl-Johan, Gillian Garcia, and Matthew I. Saal, (1996) Bank Soundness and
Macroeconomic Policy, International Monetary Fund, Washington, DC.
10. Madura, J (2001). Financial Markets and Institutions. South – Western College Publishing.
5th
ed.
11. Mayer, M (1997). The Bankers: the next Generation. Truman Talley Books/Plume, New
York. p. 391

44
12. Neyapti B., Dincer N. (2005), Measuring The Quality Of Bank Regulation And Supervision
and Its Macroeconomic Effects - An Application to Transition Economies, Journal of
Economic Inquiry, Vol. 43, p. 79-99.
13. Quartey, P (2003). Government Regulations and Banking Sectors Efficiency in Ghana.
Institute of Economic Affair, Working Paper Series (July).
14. Sheng, A. (1990). Role of Central Bank in Banking Crises: An overview. Papers presented
at the fifth seminar on Central Banking. Washington, D.C., November 5 – 15, 1990.
Cited in: The Evolving Role of Central Banks, Edited by Downes, P and Vaez-Zadeh,
R. (1991), Central Banking Department, IMF. p 197, p 215.
15. Swary, I. and Topf, B (1992). Global Financial Deregulation: Commercial Banking at the
Crossroads. Blackwell Publishers, Cambridge.
16. Tadros, S. R. Gad (2009), Measuring the Quality of Banking Regulation in Egypt, Faculty
of Management Technology, Germany University in Cairo, New Cairo. Working
Paper, No. 17, October.

45
APPENDICES
Appendix 1:
Questionnaire I: Regulatory Indices for Ghana10
Regulatory Input Index for Ghana
1) Regulations to enforce transparency
1. Are banks required by the law11
to publish your balance sheet in a national newspaper
on annual basis?
a) Yes b) No
2. Is it a requirement that external auditors revise your balance sheet before publication?
a) Yes b) No
3. Is it mandatory that, the balance sheet of banks be checked for compliance with
international accounting standards?
a) Yes b) No
4. Are there regulations by the Bank of Ghana which specify the amount of risk12
your
bank is allowed to take?
a) Yes b) No
5. Is the minimum reserve ratio stated in the law?
a) Yes b) No
6. Is the liquidity ratio13
stated in the law?
a) Yes b) No

10
This was adopted from Tadros, S. R. Gad (2009), Measuring the Quality of Banking Regulation in
Egypt, Faculty of Management Technology, Germany University in Cairo, New Cairo. Working Paper,
No. 17, October.
11
Law in this context means any law on banking, regulation or directive from the Bank of Ghana or any
ethical standard that must be observed in the banking industry.
12
Risks may include the use of hedging tools such as derivatives, interest rate hedging and any other type
of risk
13
( Cash Held At Bank / Total Deposits)

46
7. Is there a deposit insurance system in the country?
a) Yes b) No
8. If there is, is it mandatory for all banks to join?
a) Yes b) No
9. Is the minimum number of years of experience for bank’s managers specified in the
law?
a) Yes b) No
10. Is it a requirement that bank managers attend relevant courses before their
appointment?
a) Yes b) No
11. Are ethical standards considered when appointing your bank’s management?
a) Yes b) No
12. Are banks checked for having a reasonable business plan and financial projections
before license is granted?
a) Yes b) No
13. Are there specific regulations and criteria for the establishment of a new bank?
a) Yes b) No
14. Are banks owners and managers screened before the license is granted?
a) Yes b) No
15. Are there specifications for the minimum capital requirement?
a) Yes b) No

47
Regulatory Output Index for Ghana
a) Deposits as a percentage of GDP
b) Number of citizens served by each bank’s branch
2) Risk based capital ratio and other banking ratios
a) Is the risk based output relative to Basel (8%) achieved?
Other ratios that might be used to calculate the risk based capital ratios are: equity ratio
and provisions for loan losses.
a) Were there bankruptcies in Ghana over the past five years?
Other output indices would include a measurement of the performance of the bank
managers.

48
Appendix 2:
Questionnaire II: Opinion Pool of the Ghanaian Regulations
1. In your opinion, how effective do you think the banking regulations / laws of Ghana are for
the industry?
a) Very Effective b) Effective c) Not Sure
d) Not Effective e) Very ineffective
2. What areas of the banking regulation would you recommend that the Bank of Ghana
changes?
……………………………………………………………………………………………………
3. Why would you like to recommend such a change to that area of the banking regulation?
……………………………………………………………………………………………………
4. In your opinion, what would you suggest that the Bank of Ghana add to the regulations to
make it more effective?
……………………………………………………………………………………………………
5. In your opinion, what would you suggest that the Bank of Ghana remove from the
regulations to make it more effective?
……………………………………………………………………………………………………
6. Do you think there is the need for a deposit insurance system in Ghana?
a) Yes b) Not Sure c) No
7. If you think there is the need for such a deposit insurance system, how urgent do we need it?
a) Very Urgent b) Not Sure c) Not so Urgent.
8. Who should finance such a deposit insurance system if we adopt one?
a) Government b) Private investors c) Joint Venture
9. If you have any comments or suggestions or observations about the banking regulations and
banking laws of Ghana, please write them in the space provided below:
………………………………………………………………………………………………………

Owusu Achiaw Kwasi's Research on the Regulation of the Banking Industry in Ghana

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