THE FINANCIAL SECTOR AND

Transcription

1 ECONOMY OF GHANA II

2 Introduction The Role of the Financial System/Sector in the Economy The Financial Sector/System in Ghana The Financial Sector in Historical Context Inflation Trends and Analysis

3 Introduction Last year during our lecture on the Services sector, we noted that the financial sector represents a very integral part of the services sector of the Ghanaian economy. In this section, we explore in detail the nature and character of the financial sector in Ghana, its functions within the economy and how it impacts on national economic development. Later on, we examine inflation in Ghana, which it is worth noting, is linked to the financial sector in several ways.

4 The Role of the Financial Sector in the Economy What do we mean by the financial sector/system? A country s financial system or sector consists of a variety of interconnected financial institutions, both formal and informal. This consists of banks, other financial intermediaries as well as equity markets and debt markets

5 The Role of the Financial Sector in the Economy More fundamentally, what the financial system undertakes is that of financial intermediation. The process of matching net borrowers within the economy with net savers. In general however, the financial system provides four basic services essential for the smooth functioning of an economy

6 The Role of the Financial Sector in the Economy First, it provides a medium of exchange and a store of value, called money, which also serves as a unit of account to measure the value of the transactions. Second, it provides channels for mobilizing savings from numerous sources and channelling them investors, a process called financial intermediation.

7 The Role of the Financial Sector in the Economy Third, it provides a means of transferring and distributing risk across the economy. Fourth, it provides a set of policy instruments for the stabilization of economic activity (here we see the link to inflation).

8 What Role for the Financial Sector in Economic Development? Prior to the early 1970s there was hardly any clearly articulated position on this issue. Development economics appeared to be preoccupied with real sector issues (that is, with investment and savings and their productivity, as well as with issues of unemployment and output growth).

9 What Role for the Financial Sector in Economic Development? But the financial system or sector is distinguished from other sectors of the economy because of the essential role it plays within the economic system that of financial intermediation.

10 What Role for the Financial Sector in Economic Development? As we noted earlier, in any economy, we realise that individual entrepreneurs rarely have enough of their own capital to undertake investments themselves. Additionally, it is also the case that individual savers, without pooling their money, would not be able to take advantage of the potential increasing returns to scale of their investments, and would face a large degree of risk with little liquidity.

11 What Role for the Financial Sector in Economic Development? Given these scenarios, what the financial system does is to solve these problems by agglomerating capital from many smaller savers, allocating capital to the most important uses, and monitoring to ensure that it is being used well. At the same time, the financial system transfers, pools, and reduces risk, increases liquidity, and conveys information.

12 What Role for the Financial Sector in Economic Development? Well-functioning financial systems do a very good job of selecting the most productive recipients for these resources and ensuring that they are using them in high return activities. In contrast, poorly functioning financial systems often allocate capital in low-productivity investments. The differences in terms of growth and total factor productivity can be enormous.

13 What Role for the Financial Sector in Economic Development? The term financial deepening or development is used to assess the level of development of the financial sector in an economy. A well-developed financial system is an essential ingredient in the process of capital accumulation via savings and investment ratios (savings/gdp; investment/gdp) and their productivity, which in turn contributes to economic development.

14 What Role for the Financial Sector in Economic Development? Moreover, it has been argued that financial deepening is best facilitated by a competitive financial system in which interest rates are market-determined and, in which there is an absence (or at least insignificance of administratively driven selective credit allocation. But this is not to suggest that governments do not have a role to play in financial systems.

15 What Role for the Financial Sector in Economic Development? Moreover, it has been argued that financial deepening is best facilitated by a competitive financial system in which interest rates are market-determined and, in which there is an absence (or at least insignificance of administratively driven selective credit allocation. But this is not to suggest that governments do not have a role to play in financial systems. Governments play a large role in all of the most successful financial markets, usually as regulators.

16 What Role for the Financial Sector in Economic Development? There are two main channels through which financial systems can have an effect on economic growth: capital accumulation (both physical and human); and technological innovation.

17 What Role for the Financial Sector in Economic Development? They affect capital accumulation in three ways: they lower the cost of channelling funds between borrowers and lenders, by reducing information and transaction costs; they can alter individuals and households saving decisions by making longer-term investments more attractive; financial intermediation affects capital accumulation by reallocating funds to their most productive uses, which raises the rate of return to saving.

18 What Role for the Financial Sector in Economic Development? Financial systems may affect technological innovation. By allowing diversification, financial systems allow savers to obtain their desired level of exposure to high risk/reward firms, potentially increasing the level of finance directed at such activities.

19 The financial sector/system in Ghana At the heart of the financial system is the central bank, here the Bank of Ghana. The central bank is responsible for the control of the money supply and the general supervision of organised financial activity. The Bank of Ghana s core functions are specified below:

20 The financial sector/system in Ghana Functions of the Central Bank of Ghana formulate and implement monetary policy aimed at achieving the objects of the Bank; promote by monetary measure the stabilisation of the value of the currency within and outside Ghana; institute measures which are likely to have a favourable effect on the balance of payments, the state of public finances and the general development of the national economy; regulate, supervise and direct the banking and credit system and ensure the smooth operation of the financial sector;

21 The financial sector/system in Ghana Functions of the Central Bank of Ghana promote, regulate and supervise payment and settlement systems; issue and redeem the currency notes and coins; ensure effective maintenance and management of Ghana's external financial services; license, regulate, promote and supervise non-banking financial institutions; act as banker and financial adviser to the Government;

22 The financial sector/system in Ghana Functions of the Central Bank of Ghana promote and maintain relations with international banking and financial institutions and subject to the Constitution or any other relevant enactment, implement international monetary agreements to which Ghana is party; and do all other things that are incidental or conducive to the efficient performance of its functions under this Act and any other enactment.

23 The financial sector/system in Ghana But what is probably most visible about the financial system is the predominance of the commercial banks. These banks, also termed deposit money banks (DMBs) are a vital component of the financial system, as acceptor of deposits and grantor of shortand long-term credit.

24 The financial sector/system in Ghana Other elements of the financial system include savings (and loans) banks, insurance companies, investment banks specialising in long-term credit, pension funds and a stock exchange.

25 The financial sector/system in Ghana More generally, we have the following financial institutions operate in Ghana: Banks (universal banks) Rural & Community Banks Non-Bank Financial Institutions Forex Bureaux Provisional Register of Microfinance Institutions Register of Licensed Microfinance Institutions Newly Licenced Inward Money Transfer Companies

26 The financial sector/system in Ghana Deposit Money Banks (universal banks): there are currently about 28 commercial banks licensed to operate in Ghana.

27 The financial sector/system in Ghana Rural and Community Banks SUMMARY OF REGIONAL DISTRIBUTION - JANUARY 2013 REGION NUMBER 1 ASHANTI 25 2 CENTRAL 21 3 EASTERN 22 4 BRONG AHAFO 20 5 WESTERN 14 6 VOLTA 12 7 GREATER ACCRA 7 8 UPPER EAST 5 9 UPPER WEST 4 10 NORTHERN 7 TOTAL 137

28 The financial sector/system in Ghana Non-Bank Financial Institutions SUMMARY OF NBFI Nature of Business Number 1. Finance House Savings and Loans Credit Reference Bureau 3 4. Leasing 2 5. Finance and Leasing 3 6. Mortgage Finance 1 TOTAL 58

29 The financial sector/system in Ghana There are over 330 active licensed forex bureaux operating in Ghana. Also there are over 400 microfinance institutions registered by the Bank of Ghana as at October 2014.