In August 2020, the Parliament of Ghana passed into law the Development Finance Institutions Act, 2020 (Act 1032) (the DFI Act). Coming on the back of calls for long term financing for small and medium sized enterprises and a national development bank, the DFI Act is very timely.
The DFI Act provides for the licensing, regulation and supervision of development finance institutions (DFIs) in Ghana and mandates the Bank of Ghana (BoG) with overall supervisory and regulatory authority over development finance business in Ghana. All DFIs licensed by the BoG or designated as a DFI (by notice published in the Gazette) are subject to the DFI Act. No DFI is permitted to undertake the business of development financing without a licence or approval issued by BoG. DFIs governed by multilateral treaties or sovereign bilateral agreements, such as the International Finance Corporation, are exempted from the requirement of a licence. Other foreign DFIs may establish representative offices in Ghana after receipt of a certificate of approval from the BoG.
The DFI Act defines ‘development finance business’ as being the provision of (a) short, medium and long term funding, guarantees and other credit enhancement structures to key sectors of the economy in a financially sustainable manner, or (b) other development finance activity prescribed by the BoG. DFIs are required to invest (a) not less than 75% of their loanable funds in medium and long-term (being between 3 to 7 years or more) loans for economic development purposes, and (b) not more than 25% of its loanable funds in short term (being less than 3 years) loans.
The DFI Act provides for 4 classes of licences spanning wholesale development banking, retail development banking, guarantee development banking and a combination of the 3 kinds of development banking licences. A DFI must maintain an unimpaired minimum paid up capital and other capital requirements prescribed by the BoG. By a directive dated 18 March 2021, BoG has specified the minimum paid up capital requirement for each class of DFI licence. The details of the classes of licences as well as their respective minimum paid up capital is as follows:
(a) Class 1 Development Finance Licence: applies to the provision of wholesale funding to participating financial institutions for on-lending to identified sectors (Wholesale DFI Licence). An initial minimum paid up capital of GHS 800 million is required for the Wholesale DFI Licence;
(b) Class 2 Development Finance Licence: applies to the lending or provision of direct equity investment to enterprises and organisations in identified sectors where risk is borne by the DFI (Retail DFI Licence). An initial minimum paid up capital of GHS 600 million is required for the Retail DFI Licence;
(c ) Class 3 Development Finance Licence: applies to the provision of risk bearing, risk-mitigating or de-risking facilities to support investments, including foreign direct investment and domestic investment, into strategic sectors of the economy considered risky for commercial banks (Guarantee DFI Licence). An initial minimum paid up capital of GHS 600 million is required for the Guarantee DFI Licence; and
(d) Class 4 Development Finance Licence: a holder is authorised to undertake any combination of either the Wholesale DFI Licence, Retail DFI Licence or Guarantee DFI Licence. The initial minimum paid up capital depends on the specific type of combination of licences:
· Class 4(a) (Wholesale DFI Licence, Retail DFI Licence or the Guarantee DFI Licence) — GHS 1.2 billion;
· Class 4(b) (Wholesale DFI Licence and Retail DFI Licence) — GHS 1 billion;
· Class 4(c) (Wholesale DFI Licence and Guarantee DFI Licence) — GHS 1 billion; and
· Class 4(d) (Retail DFI Licence and Guarantee DFI Licence) — GHS 800 million
Where a DFI is majority or fully owned by a foreigner(s), 60% of the required capitalisation must be brought into Ghana in convertible currency.
BoG may issue a DFI licence subject to conditions and reserves the right to revoke a DFI’s licence for specified reasons including failure to commence business within a year of issuance of the licence or to comply with the conditions of the licence, or engaging in unsafe and unsound business practices.
A DFI is not permitted to accept any kind of deposits (demand, savings or time deposits included). Being a non-deposit-taking institution, the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) shall not apply to DFIs. However, the DFI Act clarifies that DFIs may use the word “bank” in the name of the institution.
Notable among the sources of funds for DFIs specified by the DFI Act are long term loans from international financial institutions, loans from national, supra-national governments and other DFIs including sovereign wealth funds and funds from development partners. In the case of subordinated term debts, early redemption is required to be at the instance of the issuer and subject to BoG approval.
Ownership and control of DFIs are subject to the same approval requirements as deposit-taking institutions. Transfers of significant shares (5%) and sale of business, mergers and reconstructions require prior BoG approval.
The DFI Act incorporates comprehensive corporate governance provisions. Generally, BoG may prescribe corporate governance rules for DFIs as it considers necessary. However, the DFI Act sets out a number of key corporate governance requirements including qualification, tenure and composition of the board of directors, committees of the board of directors and conflict of interest. A DFI must have a board of directors which will appoint the Chief Executive Officer and other key management personnel. The board must consist of not less than 7 and not more than 13 members, majority of whom must be non-executive members ordinarily resident in Ghana. Independent directors must constitute at least 60% of the composition of the board and not more than two members who are related may serve on the board. Board members will have a maximum term of 8 years comprising two 4 year terms. Further, board members are required to obtain certification in corporate governance form the National Banking College annually.
A DFI is prohibited from guaranteeing any financial exposure against itself in favour of a participating financial institution (approved financial institutions to whom wholesale funds will be provided for on-lending to beneficiaries) or other borrower and is expected to comply with the limits specified under the DFI Act for financial exposure. Further, a DFI is not permitted to create a floating charge over any of its assets.
The DFI Act also contains comprehensive provisions for the resolution of DFIs including remedial measures, appointment of advisors and liquidation. Similar to deposit-taking institutions, a DFI requires BoG certification for a voluntary winding up and BoG may at any stage convert a voluntary winding up into a liquidation, if it considers that the DFI is unable to meet its obligations in full to creditors.
A national development bank for Ghana
Ghana has had a number of development banks, with the National Investment Bank and the Agricultural Development Bank still in operation. A disproportionate focus on commercial and retail banking, has invariably resulted in a shift in focus from their core development banking mandate.
The DFI Act now provides a comprehensive regulatory framework for a national development bank to address the deficit in long term financing for economic development in Ghana.
In 2017, the Minister for Finance intimated Government’s intention to set up a national development bank. The Development Bank Ghana Limited (DBG) was incorporated in 2020 by the Government of Ghana (acting through the Ministry of Finance) to undertake the business of wholesale development banking. DBG is intended to focus primarily on providing medium to long term facilities and credit guarantees to the agribusiness and industrial sectors. Like all wholesale development banks, DBG will provide funding through select participating financial institutions for on-lending to the relevant sectors.
On 26 August 2020, the European Investment Bank announced the approval of a EUR 170 million loan to the Ministry of Finance to finance the establishment of DBG. The Word Bank also on 29 October 2020 announced the approval of credit of USD 250 million to DBG (through the International Development Association). At the launch of the Ghana Stock Exchange’s 30th anniversary, the Minister of Finance, Ken Ofori-Atta confirmed that DBG had received commitments of up to USD 500 million from its partners, including KfW, the World Bank, the European Investment Bank and the African Development Bank. At a meeting with the Ghana Employers’ Association in October 2020, he further indicated that DBG was set to take off in January 2021. Subsequently, the Ministry of Finance has put out a couple of requests for expression of interest for human resource consulting services in respect of the competitive selection of key management personnel for DBG and for consultancy services for the design and feasibility studies of a digital platform for DBG. According to the expression of interest document for the digital platform, DBG intends to sponsor a digital platform to help reduce information asymmetry and to unlock private sector capital for micro, small and medium enterprises.
With the legal framework set by the DFI Act, it is expected that DBG will provide the much needed long term financing required for economic development and adhere to strict corporate governance principles in its operations learning from the lessons of its predecessors.
Sophia Sena Asante Offei (Senior Associate, Financial Institutions and Capital Markets)
