The financial sector in Ghana has grown rapidly since 2010 but remains bank-dominated and relatively shallow. Total financial sector assets grew from 53 percent of GDP in 2010 to 78 percent in 2017. Alongside the rapidly increasing financial sector since 2010, the share of Ghanaians with access to formal financial services—a measure of financial inclusion—has increased.
Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs. But access to financial services is heterogeneous across regions and key demographics. Rural access to formal financial accounts is low, but almost doubled between 2011 and 2017, due to a rising market share of NBFI. Women are less financially included than men in Ghana. Yet, excluding women from access to financial services means widespread lost opportunity for their households and the economy as a whole.
Not surprisingly, the poor have significantly lower access to formal financial services than the non-poor. Insufficient financial literacy is an important long-term factor for low savings rates in Ghana, and more broadly, financial illiteracy suppresses consumers’ demand for financial services. In addition, persistently high interest rates in Ghana are a major barrier to affordable access.
But despite all the challenges, there has been significant growth in the number of financial access points over the past five years, primarily related to the spread of mobile money. This indicates the potential of DFS and payments to further enhance financial inclusion in Ghana. In the meantime, Ghana has a banking sector that has been facing serious soundness challenges, which after years of build-up culminated in 2018 with a series of necessary and expensive banking resolutions.
A Case for Financial Inclusion
More financial inclusion is good for the economy …
Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs. With access to a financial account, people no longer need to rely on and transact solely in cash or use their mattresses as savings cabinets. Financial access connects people into the formal financial system, making day-to-day living easier. As account holders, people are more likely to use other financial services, such as credit and insurance, to start and expand businesses, invest in education or health, manage risk, and weather financial shocks, which can improve the overall quality of their lives. Ultimately, more and better financial intermediation will have a positive impact on growth, mostly through lower transaction costs and better distribution of capital and risk across the economy. Alongside the rapidly increasing financial sector since 2010, the share of Ghanaians with access to formal financial services has increased.
According to Consultative Group to Assist the Poor (CGAP 2015) 58 percent of Ghanaians had access to formal financial services in 2015, up from 41 percent in 2010. While banks contributed 36 of the 58 percentage points in formal access, they only contributed 2 of the 17 percentage points increase between 2010 and 2015; conversely, mobile money alone accounted for 7 percentage points of the increase, and mobile money and other NBFIs—regulated MFIs, credit unions, insurance companies, etc.—jointly accounted for the remaining 8 percentage point increase.
The share of Ghanaians with a registered financial account (bank, NBFI, or mobile money account) was 48 percent in 2015. More recent data shows that the percentage of Ghanaians with registered financial accounts increased to 58 percent in 2017, while the percentage with mobile money accounts increased from 13 to 39 percent between 2014 and 2017. Yet, some regions and key demographics have only limited access to financial services. In terms of regions, the five poorest regions (Upper West, Northern, Volta, Upper East, and Brong Ahafo) remain the least financially included, despite the largest gains in financial inclusion taking place in these areas between 2010 and 2015.
Similarly, rural residents, women, and the poor have less access to financial accounts compared to the average population and their respective counterparts.
… yet rural access is low, the poor and women are largely excluded from financial services.
Rural access to formal financial accounts is low, but almost doubled between 2011 and 2017, due to a rising market share of NBFIs. People living in remote areas usually face a physical distance to financial access when banks or other access points are simply too far away to reach, unless long bus rides can be afforded (World Bank 2012). Yet, rural access in Ghana almost doubled, between 2011 and 2017, from 26 to 51 percent.
Much of the growth in rural access has come from formal accounts being offered by NBFIs, that have grown their footprints in underserved regions of the country, in a combination of mobile money and other non-bank formal institutions (World Bank 2016). In fact, rural residents—such as women and the poor—rely more heavily on NBFIs and informal financial services than do urban residents, men, and the non-poor.
Almost one-third of all adults in Ghana used informal financial services in 2015. According to CGAP (2015), 29 percent of adult Ghanaians used informal financial services and products, which are not regulated by the Government. VSLAs are one important type of informal financial institutions.
They are typically groups of around 30 members and often take the form of rotating savings and credit associations, in which members make deposits into a group fund and take turns borrowing funds for investment purposes or household needs. According to Savings Groups’ Information Exchange, there are 10,832 savings groups in Ghana, comprised of 282,001 members (an average of 26 members per group).9 Of these members, women are the largest participants, comprising 76.4 percent or approximately 214,320 members. These groups have approximately US$13 million in savings and US$8.7 million in outstanding loans. The dropout rate among members is relatively low at 2.9 percent. Women are less financially included than men in Ghana.
The exclusion of women from financial services is a prevalent phenomenon at the global level for a variety of reasons, including the fact that women often may not be aware of the services available to them or may be prevented from making use of them. In addition, it is far too common that women lack collateral for loans, making them ineligible to access financial services. In Ghana, female inclusion continues to fall below the national average. In 2017, 54 percent of women had an account with a formal financial institution, compared to 58 percent for the general population and 62 percent of men.
The percentage difference between female inclusion and inclusion of the general population has widened according to the Findex survey (one percentage points difference in 2014 compared to a four percentage points in 2017), suggesting that men are now being included at a faster rate than women. Excluding women from access to financial services means widespread lost opportunity for their households and the economy as a whole. Access to financial services helps women shape household spending decisions (often toward education and health-related causes), make investments, and manage economic risk. A 2018 study on Ghana showed that women who were provided the ability to utilize a commitment savings account prioritized savings to ensure their ability to smooth household consumption and respond to shocks. The women in the sample also maintained pressure on their partner to meet current needs and invest in children and property for the future.
Low financial literacy and high interest rates are key issues for financial inclusion
Low financial literacy is an important long-term factor for low savings rates and suppressed demand for financial services in Ghana. Baidoo et al. (2018) show that financial literacy is key to promoting domestic savings in the country and hence, according to the authors, the issue requires more policy attention. Indeed, financial illiteracy has an even more profound impact that goes beyond savings. Financially illiterate consumers are not actually able to demand the services they need on the market.
So, with a sizable proportion of the adult population still underserved by formal financial institutions, there is an argument for stimulating demand among these groups, through targeted financial literacy and education campaigns. In a crowded market with many formal and informal financial institutions offering their services, financial inclusion-related issues arise from the relationship between providers and their consumers, not only related to the use of services, but also to the low level of financial capability in general.
Persistently high interest rates are a major barrier to access. High interest rates partially reflect a high default risk as implied by high NPL rates posted by banks. In that context, leveraging data to support the development of credit markets is critical to market growth and better service provision for both individuals and SMEs.
The aggregation of data on transaction history of customers presents a significant opportunity to better ascertain the viability of a particular customer or business when it comes to the provision of credit facilities. Similarly, social media platforms, are developing data analytics tools that can predict financial behavior of individuals, which could be leveraged for developing fit for purpose credit products. However, the sharing of data throughout the financial sector in Ghana is not uniform. While some DFS providers are employing data analytics to develop alternative credit profiles, significant segments of the market remain at a data disadvantage, limiting their ability to develop and sell credit-based products.
The result is an underdeveloped credit market, which presents significant risk for default and offers services at sustained high interest rates that constrain borrowing and fuel over-indebtedness. Despite all the challenges, there has been significant growth in the number of access points over the past five years, primarily related to the spread of mobile money. The penetration of select access points—ATMs, branches, and mobile money agents—has continued to increase since 2013 (Figure 3.1.6). However, the penetration of mobile money agent locations throughout Ghana is far greater than traditional access points such as ATMs and branch networks, highlighting the importance of new technology to advance the financial inclusion agenda.
Digital Financial Services and Payments
Digital innovations play a key role for a more financially inclusive economy …
Mobile phone penetration has created opportunities for the expansion of financial services and increased the role of non-financial institutions. Ghana is the fastest growing mobile money market in Africa. The total number of mobile voice subscriptions grew 39 percent from 25.6 to 37.4 million between 2012 and 2017. In tandem, registered mobile money accounts increased six-fold between 2012 and 2017, from 3.8 million to 23.9 million. Active mobile money accounts increased significantly from 345,434 to 11.2 million between 2012 and 2017.
As a result, the number and value of mobile money transactions skyrocketed since 2012 to 982 million and GH¢156 billion in 2017, respectively. The market share is very skewed with one provider accounting for over 80 percent of the market. While registered mobile money customers and usage increased in tandem with mobile phone penetration, they remain significantly below mobile phone ownership, demonstrating that there is space for mobile money to contribute even more to financial inclusion. The expansion of the agent distribution network was critical to the success of mobile money. The number of active agents increased from 5,900 in 2012 to 151,745 in 2017. This expansion of agents offered users more cash-in and cash-out opportunities and increased the overall convenience of using mobile money. Banks have recently contributed the least to increasing financial inclusion across the country. Much of this is the result of their lack of focus on offering financial solutions to everyday Ghanaians, but instead focusing on corporate banking and high net worth individuals. However, the growth of mobile money has demonstrated the potential of retail financial services. Recognizing that mass market banking presents a significant opportunity for growth, many banks are now also utilizing digital channels to broaden their reach and customer base.
Liberalization of the Unstructured Supplementary Service Data (USSD) channel has been critical to the market, allowing banks to also leverage the mobile phone as a channel for delivering financial services. Multiple banks have developed mobile banking services, deploying solutions developed by domestic fintech companies. Other forms of electronic payment instruments are also growing, albeit at a slower rate than mobile money.
Transactions at ATMs and POS terminals facilitated by the national switch have grown consistently since 2012, with over 2.3 million being undertaken in 2017 alone. Similarly, direct credit transactions, which are transfers from one bank account into another, through the central electronic fund transfer system of Ghana, have also continued to increase. While banks have not been a driving force for increased financial inclusion in Ghana, they are seeing existing accounts being utilized more by existing customers, suggesting a deepening of financial inclusion and literacy among their current customer base. The government has facilitated interoperability across payment instruments by establishing a mobile money switching solution.
In May 2018, the GhIPSS went live with the one of the first interoperable mobile money switch in Africa. An extension of the existing GhLink switch, the new system allows customers to push and pull funds across mobile money providers and between mobile money providers and banks. Recognizing the importance of payment systems and financial inclusion to improved economic growth and performance, the Government has shown a high level of commitment in driving digitization and innovation in payments.
This commitment is within the context of a very active and burgeoning fintech space, where the rate of innovation across providers has driven the usage of mobile money accounts and other forms of transaction account. Interoperability has increased the convenience and value proposition of DFS for many financial consumers. As active usage increases, so has the range of products and services riding on the DFS infrastructure.
Customers are beginning to access micro-credit directly from their mobile phones, without having to enter a bank branch; similarly, international remittances from relatives overseas are being terminated directly onto mobile wallets, significantly increasing convenience and efficiency for beneficiaries. Partnerships between different financial institutions have been essential for much of the use-case development observed in Ghana. For instance, a leading bank and mobile money provider have come together to offer savings accounts linked to mobile money wallets that offer customers competitive annualized interest rates.
The Government has taken some initiatives to encourage financial innovation.
Another notable government initiative was the introduction in 2008 of the E-zwich biometric card. E-zwich cards can be used at any E-zwich enabled point of sale terminal or ATM, at any bank, and also for payments, including salaries or pensions, which can be loaded onto a cardholders account. The uptake and usage of the E-Zwich card has been increasing, but it is constrained by limited merchant acceptance. As of December 2018, 2.7 million E-Zwich cards had been issued, with 7.7 million transactions worth GH¢5.6 billion (2 percent of GDP). However, only 53 percent of the cards have residual value because most E-zwich transfers are immediately “cashed out.” Although not as significant as the growth seen in use of mobile money, direct credit, or check-based transactions, there has been substantial growth in the number of E-zwich cards issued, (both in volume and in value of transactions) since 2010. The number of cards issued in 2018 when compared to 2010 has grown by 5 times, while the value of transactions moving through the system have seen significant growth of over 60 times the value transacted in 2010. The success of DFS in driving financial inclusion has encouraged the Government to develop both a vision and strategies to expand financial inclusion in Ghana. Working with development partners such as the World Bank and CGAP, the GoG has developed a NFIDS that covers the 2017–2023 period. In addition, with a growing FinTech market, a DFS policy has also been developed, setting out a clear vision for establishing a truly digital economy in Ghana. Importantly, both the NFIDS and the DFS policy highlight clear opportunities and growth areas going forward. The NFIDS (2017–2023) outlines reforms to increase financial inclusion from 58 percent in 2015 to 85 percent in 2023. The reforms are structured around five mutually reinforcing priority areas or pillars of financial sector development: (i) Financial Stability; (ii) Access, Quality, and Usage of Financial Services; (iii) Financial Infrastructure; (iv) Financial Consumer Protection; and (v) Financial Capacity. In particular, the NFIDS acknowledges Ghana’s financial stability challenges and seeks to address them as a pre-condition for promoting sustainable financial inclusion and development. The increase in access to financial services is expected to create economic opportunities and contribute to poverty reduction. As a compliment to the NFIDS, the government has also developed its DFS Policy, which establishes a 3-year roadmap (2018–2020). The roadmap aims to build on technological advances and ecosystem evolutions to create a resilient, inclusive, and innovative DFS ecosystem that bolsters social development and a robust economy that supports a thriving private sector. The DFS seeks to achieve two goals by 2020: First, all Ghanaians will have access to a broad range of suitable and affordable DFS—including payment, credit, savings, insurance, and investment. Payment flows will have been digitized and formalized, thereby shrinking the informal economy, increasing government revenues, and making monetary policies more effective. Second, businesses and government will have achieved greater transparency and efficiency to contribute to the economic growth of the nation. The ongoing rollout of the biometric centralized national ID system will provide the supporting infrastructure to facilitate the financial inclusion of the remaining 42 percent of adult Ghanaians. Currently there are nine separate identity databases across various public-sector entities. The rollout of the new centralized system will accelerate digital payments by adopting a unified approach to identification and authorization of transactions. In fact, 22 percent of Ghanaians identified the lack of documentation as the reason for not having a financial account (Findex 2017).
Opportunities to Improve Financial Inclusion
Digitizing government and utility payments will be critical.
There remain significant opportunities in the payments space for driving financial inclusion, specifically in the area of government collections and utility payments. While government to person payments are nearly all electronic, there are untapped opportunities for digiting government collections, the majority of which are still paid in cash. Similarly, digitizing payments of electricity and water, which are almost exclusively still paid in cash, will bring significant convenience to millions of people, deepening financial inclusion further. Current approaches remain piecemeal and clear direction from Government is needed to further push existing projects in these areas. To do so, financial and technical support to the Ministries, Departments, and Agencies (MDAs), and utilities is required to update their internal accounting systems. This would allow full integration via open application program interfaces (APIs) into institutions such as GhIPSS, allowing for individuals to use their bank account or mobile wallets to pay for government services or utility bills. In 2014, the GoG launched the Ghana E-Payment Portal (GEPP) but the one-stop-shop idea for digitizing G2P payments has yet to take off. The GEPP has been rolled out in only twelve Municipal and District Assemblies and only very few services are offered, such as the marriage registration fee payment under Accra Metropolitan Assembly (AMA) services. Those services that are offered generally require only one-off payments. Coupled with the fact that a transaction fee is charged to customers for use of the portal, it is not surprising that there is low uptake of these services. Whether a centralized approach as seen with GEPP or bespoke solutions for individual MDAs is taken, it is evident that there is a need for a policy mandating the digital payment of all fees and fines to Government.
Collections of taxes from small payers—which are almost exclusively done via cash payments— offer a significant opportunity to leverage a large volume of payments to support financial inclusion efforts. GEPP began accepting payment of taxes online in 2017, commencing with large taxpayers; however, issues with service delivery have limited tax transactions via the portal. The Small Tax Offices (STOs) of the Ghana Revenue Authority, which are responsible for processing a significant volume of tax payments from individuals, business, and informal sector, almost conduct all transactions in cash. Therefore, mandating that such transactions be conducted digitally would not only support the financial inclusion efforts but would also address ongoing challenges such as fiscal leakages, while increasing the operational efficiency of tax offices by freeing up staff to better focus on increasing the overall tax base of the country. Digitization of utility payments such as water and electricity bills has started but is still not complete. According to the World Bank, 79 percent of the Ghanaian population has access to electricity in 2016. The distribution is provided by two separate state monopolies: the Electricity Company of Ghana (ECG)—now Power Distribution Services (PDS)—for Southern Ghana and urban areas (overall 70 percent market share; ECG 2017) and the Northern Electricity Distribution Company for the rural Northern part of Ghana. For post-paid households (those that pay for electricity after it has been used) there are digital options for making payments, including via a bank account or mobile wallet. For pre-paid customers, who account for the largest share of households, payment cards can only be used at ECG pay points or from third party vendors. As with small tax payments this can only be done via checks or with cash. The water sector12 lags significantly, with few opportunities to make digital payments. While digitization efforts are ongoing, the process needs to be simplified and standardized to ensure migration from cash-based payments. Just shifting a fraction of the customers to digital payments would be a significant achievement for the GoG, as studies have shown that access to energy and water offers a significant incentive for customers to register for and actively use digital payment channels (BTCA 2017).
Linking informal channels with formal financial services is key
Since informal groups play a critical role in the provision of financial services, there is an opportunity to increase formal financial inclusion by linking them to formal financial services providers. There have been programs in the past attempting to create linkages between VSLAs and the formal financial sector. Typically, linkage programs help to create or train VSLA groups on how to operate as a group and support formal financial services providers design and offer products suitable to VSLAs. For example, one common approach is to help groups open accounts in banks or in other financial institutions, therefore substituting for traditional ‘lock box’ used to keep group money safe. Mobile money is increasingly being used to improve the VSLA business model. Through partnerships between financial institutions and mobile money operators, VSLA groups can store and access their money in e-wallets on their phones and split up the electronic pin among multiple group members to ensure the security of funds. Interoperability between a mobile provider and a bank account has also enabled VSLA groups to move funds between banks, mobile wallets, and the group itself. This also helps ease the burden and risk of moving cash between a group and a financial institution. Such linkages can help VSLA members get their foot in the door of formal financial institutions and to build their capacity to utilize formal financial services, so when members are ready to join as individuals, they can do so by opening a savings or transaction account.
Overall, the effectiveness of linkages depends on the availability of access points (including a network of bank and mobile money agents) and a stronger consumer protection framework. Thus, there is a complementarity between linkages and the promotion of agent banking. Without effective consumer protection, linkages expose VSLAs members to abusive and predatory practices by some financial services providers. Therefore, it is essential to educate consumers about their rights and to put in place a reliable recourse mechanism.
Promoting agent banking can increase institutional footprints across the country
Many banks and other non-bank financial institutions are yet to take advantage of agent banking and other low-cost models to increase their footprint throughout the country. High costs of setting up brick and mortar branches and lower levels of economic activity in some rural areas of Ghana have eroded the business case for improving financial access to communities in these regions. To set up one branch location can cost between GH¢300,000 and GH¢600,000, with an additional GH¢10,000– 30,000 per month in operational costs. In comparison, the cost of starting an agent outlet is estimated at GH¢10,000. In addition, given their physical and cultural proximity to financially underserved communities, agents are better suited than traditional bank branches to drive financial inclusion, particularly in rural areas. A recent study conducted in Senegal by the World Bank, shows that, compared to branches, agent banking lowers transaction costs and encourages individuals to visit the agents often and to save more (Buri et al. 2018). The industry is yet to respond to regulatory developments allowing them to authorize agents to act on their behalf. By authorizing retail businesses (shops, pharmacies, etc.) and individuals to act as agents on behalf of financial institutions, agent banking enables the provision of financial services in remote areas on a scale that is commensurate with transaction levels. Recognizing the opportunity, the BoG issued Agent Guidelines in July 2015 to guide the recruitment and management of agent networks by banks and electronic money issuers. However, the adoption of the agent banking model has been slow, despite a successful rollout of agent banking by a leading indigenous bank. It is clear that further promotion of agent banking is needed.
Financial literacy and better use of data can stimulate demand for services.
Improved financial literacy programs could stimulate demand for services. In Ghana, many consumers have been victims of predatory practices as they seek high investment returns offered by MFIs; others have been using digital credit products without fully understanding their rights and obligations as consumers. Literacy and education programs should be tailored to the needs of target groups, and emphasize knowledge of financial products, financial concepts, and basic numeracy skills. Given the growth in the use of DFS, it is important to increase the digital literacy of the public to safeguard customers’ rights and prevent instances of misuse or fraud. A concerted effort to improve the overall level of financial literacy in Ghana will give consumers a better understanding of why financial services can be of benefit to achieving economic empowerment. The Government should take the lead in developing sound policies and/or the legal frameworks to mandate data-sharing. There is a role for Government in mandating data-sharing or data portability to help level the playing field, allowing for new entrants into the market to create competition and lower transaction costs. Leveraging the concept that the individual is the owner of their own data, as outlined in the Data Protection Act 2012, the GoG could facilitate the introduction of a limited data-sharing regulation between data controllers and other regulated credit institutions, on the basis that explicit consumer consent is obtained prior to the sharing of any individuals information. As outlined in MoF (2018), there is a clear role for the Ministry of Communication and the BoG in moving this forward and in obtaining buy-in from other stakeholders such as the current data controllers in the Ghanaian market (MNOs, Social Media platforms, banks). This would build on information already provided by credit bureaus and the collateral registry. In conclusion, universal financial access is an attainable target in Ghana with the use of innovative technology and approaches. This is needed as access to financial services is heterogeneous across regions and key demographics. The analysis found, not surprisingly, that the poor have significantly lower access to formal financial services than the non-poor. Insufficient financial literacy is an important long-term factor for low savings rates in Ghana, and more broadly, financial illiteracy suppresses consumers’ demand for financial services. In addition, persistently high interest rates in Ghana are a major barrier to affordable access. But despite all the challenges, there has been significant growth in the number of financial access points over the past five years, primarily related to the spread of mobile money. This indicates the potential of DFS and payments to further enhance financial inclusion in Ghana. In the meantime, Ghana has a banking sector that has been facing serious soundness challenges, which after years of build-up culminated in 2018 with a series of necessary and expensive banking resolutions. Further reducing vulnerabilities in the financial sector is urgent and will require additional efforts in 2019, and over the medium term. The GoG must lead the implementation of the approaches outlined in NFIDS and DFS Policy; this should be done in collaboration with the private sector. With the successes already realized in the payment space with mobile money, the demand for effective financial solutions has been proven. Investments should now be made to improve internal systems and processes of MDAs, generating new use cases that will bring greater convenience to customers.