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ECONOMY OF GHANA II

THE FINANCIAL SECTOR AND

INFLATION

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


INFLATION

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.


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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


INFLATION

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


INFLATION


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.


INFLATION


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).


INFLATION

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).


INFLATION

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.


INFLATION

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.


INFLATION


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.


INFLATION


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.


INFLATION


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.


INFLATION


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.


INFLATION


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.


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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.


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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.


INFLATION


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.


INFLATION

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:


INFLATION


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;


INFLATION



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;


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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.


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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 short-

and long-term credit.


INFLATION


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.


INFLATION 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



Deposit Money Banks (universal banks): there are

currently about 28 commercial banks licensed to

operate 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



Non-Bank Financial Institutions

SUMMARY OF NBFI

Nature of Business Number

1. Finance House 25

2. Savings and Loans 24

3. Credit Reference Bureau 3

4. Leasing 2

5. Finance and Leasing 3

6. Mortgage Finance 1

TOTAL 58



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.

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