Kwasi Menako Asare-Bekoe

A RISK-BASED ASSESSMENT OF
ECOBANK GHANA LIMITED (EGH)
Master’s Thesis towards the award of
Master of Science degree in Economics and Business Administration
(CMFSM - Finance & Strategic Management)
at Copenhagen Business School
Author of paper: KWASI MENAKO ASARE-BEKOE
140179-3867
October 2010
Counselor: JENS BORGES, External Lecturer
Institute of Finance
Number of characters including spaces plus figures (STUs): 219881 ~ 112 pages (with
appendices) and 79 pages (without appendices).
Masters Thesis: A risk-based assessment of Ecobank Ghana Limited October, 2010
DEDICATION
To the only true God, His only son Jesus Christ and His Holy Spirit. You have brought me
this far, giving me strength and guidance through the journey. To You be all the glory and
adoration now and forever more. Amen
To my wife, children and parents. God bless you for your support. You have been my
encouragement.
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ACKNOWLEDGEMENT
I wish to express my sincere gratitude to the Copenhagen Business School for sponsoring my
participation in this graduate programme. It is an opportunity I will forever cherish.
I am grateful to Mr. Jens Borges, my supervisor. Your counsel was very valuable.
I thank all my friends and well-wishers. God be with you all.
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TABLE OF CONTENT
DEDICATION ........................................................................................................................... 1
ACKNOWLEDGEMENT ......................................................................................................... 2
TABLE OF CONTENT ............................................................................................................. 3
LIST OF TABLES ..................................................................................................................... 7
LIST OF FIGURES ................................................................................................................... 8
EXECUTIVE SUMMARY ....................................................................................................... 9
CHAPTER ONE - INTRODUCTION..................................................................................... 11
1.0 BACKGROUND OF STUDY .................................................................................. 11

1.1 JUSTIFICATION OF CHOICE OF INSTITUTION................................................ 12
1.2 INTRODUCTION OF COMPANY.......................................................................... 14
1.3 STATEMENT OF THE PROBLEM ........................................................................ 14
1.4 OBJECTIVE OF THE STUDY ................................................................................ 15
1.5 SIGNIFICANCE OF THE STUDY .......................................................................... 15
1.6 SCOPE AND LIMITATION OF THE STUDY ....................................................... 16
1.7 ORGANISATION OF THE STUDY ....................................................................... 16
CHAPTER TWO - LITERATURE REVIEW ......................................................................... 17
2.0 INTRODUCTION ..................................................................................................... 17

2.1 RISK MANAGEMENT IN BANKING ................................................................... 17
2.2 RATIONALES FOR RISK MANAGEMENT IN BANKING ................................ 18
2.3 CATEGORIES OF RISK MANAGEMENT ............................................................ 19
2.4 KEY BANK RISKS ................................................................................................. 20
2.4.1 Credit Risk ......................................................................................................... 21
2.4.2 Market Risks ...................................................................................................... 22
2.4.3 Operational Risk ................................................................................................ 26
2.4.4 Strategic Risk ..................................................................................................... 27
2.5 VAR: A TOOL FOR MEASURING MARKET RISKS .......................................... 29
2.6 INTEGRATED RISK MANAGEMENT: AN ULTIMATE GOAL OF A
FORWARD-LOOKING RISK MANAGEMENT FRAMEWORK ................................... 31
2.6.1 Enterprise Risk Management: A useful tool for integrating risks ..................... 33
3
2.7 THE PLACE OF CORPORATE GOVERNANCE IN THE MANAGEMENT OF

BANK RISKS ...................................................................................................................... 35
CHAPTER THREE - METHODOLOGY ............................................................................... 38
3.0 INTRODUCTION ..................................................................................................... 38

3.1 DATA SOURCE ....................................................................................................... 38
3.2 BENCHMARKS ....................................................................................................... 38
3.3 ANALYSTICAL TOOLS ......................................................................................... 39
3.3.1 Ratios ................................................................................................................. 39
3.3.2 Graphs and Charts .............................................................................................. 40
3.4 ANALYTICAL TECHNIQUES ............................................................................... 40
3.4.1 Ratio Analysis .................................................................................................... 41
3.4.2 Common-Size Analysis ..................................................................................... 41
3.4.3 Trend Analysis ................................................................................................... 42
3.5 ANALYTICAL COMPONENTS ............................................................................. 42
CHAPTER FOUR - ASSESSMENT OF BANK RISK PROFILE ......................................... 44
4.0 INTRODUCTION ..................................................................................................... 44

4.1 BALANCE SHEET RISKS ...................................................................................... 44
4.1.1 Assets ................................................................................................................. 44
4.1.2. Liabilities ........................................................................................................... 45
4.1.3 Equity and Capital Adequacy ............................................................................ 47
4.2 INCOME STATEMENT RISKS .............................................................................. 48
4.3 CREDIT RISK .......................................................................................................... 51
4.3.1 Size..................................................................................................................... 51
4.4.2 Concentration ..................................................................................................... 52
4.3.3 Product distribution............................................................................................ 54
4.3.4 Customer loans distribution by tenor ................................................................. 54
4.3.5 Loan Quality ...................................................................................................... 55
4.3.6 Related Party Dealings ....................................................................................... 56
4.4 LIQUIDITY RISK .................................................................................................... 57
4.4.1 Liquidity Mismatches ........................................................................................ 57
4.4.2 Structure of funding ........................................................................................... 58
4.4.3 Cashflows and ratios .......................................................................................... 60
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4.6. INTEREST RATE RISK .......................................................................................... 62

4.7. CURRENCY RISK ................................................................................................... 63
CHAPTER FIVE - ASSESSMENT OF RISK MANAGEMENT FRAMEWORK ............... 65
5.0 INTRODUCTION ..................................................................................................... 65

5.1 CREDIT RISK .......................................................................................................... 65
5.1.1 Organisation ....................................................................................................... 65
5.1.2 Risk identification .............................................................................................. 66
5.1.3 Risk Measurement ............................................................................................. 67
5.1.4 Risk Monitoring and Control ............................................................................. 68
5.1.5 Risk Reporting ................................................................................................... 69
5.2 MARKET RISK ........................................................................................................ 69
5.2.1 Organisation ....................................................................................................... 69
5.2.2 Risk Identification .............................................................................................. 71
5.2.5 Risk Reporting ................................................................................................... 74
5.3 OPERATIONAL RISK ............................................................................................. 75
5.3.1 Organisation ....................................................................................................... 75
5.3.2 Risk Identification .............................................................................................. 75
5.3.5 Risk Reporting ................................................................................................... 77
5.4 SUMMARY .............................................................................................................. 77
CHAPTER SIX - CONCLUSION AND RECOMMENDATIONS ....................................... 79
6.0 INTRODUCTION ..................................................................................................... 79

6.1 CONCLUSION ......................................................................................................... 79
6.2 RECOMMENDATIONS .......................................................................................... 81
6.2.1 Interest Rate Risk Management ......................................................................... 81
6.2.2 Adopting an integrated approach to risk management ...................................... 82
APPENDIX A: Glossary of key financial terms and ratios ..................................................... 85
APPENDIX B: Comparative Financial Statements of EGH for 2007 - 2009 ......................... 86
APPENDIX C: Bloomberg L. P ratings and Stock Trends ..................................................... 89

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APPENDIX D: Tables and Charts for Risk Profile Assessment ............................................. 90
APPENDIX E:International Recommended Principles for ensuring Sound Risk Management ..... 101
REFERENCES ...................................................................................................................... 109
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LIST OF TABLES
Table 1.1: Summary of EGH‘s performance in Ghanaian banking industry ........................... 13
Table 3.1: Ratios in assessing bank risks ................................................................................. 39
Table 4.1: Capital adequacy and off-balance sheet measures.................................................. 47
Table 4.2: Customer loans distribution by borrower group ..................................................... 53
Table 4.3: Loan loss coverage ................................................................................................. 56
Table 4.4: Maturity Ladder ...................................................................................................... 58
Table 5.1: EGH‘s internal risk rating system........................................................................... 66
Table 5.2: VAR limits at various levels ................................................................................... 72
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LIST OF FIGURES
Figure 1.1: Performance of Ecobank Ghana Limited on Ghana Stock Exchange ................... 13
Figure 3.1: Diagrammatic representation of components of the bank‘s risk profile ............... 43
Figure 4.1: Changes in the composition of assets over the past three years. ........................... 45
Figure 4.2: Changes in the composition of liabilities over the past two years. ....................... 46
Figure 4.3: Profitability & efficiency indicators ...................................................................... 50
Figure 4.4: Sources of Income versus Operating Costs ........................................................... 50
Figure 4.5: 50 largest exposures .............................................................................................. 52
Figure 4.6: Sectoral allocation of loans ................................................................................... 53
Figure 4.7: Customer loans by products .................................................................................. 54
Figure 4.8: Distribution of Customer Loans per Tenor and Borrower Group ......................... 55
Figure 4.9: Loan Quality .......................................................................................................... 56
Figure 4.10: Related party information .................................................................................... 57
Figure 4.11: Funding soucres ................................................................................................... 59
Figure 4.12: Customer deposits by type .................................................................................. 59
Figure 4.13: Trend of Cash flows ............................................................................................ 60
Figure 4.14: Trends in liquidity ratios ..................................................................................... 62
Figure 4.15: Interest rates repricing gap .................................................................................. 63
Figure 4.16: Currency Structure of Loan Portfolio and Customers Deposits .......................... 64
Figure 4.17: Currency Risk : Currency Exposure as % of Qualifying Capital ........................ 64
Figure 5.1: A diagrammatic illustration for measuring expected loss ..................................... 68
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EXECUTIVE SUMMARY
The global financial crises over the past three years should make everyone concerned about
recent significant levels of bad debts on the books of banks in the Ghanaian financial sector.
It calls for thorough assessments of the structure and components of the risk management
frameworks and practices of banks by regulators, analysts and financial watchers from time
to time, to ascertain the adequacy of the systems, policies and procedures for managing risks
as well as their conformity to current best practices. As a contribution to this exercise, this
study is focused on Ecobank Ghana Limited (EGH) with the aim of evaluating the bank‘s risk
profile as well as assessing its risk management framework to ascertain its soundness and
conformity to international best practices.
Both the computational based and analytical based approaches were adopted in assessing the
risk condition of EGH. By applying analytical tools such as ratios, tables and charts, to the
bank‘s 2009 financial statements, and those of years 2007 and 2008 serving as references for
comparison. Trends and relationships in the financial statements and other financial data were
also established. This helped in making well-reasoned analysis of the bank‘s capital
adequacy, balance sheet structure and composition, profitability and reliability of earnings,
credit exposure size and quality, liquidity, interest rate and currency risks situations. A review
of the EGH‘s risk management structure and policies, vis-à-vis recommendations by the
Basel Committee on Banking Supervision, helped in establishing the soundness or otherwise
of the bank‘s risk management practices.
The study revealed that EGH‘s has a good risk profile in the face of challenging global
economic and business environment. This is because the significant expansion of its balance
sheet size did not result in the absorption of more risk but rather lead to a healthy asset mix
balancing liquidity with profitability. The assets were efficiently applied to generate high
profit margin which was powered by stable income sources. The bank‘s asset quality as well
as its capacity to absorb credit losses had improved in the face of general levels of asset
deterioration in the Ghanaian banking industry. The high level of loan portfolio concentration
to few large corporate bodies was however the weak point in the bank‘s credit risk condition.
Also, with the majority of its cash flow obtained from operational activities, coupled with
large portion of deposits provided by core deposit customers, the prospects of EGH
encountering liquidity challenges was minimal. In addition, the bank had adequate funding in
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foreign currency to back foreign currency loans and meet demands for foreign currency
transactions, shielding it from adverse foreign currency risk exposure. EBH lost some interest
income as a result of maintaining more short term sensitive assets than short term sensitive
liabilities during the year 2009 when there was a general decline in interest rates.
The study also revealed that EGH had adequate risk management structures to ensure sound
management of financial and operational risks. There was an appropriate environment in
place for managing risk, in that; the governance structure was solid with clear obligations and
lines of authority set out. Policy documents containing procedures, processes and techniques
for handling various risks had also been approved by the board. Relevant tools and
management information systems as well as effective controls were in place to ensure
adequate and consistent identification, measurement, monitoring and controlling as well as
reporting on the various risks the bank is exposed to. These structures were also in line with
internationally accepted principles for managing risks as put forward by the Basel Committee
for Banking Supervision and expected to be implemented by all banks operating in Ghana as
they have incorporated in the Ghana Banking Act 2004, Act 673.
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CHAPTER ONE - INTRODUCTION
1.0 BACKGROUND OF STUDY
Developments in the global financial sector within the past decade have given stakeholders in
the Ghanaian banking industry cause to not only consider the returns made in the sector but
also critically examine frameworks used to manage risks in the sector and safeguard their
interests. This is because the failures faced by the industry in recent times have been blamed
largely on the weaknesses of the regulatory frameworks and the risk management practices of
the financial institutions1. The greatest impact of the crisis has been on the banking industry,
where some banks which were hitherto performing well suddenly announced large losses
with some of them going burst. Some reasons put forward for the failures in risk
management in this regard include the limited role of risk management in the granting of
loans in most banks as they are unable to influence business decisions and the fact that their
considerations are subordinate to profitability interests and lack of capacity to adequately
make timely and accurate forecasts. This has resulted in the flouting of basic risk
management rules such as avoiding strong concentrations of assets and minimising the
volatility of returns.
The impact of the global financial crisis on the banking sector in Ghana has been quite
minimal such that it did not threaten the survival of banks in the sector. This is largely
because the sector has little exposure to complex financial instruments and relies mainly on
low-cost domestic deposits and liquidity. However, the deterioration of asset quality
(impairment charge / gross loans and advances) of the banks in Ghana, from about 1.5% to
4.2%2, in the past three years due to significant balances of bad and doubtful debts on their
books is an indication that all is not well with the sector. Various reasons have been put
forward by analysts as accounting for the deterioration in the quality of bank‘s loans and
advances. These include increased cost of funds, inflation, depreciation of the Cedi and the
delay by government in paying contractors and other service providers. Unlike the case in
developed countries, questions have not been raised about weakness or otherwise of the risk
1
As put forward by some professionals and scholars such as Dr Rakesh Mohan, Deputy Governor of the
Reserve Bank of India, at the 7th Annual India Business Forum Conference, London Business School, London,
23 April 2009 and Gabriele Sabato (August, 2009).
2
Contained in the 2010 Banking Survey Report by PriceWaterhouseCoopers, Ghana.
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management practices of the Ghanaian banks which have resulted in significant financial
losses, although there have been a few reported cases of fraud, theft and other operational
occurrences.
The general believe is that banks in Ghana have good risk management structures since there
have not been any complaints or adverse findings against them by the regulators, that is,
Bank of Ghana and Securities and Exchange Commission of Ghana (in the case of listed
banks) concerning significant weaknesses in their risk management systems. The banks are
believed to be generally compliant with major regulatory requirements which are basically in
line with international standards set by the Basel Committee on Banking Supervision. These
requirements include rigorous risk and capital management requirements designed to ensure
that the banks hold capital reserves appropriate to the risk they expose themselves to through
its lending and investment practices. However, in order to ascertain the resilience of the
Ghanaian banking sector to withstand serious economic shocks, there would be the need for
thorough assessments of the structure and components of the risk management frameworks
and practices of the banks from time to time. This study was therefore a contribution to this
exercise with a focus on Ecobank Ghana Limited (EGH).
1.1 JUSTIFICATION OF CHOICE OF INSTITUTION
Ecobank Ghana limited was chosen for this study because of its reputation as being among
the top four banks in Ghana. It is also listed on the Ghana Stock Exchange and therefore has
its financial and other regulatory reports published, ensuring that the public has access to
some basic information. Over the past decade EGH has won several banking awards in
various categories including the coveted ―Bank of the Year Award‖ for five consecutive
years. According to the 2010 Banking Survey Report3 released by PricewaterhouseCoopers
Ghana in collaboration with the Ghana Association of Bankers, EGH is ranked the fourth
largest bank in terms of total assets contributing 10.1% to total assets of the banking industry.
The bank was the third largest contributor to both industry deposits and gross loans and
advances with 10.5% and 7.7% respectively. EGH‘s share of industry assets, deposits, and
loans and advances, over the last three years, are indicated below.
3
http://www.pwc.com/en_GH/gh/pdf/ghana-banking-survey-2010.pdf
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Table 1.1: Summary of EGH‘s performance in Ghanaian banking industry

2009 2008 2007
Category % Ranking % Ranking % Ranking
Contribution Contribution Contribution
Share of Industry 10.1 4 8.5
4 8.8 4
Assets
Share of Industry 10.5 3 8.7 4 8.9 4
Deposits
Share of Industry 7.7 3 7.3 4 7.8 3
Gross Loans and
Advances
Source: 2010 Ghana Banking Survey Report issued by PricewaterhouseCoopers Ghana
As a further indication of public confidence in the bank‘s performance, its shares have
performed considerable well on the Ghana Stock Exchange since it got listed (Figure 1.1
gives an illustration of the bank‘s performance on the Ghana Stock Exchange). Analysts also
rate EGH quite favourably, with Bloomberg L. P. rating its short term local currency A1+ and
Global Credit Rating Company (a reputable international rating agency) rating the banks long
and short term credits (exposures) AA- and A1+ respectively4. These give an indication of
the soundness of its credits. In the light of the above, I consider the bank to be an appropriate
case for this study.
Figure 1.1: Performance of Ecobank Ghana Limited on Ghana Stock Exchange
Source: Own construction with data compiled by Gold Coast Securities Limited
4
Refer to Appendix C1 for Bloomberg’s screen print of ratings
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1.2 INTRODUCTION OF COMPANY
Ecobank Ghana Limited (EGH) is one of the thirty one (31) subsidiaries of the Ecobank
Group which is the leading Pan African banking group in Africa. It was incorporated under
Ghana‘s Companies Code on January 9, 1989 as a private limited liability company to engage
in the business of banking. EGH was initially licensed to operate as a merchant bank by the
Bank of Ghana on November 10, 1989 but following the introduction of Universal Banking
by the Bank of Ghana in 2003, it became the first bank to be granted the license to do general
banking business. This action cleared the way for it to embark on its medium term strategic
shift of moving from being a predominantly wholesale bank to one with a retail focus. In
June 2006, EGH went public and was listed on the Ghana Stock Exchange. The bank
operates four (4) subsidiaries: Ecobank Investment Managers Limited, Ecobank Leasing
Company Limited, Ecobank Venture Capital Limited, and EB Accion Savings & Loans
Company Limited. Together with its subsidiaries, EGH provides corporate banking,
investment banking and retail banking products and services to wholesale and retail
customers in Ghana.
1.3 STATEMENT OF THE PROBLEM
There is the general belief that the banking sector in Ghana is relatively stable with individual
banks having healthy risk profiles and sound risk management frameworks. This belief stems
from the fact that, with the exception of worsening asset quality which is blamed on internal
macro economic factors; the industry has not experienced major losses in the face of the
global financial crises. Also, the supervisory and regulatory bodies have not found any of the
banks in Ghana culpable of flouting prudential arrangements aimed at protecting the interests
of clients and shareholders as was experienced in Nigeria5.There has, however, not been any
major internal test to ascertain the resilience of the banking industry to withstand major
shocks. So there is a vacuum between the general belief on the risk position of the Ghanaian
banking industry and the evidence to bank this belief. To do this requires thorough
assessment of the risk profiles of banks in Ghana as well as evaluate the adequacy of the risk
5
The Governor of the Nigeria Central Bank have had to sack directors and chief executive officers of some
Nigeria banks for breach of prudential arrangements and mismanagement in addition to recommending the
injection of funds into those banks by the central bank to safeguard the interest of clients and shareholders.
14
management frameworks employed by the banks to handle the various risks they are exposed
to.
1.4 OBJECTIVE OF THE STUDY
The objectives of the study were two fold, which were to assess :
I. the bank‘s risk profile as at the end of the 2009 financial year. This involved an
assessment of the income statement and balance sheet to identify inherent risks in
their components and structure. It also involved using various tools (ratios, charts and
tables) to ascertain the level of credit and market (liquidity, interest rate, foreign
currency) risks the bank is exposed to.
II. the effectiveness of the bank‘s risk management framework for managing credit,
market and operational risks it is exposed to. This involved an assessment of:
a. the strong governance structure in place,
b. the adequate policies, procedures, tools and skills,
c. the effective control measures, and
d. the information management systems to support timely and accurate
information delivery in place to manage risk.
The assessment here also included an evaluation of the bank‘s risk management practices vis-
à-vis current recommended standards and best practices by the Basel Committee on Banking
Supervision.
1.5 SIGNIFICANCE OF THE STUDY
An assessment of EGH‘s risk management framework provided the state of the bank‘s ability
to handle the inherent risks in its operations. Also deviations from international best practices
were also identified and alternatives recommended. The bank‘s ability to deal with significant
shocks and avoid losses during crisis periods was also tested.
Since there is not much structural and operational difference amongst the banks in Ghana, it
is hoped that this study will provide an indication of how the risk management landscape
looks like in Ghana‘s banking sector. In addition, it will provide a guide for further studies on
risk management in the industry.
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1.6 SCOPE AND LIMITATION OF THE STUDY
In conducting a risk-based analysis of Ecobank Ghana Limited, information was mainly

gathered from financial statements and other disclosures contained in the bank‘s annual
reports. In this regard, annual reports of the last three years (2009, 2008, and 2007) were
considered to ensure consistency in the value used. This is because the bank shifted from the
use of International Accounting Standards (IAS) to International Financial Reporting
Standards (IFRS), in conformity with requirements by The Institute of Chartered Accountants
(Ghana), Ghana Stock Exchange and the Securities and Exchange Commission for listed
companies to prepare their financial statements for the year ended 31st December 2007 and
beyond. The bank‘s risk management policy manuals and other independent reports on its
financial performance was used to gather relevant information concerning the bank‘s current
health and capacity to remain stable in the face of instability in the industry and the global
economy as a whole. However, the bank considers most information, except those contained
in the annual report and official releases, sensitive and for that matter detailed but relevant
information was not available for use. Also, due to lack of adequate comparable data on other
players in the Ghanaian banking industry, the study was unable to provide a complete
picture of the performance EGH‘s risk in relation to peer group trends and industry norms in
all cases. However, in cases where industry data was available comparative analysis was
undertaken.
1.7 ORGANISATION OF THE STUDY
The study has been organised into six (6) chapters. Chapter One deals with the introduction
of the study. It focuses on the background, introduction of company, objectives, significance,
scope and limitation of the study. Chapter Two discusses the existing literature on the subject
matter. This included theoretical and empirical literature. Chapter Three provides a
framework (methodology) for assessing the bank. The assessment of the bank‘s risk profile is
presented in Chapter Four, whiles Chapter Five contains the assessment of the risk
management framework of the bank. Chapter Six includes conclusion and proposed
recommendations, based on the assessment done.
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CHAPTER TWO - LITERATURE REVIEW
2.0 INTRODUCTION
This chapter reviews the literature on risk management in banking. It discusses issues on risk
management from different perspectives and with the view of giving a theoretical foundation
to the study. It starts with an exposition on risk management, followed by reviews of
literature on the rationales and categories of risk management activities as well as the kinds
of risk faced by banks, VaR as a risk management tool, Integrated Risk Management as the
ultimate goal for risk management framework, Enterprise Risk Management and the place of
Corporate Governance in bank risk management are also discussed in this chapter.
2.1 RISK MANAGEMENT IN BANKING
Risk management is described as the performance of activities designed to minimise the

negative impact (cost) of uncertainty (risk) regarding possible losses (Schmidt and Roth,
1990). Redja (1998) also defines risk management as a systematic process for the
identification and evaluation of pure loss exposure faced by an organisation or an individual,
and for the selection and implementation of the most appropriate techniques for treating such
exposure. The process involves: identification, measurement, and management of the risk.
Bessis (2010) also adds that in addition to it being a process, risk management also involves a
set of tool and models for measuring and controlling risk.
The objectives of risk management include to: minimise foreign exchange losses, reduce the
volatility of cash flows, protect earnings fluctuations, increase profitability, and ensure
survival of the firm (Fatemi and Glaum, 2000). To ensure that banks operate in a sound risk
management environment, where there is reduced impact of uncertainty and potential losses,
managers need reliable risk measures to direct capital to activities with the best risk/reward
ratios. They need estimates of the size of potential losses to stay within limits set through
careful internal considerations and by regulators. They also need mechanisms to monitor
positions and create incentives for prudent risk taking by divisions and individuals.
According to Pyle (1997), risk management is the process by which managers satisfy these
needs by indentifying key risks, obtaining consistent, understandable, operational risk
measures, choosing which risks to reduce, which to increase and by what means, and
17
establishing procedures to monitor resulting risk positions. Bessis (2010) indicates that the
goal of risk management is to measure risks in order to monitor and control them, and also
enable it to serve other important functions in a bank in addition to its direct financial
function. These include assisting in the implementation of the bank‘s ultimate strategy by
providing it with a better view of the future and therefore defining appropriate business
policy and assisting in developing competitive advantages through the calculation of
appropriate pricing and the formulation of other differentiation strategies based on customers‘
risk profiles.
According to Santomero (1995), the management of the banking firm relies on a sequence of
steps to implement a risk management system. These normally contain four parts which are
standards and reports, position limits or rules, investment guidelines or strategies, incentive
contracts and compensation. These tools are generally established to measure exposure,
define procedures to manage these exposures, limit individual positions to acceptable levels,
and encourage decision makers to manage risk in a manner that is consistent with the firm's
goals and objectives.
2.2 RATIONALES FOR RISK MANAGEMENT IN BANKING
The main aim of management of banks is to maximise expected profits taking into account its
variability/volatility (risk). This calls for an active management of the volatility (risk) in order
to get the desired results. Risk management is therefore an attempt to reduce the volatility of
profit which has the potential of lowering the value of shareholders‘ wealth. Various authors
including Stulz (1984), Smith et al (1990) and Froot et al (1993) have offered reasons why
managers should concern themselves with the active management of risks in their
organisations.
According to Oldfield and Santomero (1995), recent review of the literature presents four
main rationales for risk management. These include managers self interest of protecting their
position and wealth in the firm. It is argued that due to their limited ability to diversify their
investments in their own firms, they are risk averse and prefer stability of the firm‘s earnings
to volatility because, all things being equal, such stability improves their own utility. Beyond
managerial motives, the desire to ensure the shouldering of lower tax burden is another
rationale for managers to seek for reduced volatility of profits through risk management.
18
With progressive tax schedules, the expected tax burden are reduced when income smoothens
therefore activities which reduce the volatility of reported taxable income are pursued as they
help enhance shareholders‘ value.
Perhaps the most compelling rationale for managers to engage in risk management with the
aim of reducing the variability of profits is the cost of possible financial distress. Significant
loss of earnings can lead to stakeholders losing confidence in the firm‘s operations, loss of
strategic position in the industry, withdrawal of license or charter and even bankruptcy. The
costs associated with these will cause managers to avoid them by embarking on activities that
will help avoid low realisations. Finally, risk management is pursued because firms want to
avoid low profits which force them to seek external investment opportunities. When this
happens, it results in suboptimal investments and hence lower expected shareholders‘ value
since the cost of such external finance is higher than the internal funds due to capital market
imperfections. This undesirable outcome encourages managers to actively embark upon
volatility reducing strategies, which have the effect of reducing the variability of earnings. It
is believed that any of the above mentioned rationales is sufficient to motivate management
to concern itself with risk and embark upon a careful assessment of both the level of risk
associated with any financial product and potential risk mitigation techniques.
2.3 CATEGORIES OF RISK MANAGEMENT
As Merton (1989) noted, a key feature of the franchise of financial institutions (including
banks) is the bundling and unbundling of risks. However, not all risks inherent in their
business should be borne directly by them; some can be traded or transferred whiles others
can be eliminated altogether. It is therefore useful to defragment the risks inherent in their
activities and assets into three distinctive subgroups in accordance with their nature so that
the appropriate strategies can be adapted to mitigate them. Oldfield and Santomero (1995)
argue therefore that risk facing financial institutions can be segmented into three separable
categories from a management perspective. These are risks that can be eliminated or avoided
by simple business practices, risks that can be transferred to other participants, and risk that
must be actively managed at the firm level.
Avoiding risk altogether by business practices has the goal of ridding the bank of risks that
are not essential to the services provided or absorbing on the optimal quantity of a particular
19
kind of risk. This is done by engaging in actions such as underwriting standards,

diversification, hedging, reinsurance and due diligence investigation to reduce the chances of
idiosyncratic losses by eliminating risks that are superfluous to the bank‘s business purpose.
After this is done, what will be left is some portion of systematic and operational risks which
should be minimised to the greatest extent possible and their level and costs communicated to
stakeholders. This is because an attempt to aggressively avoid these risks will constrain risks
alright but will also reduce the profitability of the business activity. Some risks can also be
transferred by the bank, when there is no value-added or competitive advantage associated
with absorbing and/or managing them, to other parties who are in better positions to manage
and benefit from them. There is yet another class of risks which should be adsorbed and
aggressively managed at the originating bank level because good reasons exist for using
further resources to manage them. Some activities whose inherent risks have to be managed
by the bank include those where the nature of the embedded risk may be complex and
difficult to reveal to non-firm interests. For instance, banks holding complex illiquid and
proprietary assets may find communicating the nature of such assets more difficult or
expensive than hedging the underlying risk6. Moreover, revealing information about
customers or clients may give competitors an undue advantage. Internal management of some
risks may also be necessary because it is central to the bank‘s business purpose because they
are the raison d‘être of the firm. This includes propriety positions that are accepted because of
their risks and expected return. In all these circumstances when risk is absorbed, risk
management activity requires the monitoring of business activity risk and returns and it is
considered as part of doing business. In effect, banks should accept only those risks that are
uniquely a part of the bank‘s array of unique value-added services (Allen & Santomero, 1996,
Oldfield & Santomero, 1995).
2.4 KEY BANK RISKS
The risks associated with the provision of banking services differ by the type of service
rendered. Different authors have grouped these risks in various ways to develop the
frameworks for their analyses but the common ones which are considered in this study are
credit risk, market risks (which includes liquidity risk, interest rate risk and foreign exchange
risk), operational risks which sometimes include legal risk, and more recently, strategic risk.
6
This point has been made in a different context by both Santomero and Trester (1997) and Berger and Udell
(1993)
20
2.4.1 Credit Risk
Greuning and Bratanovic (2009) define credit risk as the chance that a debtor or issuer of a
financial instrument— whether an individual, a company, or a country— will not repay
principal and other investment-related cash flows according to the terms specified in a credit
agreement. Inherent to banking, credit risk means that payments may be delayed or not made
at all, which can cause cash flow problems and affect a bank‘s liquidity. The goal of credit
risk management is to maximise a bank‘s risk-adjusted rate of return by maintaining credit
risk exposure within acceptable parameters. More than 70 percent of a bank‘s balance sheet
generally relates to credit risk and hence considered as the principal cause of potential losses
and bank failures. Time and again, lack of diversification of credit risk has been the primary
culprit for bank failures. The dilemma is that banks have a comparative advantage in making
loans to entities with whom they have an ongoing relationship, thereby creating excessive
concentrations in geographic and industrial sectors. Credit risk includes both the risk that a
obligor or counterparty fails to comply with their obligation to service debt (default risk) and
the risk of a decline in the credit standing of the obligor or counterparty.
While default triggers a total or partial loss of any amount lent to the obligor or counterparty,
a deterioration of the credit standing leads to the increase of the possibility of default. In the
market universe, a deterioration of credit standing of a borrower does materialise into a loss
because it triggers an upward move of the required market yield to compensate the higher
risk and triggers a value decline (Bessis, 2010). Normally the financial condition of the
borrower as well as the current value of any underlying collateral are of considerable interest
to banks when evaluating the credit risks of obligors or counterparties (Santomero, 1997).
According to Greuning and Bratanovic (2009), formal policies laid down by the board of
directors of a bank and implemented by management plays a vital part in credit risk
management. As a matter of fact, a bank uses a credit or lending policy to outline the scope
and allocation of a bank‘s credit facilities and the manner in which a credit portfolio is
managed— that is, how investment and financing assets are originated, appraised, supervised,
and collected.
There are also minimum standards set by regulators for managing credit risk. These cover the
identification of existing and potential risks, the definition of policies that express the bank‘s
risk management philosophy, and the setting of parameters within which credit risk will be
21
controlled. There are typically three kinds of policies related to credit risk management. The
first set aims to limit or reduce credit risk, which include policies on concentration and large
exposures, diversification, lending to connected parties, and overexposure. The second set
aims at classifying assets by mandating periodic evaluation of the collectability of the
portfolio of credit instruments. The third set of policies aims to make provision for loss or
make allowances at a level adequate to absorb anticipated loss.
2.4.2 Market Risks
Market risk is generally considered as the risk that the value of a portfolio, either an
investment portfolio or a trading portfolio, will decrease due to the change in value of the
market risk factors. Pyle (1997) defines market risk as the change in net asset value due to
changes in underlying economic factors such as interest rates, exchange rates, and equity and
commodity prices. There are three common market risk factors to banks and these are
liquidity, interest rates and foreign exchange rates.
2.4.2.1 Liquidity Risk
Greuning and Bratanovic (2009), indicate that a bank faces liquidity risk when it does not
have the ability to efficiently accommodate the redemption of deposits and other liabilities
and to cover funding increases in the loan and investment portfolio. These authors go further
to posit that a bank has adequate liquidity potential when it can obtain needed funds (by
increasing liabilities, securitising, or selling assets) promptly and at a reasonable cost. The
Basel Committee on Bank Supervision, in its June 2008 consultative paper, defined liquidity
as the ability of a bank to fund increases in assets and meet obligations as they become due,
without incurring unacceptable losses.
Bessis (2010) however considers liquidity risk from three distinct situations. The first angle is
where the bank has difficulties in raising funds at a reasonable cost due to conditions relating
to transaction volumes, level of interest rates and their fluctuations and the difficulties in
finding a counterparty. The second angle looks at liquidity as a safety cushion which helps to
gain time under difficult situations. In this case, liquidity risk is defined as a situation where
short-term asset values are not sufficient to match short term liabilities or unexpected
outflows. The final angle from where liquidity risk is considered as the extreme situation.
Such a situation can arise from instances of large losses which creates liquidity issues and
22
doubts on the future of the bank. Such doubts can result in massive withdrawal of funds or
closing of credit lines by other institutions which try to protect themselves against a possible
default. Both can generate a brutal liquidity crisis which possibly ends in bankruptcy.
Liquidity is necessary for banks to compensate for expected and unexpected balance sheet
fluctuations and to provide funds for growth (Greuning and Bratanovic, 2009). Santomero
(1995) however, posits that while some would include the need to plan for growth and
unexpected expansion of credit, the risk here should be seen more correctly as the potential
for funding crisis. Such a situation would inevitably be associated with an unexpected event,
such as a large charge off, loss of confidence, or a crisis of national proportion such as a
currency crisis. Effective liquidity risk management therefore helps ensure a bank's ability to
meet cash flow obligations, which are uncertain as they are affected by external events and
other agents' behaviour.
The Basel Committee on Bank Supervision consultative paper (June 2008) asserts that the
fundamental role of banks in the maturity transformation of short-term deposits into long-
term loans makes banks inherently vulnerable to liquidity risk, both of an institution-specific
nature and that which affects markets as a whole. A liquidity shortfall at a single bank can
have system-wide repercussions and hence liquidity risk management is of paramount
importance to both the regulators and the industry players. The price of liquidity is however a
function of market conditions and the market‘s perception of the inherent riskness of the
borrowing institution (Greuning and Bratanovic, 2009). So if there is a national crisis such as
acute currency shortage or decline, or perception of the bank‘s credit standings deteriorates,
or fundraising by the bank becomes suddenly important and recurrent or has unexpected
fluctuation, funding becomes more costly. Financial market developments in the past decade
have increased the complexity of liquidity risk and its management.
2.4.2.2 Interest Rate Risk
In general, interest rate risk is the potential for changes in interest rates to reduce a bank‘s
earnings or value. Most of the loans and receivables of the balance sheet of banks and term or
saving deposits, generate revenues and costs that are driven by interest rates and since interest
rates are unstable, so are such earnings. Though interest rate risk is obvious for borrowers and
lenders with variable rates, those engaged in fixed rate transactions are not exempt from
23
interest rate risks because of the opportunity cost that arises from market movements (Bessis,
2010). According to Greuning and Bratanovic (2009), the combination of a volatile interest
rate environment, deregulation, and a growing array of on and off-balance-sheet products
have made the management of interest rate risk a growing challenge. At the same time,
informed use of interest rate derivatives— such as financial futures and interest rate swaps—
can help banks manage and reduce the interest rate exposure that is inherent in their business.
Bank regulators and supervisors therefore place great emphasis on the evaluation of bank
interest rate risk management, particularly since the Basel Committee recommends the
implementation of market risk– based capital charges.
Greuning and Bratanovic (2009) posits that banks encounter interest rate risk from four main
sources namely repricing risk, yield curve risk, basis risk, and optionality. The primary and
most often discussed source of interest rate risk stems from timing differences in the maturity
of fixed rates and the repricing of the floating rates of bank assets, liabilities, and off-balance
sheet positions. The basic tool used for measuring repricing risk is duration, which assumes a
parallel shift in the yield curve. Also, repricing mismatches expose a bank to risk deriving
from changes in the slope and shape of the yield curve (nonparallel shifts). Yield curve risk
materialises when yield curve shifts adversely affect a bank‘s income or underlying economic
value. Another important source of interest rate risk is basis risk, which arises from imperfect
correlation in the adjustment of the rates earned and paid on different instruments with
otherwise similar repricing characteristics. When interest rates change, these differences can
give rise to unexpected changes in the cash flows and earnings spread among assets,
liabilities, and off-balance-sheet instruments of similar maturities or repricing frequencies
(Wright and Houpt, 1996).
An increasingly important source of interest rate risk stems from the options embedded in
many bank asset, liability, and off-balance-sheet portfolios. If not adequately managed,
options can pose significant risk to a banking institution because the options held by
customers, both explicit and embedded, are generally exercised at the advantage of the holder
and to the disadvantage of the bank. Moreover, an increasing array of options can involve
significant leverage, which can magnify the influences (both negative and positive) of option
positions on the financial condition of a bank. Broadly speaking, interest rate risk
management comprises various policies, actions and techniques that a bank uses to reduce the
risk of diminution of its net equity as a result of adverse changes in interest rates from any of
24
the sources mentioned above. Risk factors related to interest rate risk are estimated in each
currency in which a bank has interest-rate-sensitive on and off-balance sheet positions. Since
interest rate risk can have adverse effects on both a bank‘s earning and its economic value, an
approach which focuses on the impact of interest rate changes on a bank‘s net interest income
is combined with another which takes a more comprehensive view of the potential long-term
effects of such interest rates changes on its economic value is used to assess the interest risk
exposure.
2.4.2.3 Foreign Exchange Risk
Bessis (2010) defines foreign exchange risk as incurring losses due to changes in exchange
rates. Such loss of earnings may occur due to a mismatch between the value of assets and that
of capital and liabilities denominated in foreign currencies or a mismatch between foreign
receivables and foreign payables that are expressed in domestic currency. According to
Greuning and Bratanovic (2009), foreign exchange risk is speculative and can therefore result
in a gain or a loss, depending on the direction of exchange rate shifts and whether a bank is
net long or net short (surplus or deficit)in the foreign currency. In principle, the fluctuations
in the value of domestic currency that create currency risk result from long-term
macroeconomic factors such as changes in foreign and domestic interest rates and the volume
and direction of a country‘s trade and capital flows. Short-term factors, such as expected or
unexpected political events, changed expectations on the part of market participants, or
speculation based currency trading may also give rise to foreign exchange changes. All these
factors can affect the supply and demand for a currency and therefore the day-to-day
movements of the exchange rate in currency markets. Foreign exchange risk is generally
considered to comprise of transaction risk, economic risk and revaluation risk.
Transaction risk is the price-based impact of exchange rate changes on foreign receivables
and foreign payables, that is, the difference in price at which they are collected or paid and
the price at which they are recognised in local currency in the financial statements of a bank
or corporate entity. Alternatively known as business risk, economic risk relates to the impact
of exchange rate changes on a country‘s long-term or a company‘s competitive position. With
increasing globalisation, capital moves quickly to take advantage of changes in exchange
rates and therefore devaluations of foreign currencies can lead to increased competition in
both overseas and domestic markets. This phenomenon makes this component of foreign
25
exchange risk very critical for its management. The third component, revaluation or
translation risk arises when a bank‘s foreign currency positions are revalued in domestic
currency, and when a parent institution conducts financial reporting or periodic consolidation
of financial statements. Banks conducting foreign exchange operations are also exposed to
foreign exchange risk in forms of credit risks such as the default of the counterparty to a
foreign exchange contract and time-zone-related settlement risk.
2.4.3 Operational Risk
The Basel Accord (2007) defines operational risk as the risk of direct or indirect loss
resulting from inadequate or failed internal processes, people and systems or from external
events. Malfunctions of the information systems, reporting systems, internal monitoring rules
and internal procedures designed to take timely corrective actions, or the compliance with the
internal risk policy rules result in operational risks (Bessis, 2010). Operational risks,
therefore, appear at different levels, such as human errors, processes, and technical and
information technology. Because operational risk is an ―event risk‖, in the absence of an
efficient tracking and reporting of risks, some important risks will be ignored, there will be
no trigger for corrective action and this can result in disastrous consequences. Developments
in modern banking environment, such as increased reliance on sophisticated technology,
expanding retail operations, growing e-commerce, outsourcing of functions and activities,
and greater use of structured finance (derivative) techniques that claim to reduce credit and
market risk have contributed to higher levels of operational risk in banks (Greuning and
Bratanovic, 2009).
The recognition of the above-mentioned contributory factor in operational risk has led to an
increased attention on the development of sound operational risk management systems by
banks with the initiative being taken by the Basel Committee on Banking Supervision. The
Committee addressed operational risk in its Core Principles for Effective Banking
Supervision (1997) by requiring supervisors to ensure that banks have risk management
policies and processes to identify, assess, monitor, and control or mitigate operational risk. In
its 2003 document, Sound Practices for the Management and Supervision of Operational
Risk, the Committee further provided guidance to banks for managing operational risk, in
anticipation of the implementation of the Basel II Accord, which requires a capital allocation
for operational risks. Despite all these efforts by the regulators at addressing operational risk,
26
practical challenges exist when it comes to its management. In the first place, it is difficult to
establish universally applicable causes or risk factors which can be used to develop standard
tools and systems of its management since the events are largely internal to individual banks.
Moreover, the magnitude of potential losses from specific risk factors is often not easy to
project. Lastly, it is difficult designing an effective mechanism for systematic reporting of
trends in a bank‘s operational risks because very large operational losses are rare or isolated.
Because of the data and methodological challenges raised by operational risk, the first stage
of developing an effective framework to manage it is to set up a common classification of
loss events that should serve as a receptacle for data gathering process on event frequency
and costs. The data gathered is then analysed (risk mapping) with various statistical
techniques such as graphical representation of the probability and severity of risks. This helps
to find the links between various operational risks. The process then ends with some
estimates of worst-case losses due to events risks. Modelling of loss distributions due to
operational risks will enable the right capital charges to be made for operational risk as
required by current regulations (Bessis, 2010). In order for the objectives of setting up an
operational risk management framework to be accomplished, it may require a change in the
behaviour and culture of the firm. Management must also not only ensure compliance with
the operational risk policies established by the board, but also report regularly to senior
executives. A certain amount of self-assessment of the controls in place to manage and
mitigate operational risk will be helpful.
2.4.4 Strategic Risk
While financial risk and credit risk in banking have been rigorously explored, the risk
management implications of many corporate strategies and the external market and industry
uncertainties have received relatively little attention (Miller, 1992). Slywotzky and Drzik
(2005), define strategic risk as the array of external events and trends that can devastate a
company‘s growth trajectory and shareholder value. Whiles these two authors consider
strategic risk as a sole consequence of external occurrences, other authors look at strategic
risk as the current and prospective impact on earnings and/or capital arising from internal
business activities such as adverse business decisions, improper implementation of decisions,
or lack of responsiveness to industry changes. They therefore consider strategic risk as a
function of the compatibility of an organisation‘s strategic goals, the business strategies
27
developed to achieve those goals, the resources deployed against these goals, and the quality
of implementation. Emblemsvåg and Kjølstad (2002), also define strategic risk as risk which
arises as a firm pursues its business objectives either by exploiting opportunities and/or
reducing threats. Which ever way this is considered, strategic risk encompasses a variety of
uncertainties which are not financial in nature, but rather credit or operational related caused
by macro-economic factors, industry trends or lapses in a firm‘s strategic choices which
affects the firm‘s earnings and shareholders‘ value adversely. Strategic risks often constitute
some of a firm‘s biggest exposures and therefore can be a more serious cause of value
destruction. Unfortunately, as strategic risks are often highly unpredictable and of different
forms, managers have also not yet been able to systematically develop tools and techniques to
address them (Slywotzky and Drzik, 2005). This is because the more formalised risk
management approaches often remain focused on identifiable exposures and thus less suitable
to deal with many of the unexpected economic and strategic events that characterise
contemporary business environment in which strategic risks are embedded. Slywotzky and
Drzik (2005) attempted to identify significant events which contribute to strategic risk and
categorised them into seven main classes. These include industry margin squeeze, threat of
technology shift which has the possibility of driving some products and services out of the
market, brand erosion, emergence of one-of-a-kind competitor to seize the lion share of value
in the market, customer priority shift, new project failure and market stagnation. The idea
was to provide a framework for assessing a company‘s strategic risks and develop counter
measures to address them. The authors intimate that the key to surviving strategic risks is;
knowing how to assess and respond to them and therefore devoting resources to it. They also
advice management to adjust their capital allocation decisions by applying a higher cost of
capital to riskier projects and to build greater flexibility into their capital structure when faced
with riskier competitive environments.
How these risks can be managed is determined by the organisational characteristics – the
strengths and weaknesses. They include communication channels, operating systems,
delivery networks, and managerial capacities and capabilities. The organisation‘s internal
characteristics must be evaluated against the impact of economic, technological, competitive,
regulatory, and other environmental changes. An effective strategic risk management
approach should embrace both the upside and downside of risk. It should seek to counter all
losses, both from accidents and from unfortunate business judgments, and seize opportunities
28
for gains through organisational innovation and growth. Seizing upside risk involves
searching for opportunities and developing plans to act on these opportunities when the future
presents them. Countering downside risk on the other hand is done by reducing the possibility
of occurring (probability) and scope (magnitude) of losses; and financing recovery from these
losses (Herman and Head, 2002). Beasley and Frigo (2007) posit that the first step in strategic
risk management is finding a way to systematically evaluate a company‘s strategic business
risk. Thus, strategic risk management begins by identifying and evaluating how a wide range
of possible events and scenarios will impact a business‘s strategy execution, including the
ultimate impact on the valuation of the company.
Before management can effectively manage risks that might be identified by various scenario
analyses, they need to define an overriding risk management goal. Stephen Gates (2006)7
argues that due to the complexity of the concept of strategic risk, no single quantitative
measure will prove satisfactory in all strategic situations. Because of the uniqueness of the set
of strategic risk faced by every/each financial institution, regulators have not been able to
develop general guidelines for all the institutions for managing strategic risk. Some
consultants and scholars have come out with some recommendations and guidelines for
managing strategic risk. One such guide is by Slywotzky and Drzik (2005). Building a
rigorous strategic risk management framework requires an institution to re-examine both its
internal practices and its external environment, and to understand how closely the two are
connected. In other words, external factors have an impact on internal practices, but those
internal practices, due to the interconnectivity of financial markets can in turn have an
impact on how the institution is viewed externally--and even have an impact on the
marketplace in general (Governor Kroszner, October 2008)8.
2.5 VAR: A TOOL FOR MEASURING MARKET RISKS
Jorion (2007) defines VaR intuitively as a summary of the worst loss over a target horizon
that would be exceeded with a given level of confidence. It estimates the maximum potential
7
In an article published in the Fall 2006 edition of the Journal of Applied Corporate Finance
8
He made this point in a speech he delivered at an Annual Risk Management Conference of Risk Management
Association Baltimore, Maryland October, 2008 on the topic Strategic Risk Management in an Interconnected
World
29
loss that may be incurred on a position at a given horizon and level of confidence. Greuning
and Bratanovic (2009) refer to it as a modelling technique that typically measures a bank‘s
aggregate market risk exposure and, given a probability level, estimates the amount a bank
would lose if it were to hold specific assets for a certain period of time. It is a forward-
looking method that expresses financial market risk in a form that anybody can understand,
namely currency. It measures the predicted worst loss (maximum movement of the yield
cure), over a target horizon (for example, 10 days, which provides the benefit of early
detection), within a given confidence level (99 percent is the level chosen by the Basel
Committee). VaR-based models cover a number of market risks, the bank is able to fine-tune
its portfolio structure, drawing on a range of options for portfolio diversification to reduce the
risk to which it is exposed and the associated capital requirements. The well-known
proprietary models that use VaR approaches are JP Morgan‘s Risk metrics, Banker‘s trust
Risk Adjusted Return on Capital, and Chase‘s Value at risk. Inputs to a VaR-based model
include data on the bank‘s positions and on prices, volatility, and risk factors.
VaR-based models combine the potential change in the value of each position that would
result from specific movements in underlying risk factors with the probability of such
movements occurring. The changes in value are aggregated at the level of trading book
segments and across all trading activities and markets. The VaR amount may be calculated
using one of a number of methodologies which are the historical simulation approach, the
delta-normal or variance/covariance methodology and the Monte Carlo simulation method.
According to the Basel Committee on Banking Supervision, the disclosure requirements for
each portfolio9 should include VaR calculations, broken down by type of risk or asset class
and in the aggregate, estimated for one-day and two-week holding periods, and reported in
terms of high, medium, and low values over the reporting interval and at period end. Also
there should be information about risk and return in the aggregate, including a comparison of
risk estimates with actual outcomes. Further, there should be qualitative discussions to assist
with a comparison of the P/L to VaR, including a description of differences between the basis
of the P/L and the basis of the VaR estimates, and quantitative measure of firm-wide
exposure to market risk, broken down by type of risk, that in the bank‘s judgment best
9
Contained in the Basel Committee on Banking Supervision Working Paper on Pillar 3– Market Discipline
(2001)
30
expresses exposure to risk, reported in terms of high, medium, and low values over the
reporting period and at period end.
VaR numbers should be aggregated on a simple-sum basis across risk factor categories,
taking into consideration cross correlations within each category. The Basel Committee
market risk capital standard also requires that the VaR be computed daily and the market
risk– related capital requirements met on a daily basis. The capital requirement is expressed
as the higher of the previous day‘s VaR and the average of the daily VaR measures for each
of the last 60 business days. This is then multiplied by an additional factor designated by
national supervisory authorities and related to the quality of a bank‘s risk management
system. VaR faces some limitations based on the fact that it assumes that historical
experiences may be repeated in future. It should therefore be used as one tool in an integrated
set of tools— and not as the only measure of a portfolio‘s exposure.
2.6 INTEGRATED RISK MANAGEMENT: AN ULTIMATE GOAL OF A

FORWARD-LOOKING RISK MANAGEMENT FRAMEWORK
DeLoach (2000) argues that risk management must be integrated with business planning and
strategic management so that it becomes inextricably linked to those processes. A report by
the Joint Forum‘s Working Group of the Basel Committee on Banking Supervision in 2003,
reveals that there is greater emphasis on the management of risk on an integrated firm-wide
basis, and related efforts to ―aggregate‖ risks faced by firms in the financial sector. The
Working Group believes that these trends stem from the interest of firms in understanding
better the variety of risks that they face; thereby enabling them to determine more accurately
the amount of capital they need to operate their businesses. It is also clear that the passage of
Sarbanes-Oxley in 2002 and the wave of scandals that prompted it, have heightened the need
for an integrated approach to managing risk in organisations to survive in the current volatile
business environment and accommodate the rapid changing risk profiles. Andersen (2009)
also agues that recent financial management practices, where aggregate market exposures of
different geographically dispersed assets are typically expressed in a single value-at-risk
metric derived from analyses of co-variation in asset returns, inspires for a more integrated
perspective to risk management. It is further noted that environmental hazards, market-related
vulnerability and operational disruptions can interact even though these risks are handled by
specialised functional departments (Andersen and Terp, 2006). In fact, studies reveal that
31
about 80% of the companies with the largest losses in recent times had been hit by two or
more risks that were interrelated, thus revealing the need for a risk management function that
transcends corporate silos and the resulting compartmentalisation of risks (Funston, 2004)10.
Meulbroek (2002) argues that integrated risk management has only recently become a
practical possibility, because of the enormous improvements in information and
communication technologies, and sophisticated and globally-tested legal and accounting
infrastructure to support the use of contractual agreements on large scale and at low cost.
Meulbroek (2002) defines integrated risk management as the identification and assessment of
the collective risks that affect firm value, and the implementation of a firm-wide strategy to
manage those risks. The Joint Forum‘s Working Group11 argues that an integrated risk
management system seeks to have in place management policies and procedures that are
designed to help ensure an awareness of, and accountability for, the risks taken throughout
the financial firm, and also to develop the tools needed to address those risks. A key objective
is to ensure that the firm does not ignore any material source of risk. It is considered to be
strategic instead of tactical by looking at how risks affect the value of the entire firm. What
integrated risk management provides is a systematic way of thinking about risk and
identifying its multi-dimensional effects on the firm, coupled with a framework for deciding
upon the best strategy for implementation. It provides managers with the opportunity of
benefiting from new insights into the interplay among different types of risk and traditional
financial decision areas, connections easily missed without a comprehensive framework
(Meulbroek, 2002). From a decision-making perspective, integrated risk management
typically involves the establishment of hierarchical limit systems and risk management
committees to help determine how to set and allocate such limits.
According to Rosenberg and Schuermann (2005), the goal of integrated risk management in a
bank is to measure and manage risk and capital across a diverse range of activities in the bank
which requires an approach for aggregating different risk types in the bank. To help
accomplish this, many banks have increased the share of their resources devoted to risk
management activities to strengthen its dedicated risk management function. Many banks
have also invested considerably in centralised information systems to help keep track of risks
10
R. Funston, ―Avoiding the Value Killers,‖ Treasury and Risk Management, April, 2004, p. 11.
11
Of the Basel Committee on Banking Supervision in their 2003 report on Trends in risk integration and
aggregation
32
within the bank. But it is worth noting that an integrated risk management process does not
necessarily imply a centralised risk management structure. Rather, the key characteristic of
the integrated risk management process is simply that it seeks to ensure that the firm
appropriately considers and evaluates all material risks. As mentioned earlier in Meulbroek‘s
definition, integrated risk management also involves the aggregation of all the risks faced by
the firm. It evaluates the firm‘s total risk exposure, instead of a partial evaluation of each risk
in isolation, because it is the total risk of the firm which typically ―matters‖ to the assessment
of the firm‘s value and of its ability to fulfil its contractual obligations in the future.
Furthermore, by aggregating risks, some individual risks within the firm will partially or
completely offset each other thereby reducing the total expense of hedging or otherwise
managing those risks.
The Joint Forum‘s Working Group of the Basel Committee on Banking Supervision broadly
refers to risk aggregation as efforts by firms to develop quantitative risk measures that
incorporate multiple types or sources of risk. The most common approach is to estimate the
amount of ―economic capital‖ that a firm believes is necessary to absorb potential losses
associated with each of the included risks. This is typically accomplished via mathematical or
statistical techniques designed to assess the likelihood of potential adverse outcomes,
although the use of specific stress scenarios is also relatively common. Aggregation of risks
results in diversification benefits to the firm due to imperfect correlations in the risks faced
by the firm. Total risk becomes lesser and the capital required to safely operate is also lesser
than would otherwise be the case if risks were not aggregated. The evolution in approaches to
risk integration and risk aggregation by firms reflects supervisory and regulatory initiatives
and also provides an impetus for continued advances in supervisory and regulatory
approaches.
2.6.1 Enterprise Risk Management: A useful tool for integrating risks
In recent times there has been an increased attention to risk management at the enterprise
level and this can be linked to a number of policy decisions (Beasley et al, 2005). As
mentioned earlier, regulators, board audit committees, rating agencies, and shareholders are
all becoming interested in having an integrated corporate risk management approach to
managing risk in order to account for all firms‘ risks, their interrelations with each other and
their combined effect on firms. Standard and Poor‘s for instance has introduced Enterprise
33
Risk Management analysis into its global corporate credit rating process beginning with the
third quarter of 2008 (Standard and Poor‘s, May 2008). It is in this light that Enterprise Risk
Management (ERM) has subsequently emerged as an increasingly popular strategy that
attempts to holistically evaluate and manage all of the risks faced by the firm. ERM uses the
firm‘s risk appetite to determine which risks should be accepted and which should be
mitigated or avoided. DeLoach (2000) describes ERM as a ―structured and disciplined
approach: it aligns strategy, process, people, technology and knowledge with the purpose of
evaluating and managing the uncertainties the enterprise faces as it creates value. It means
just that: an elimination of functional, departmental or cultural barriers. It is a truly holistic,
integrated, forward-looking and process oriented approach to managing all kinds of business
risks and opportunities – not just financial ones – with the intent of maximising shareholder
value for the enterprise as a whole‖.
The Committee of Sponsoring Organisations of the Treadway Commission (COSO) report on

enterprise risk management (ERM) in 2004 defines it as ―a process, effected by an entity‘s
board of directors, management and other personnel, applied in strategy setting and across the
enterprise, designed to identify potential events that may affect the entity, and manage risk to
be within its risk appetite, to provide reasonable assurance regarding the achievement of
entity objectives‖. The report posits that the underlying premise of ERM is that every entity
exists to provide value for its stakeholders. ERM enables management to effectively deal
with uncertainty and associated risk and opportunity, enhancing the capacity to build value.
ERM is able to do this because it assists in aligning risk appetite and strategy, enhancing risk
response decisions, reducing operational surprises and losses, identifying and managing
multiple and cross-enterprise risks, seizing opportunities and improving deployment of
capital. These capabilities inherent in ERM help management achieve the entity‘s
performance and profitability targets and prevent loss of resources. Enterprise risk
management helps ensure effective reporting and compliance with laws and regulations, and
helps avoid damage to the entity‘s reputation and associated consequences. In sum, enterprise
risk management helps an entity get to where it wants to go and avoid pitfalls and surprises
along the way.
34
2.7 THE PLACE OF CORPORATE GOVERNANCE IN THE MANAGEMENT

OF BANK RISKS
The importance of corporate governance has captured the attention of both national
authorities as well as institutions engaged in international trade, and financial flows.
Corporate governance is also essential to protecting the stability of international markets such
as the Organisation for Economic Co-operation and Development (OECD), the Bank for
International Settlements (BIS), the International Monetary Fund (IMF), and the World Bank.
Several factors can be attributed to this increased attention. These include the growth of
institutional investors such as pension funds, insurance companies, mutual funds, and highly
leveraged institutions and their role in the financial sector. In addition, the widely articulated
concerns and criticism that the contemporary monitoring and control of publicly held
corporations are seriously defective, leading to suboptimal economic and social development,
is also a factor to consider. Further, the shift away from a traditional view of corporate
governance as centred on ―shareholder value‖ in favour of a corporate governance structure
extended to a wide circle of stakeholders and the impact of increased globalisation of
financial markets, a global trend toward deregulation of financial sectors, and liberalisation of
institutional investors‘ activities, all account for the growing importance of corporate
governance (Greuning and Bratanovic, 2009).
According to Greuning and Bratanovic (2009), corporate governance relates to the manner in
which the business of the bank is governed. It is defined by a set of relationships between the
bank‘s management, board, shareholders, and other stakeholders. This includes setting
corporate objectives and a bank‘s risk profile, aligning corporate activities and behaviours
with the expectation that management will operate the bank in a safe and sound manner,
running day-to-day operations within an established risk profile and in compliance with
applicable laws and regulations, while protecting the interests of depositors and other
stakeholders. An effective governance practice in the banking system helps maintain public
trust and confidence in the banking system. It is also said to create an enabling environment
that rewards banking efficiency, mitigates financial risks, and increases systemic stability.
Cost of capital tends to be lower when corporate governance is perceived to be good as it
conveys a sense of lower risk that translates into shareholders‘ readiness to accept lower
returns. Good corporate governance has been proven to improve operational performance and
reduce the risks of contagion from financial distress. Besides mitigating the internal risk of
35
distress by positively affecting investors‘ perception of risk and their readiness to extend
funding, good governance increases the firms‘ robustness and resilience to external shocks.
Greuning and Bratanovic (2009) also posit that the key elements of a sound corporate
governance framework in a bank include a well articulated corporate strategy against which
the overall success and the contribution of individuals can be measured. It also includes
setting and enforcing clear assignment of responsibilities, decision making authority, and
accountabilities appropriate for the bank‘s selected risk profile and a strong financial risk
management function (independent of business lines), adequate internal control systems
(including internal and external audit functions), and functional process design with the
necessary checks and balances. It also consists of adequate corporate values, codes of
conduct, and other standards of appropriate behavior and effective systems used to ensure
compliance. This includes special monitoring of the bank‘s risk exposures where conflicts of
interest are expected to appear such as relationships with affiliated parties. Financial and
managerial incentives to act in an appropriate manner offered to the board, management, and
employees, including compensation, promotion, and penalties are also important elements to
a sound corporate governance as well as transparency and appropriate information flows
internally and to the public.
Due to the critical importance of corporate governance to the banking industry, the Basel
Committee on Banking Supervision has in place a set of governance principles for banking
institutions. The guidelines contain four important forms of oversight that should be included
in the organisational structure of any bank to ensure appropriate checks and balances. These
are oversight by the board of directors or supervisory board, oversight by individuals not
involved in the day-to-day running of the various business areas, direct line supervision of
different business areas and independent risk management, compliance, and audit functions.
In addition, it is important that key personnel are fit and proper for their jobs.
In the publication by Greuning and Bratanovic (2009), the key players involved in bank
corporate governance and risk management are the regulatory and supervisory authorities
who create a regulatory and legal environment in which the quality and effectiveness of bank
risk management can be optimised to contribute to a sound and reliable banking system. Next
are the shareholders who determine the direction of a bank by electing the supervisory board
and approving the board of directors, the audit committee, and external auditors. The board
36
sets the strategic direction, appoints management, establishes operational policies, and, most
importantly, takes responsibility for ensuring the soundness of a bank. Another key player in
the corporate governance structure of a bank is management who are responsible for bank
operations and for implementing risk management policies. An audit committee which can be
regarded as an extension of the board‘s risk management function helps management with the
identification and handling of risk. A key external player in bank governance is the external
auditors. They provide shareholders, the market and other stakeholders with information and
capacity to hold directors and management accountable for the sound operation of a bank.
They play a key role in improving the market‘s ability to determine which banks to do
business with.
37
CHAPTER THREE - METHODOLOGY
3.0 INTRODUCTION
This chapter lays down the methodology for the analysis. It presents a detailed and systematic
process of how the significant risks faced by Ecobank Ghana Limited (EGH) are identified,
measured and managed. The main discussions of this chapter includes data sourcing,
benchmarking, analytical tools to be used, analytical techniques used for interpreting the data
as well as an outline of the analytical components of the risks the bank is exposed to.
3.1 DATA SOURCE
The study relied mainly on secondary data. This was obtained from the annual reports and
other reports issued by the bank and other organisations. Some of these external secondary
data comes from the regulators, industry watchers and other financial analysts. The bank‘s
policy documentations and guidelines concerning the management of the various risks are
also a major source of information for determining whether the bank‘s structures and risk
management tools are adequate in handling inherent risk in their business activities.
3.2 BENCHMARKS
The major benchmarks used for this assessment are the various documents released by the
Risk Management Group of the Basel Committee on Banking Supervision regarding
principles which ensure sound management of risks in banks. This helped in evaluating the
adequacy of the EGH‘s risk management framework as the essential components of the
recommended guidelines were mirrored to those in the banks policies in respect of its
structures, processes, procedures and tools put in place to manage risks. According to the
main regulators of the banks in Ghana (Bank of Ghana), the Basel principles for ensuring
sound management of risks have been incorporated in Ghana‘s Banking Act, Act 673 and
should therefore be adhered to by all banks operating in Ghana12. To assist in assessing the
performance of EGH vis-à-vis that of the Ghanaian banking industry, the Financial stability
reports issued by the Bank of Ghana on periodic bases were relied upon for industry data.
Also, the 2010 Ghana Banking Survey report issued by PricewaterhouseCoopers Ghana in
12
This information was confirmed by the Deputy Governor of Bank of Ghana, Mr. L. Van Lare Dosoo at the
Regional Seminar on Risk-based supervision on 24 April, 2006 in Accra.
38
collaboration with Ghana Association of Bankers provided some peer ratios and industry
averages and served as useful benchmarks for assessing the risk profile of EGH.
3.3 ANALYSTICAL TOOLS
The analysis in this report relied heavily on excel models. These consisted of a series of
spreadsheet-based data input tables that allowed data to be collected and manipulated in a
systematic manner. The spreadsheet allowed for the generation of relevant tables, ratios and
graphs which assisted in the interpretation and analysis of the data collected to help measure
the bank‘s performance as well as judge the effectiveness of its risk management process.
3.3.1 Ratios
A ratio refers to the mathematical expression of one quantity relative to another. There are
many relationships between financial accounts and between expected relationships from one
point to another. In addition to giving an indication of current situations, ratios also aids in
making forward-looking projections. The ratios covered the areas of risk management in
varying degrees of detail using the balance sheet, income statement and cash flow schedules.
Some of the areas of risk where ratios helped in expressing useful relationships include
profitability, liquidity, debt and leverage and capital adequacy. Ratios, however, do not
provide a complete picture of a bank‘s performance and should be considered in conjunction
with other qualitative information and contextually. Some of the ratios used in assessing bank
risk can be found in table 3.1.
Table 3.1: Ratios in assessing bank risks

Category Ratios
Solvency Capital Adequacy: Total Qualifying Capital / Total Risk Weighted
Assets
Profitability Return on Assets: Profit After Tax / Average total Assets

Return on Equity: Profit After Tax / Average total Shareholders' Funds
Efficiency Net Interest Income / Average total Assets

Net Interest Income / Gross Loans and Advances
Operating Expenses / Average total Assets
Operating Expenses / Gross Operating Income
Credit Risk Customer Loans / Gross Loans and Advances

Bank Loans / Gross Loans and Advances
39
50 Largest Exposures / Gross Loans and Advances

Collateral / Non-performing Loans (Coverage ratio)
Non-performing Loans / Gross Loans and Advances
Impairment Charge / Gross Loans and Advances
Allowances for Impairment / Gross Loans and Advances
Liquidity Risk Customer Loans / Customer Deposits

Interbank Loans / Interbank Deposits
Readily Marketable Assets / Total Assets
Liquid Assets / Volatile Liabilities (Volatility Coverage)
Volatile Liabilities / Total liabilities
Liquid Assets /Total deposits (Bank Run)
Interest Rate Risk GAP / Total Assets

GAP / Total Equity
Interest Rate Sensitive Assets / Interest Rate Sensitive Liabilities
Interest Rate Sensitive Assets / Total Assets
Interest Rate Sensitive Liabilities / Total Liabilities
Currency Risk Net Open Currency Position / Qualifying Capital
Source: Own construction
3.3.2 Graphs and Charts
Graphs and charts provided visual representations of some of the analytical results. They
provided a quick snap short of the current situation of the bank by presenting the structures in
the assets, liabilities and incomes. They also facilitated comparison of performance over time
and show trend lines and changes in significant aspects of the bank‘s operations and
performance. A high-level overview of the trends in the bank‘s risks was presented through
graphs and charts as they were used to illustrate levels of profitability, capital adequacy,
composition of portfolios, major types of credit risk exposures and exposures to interest rate,
liquidity and currency risks.
3.4 ANALYTICAL TECHNIQUES
These refer to the ways in which the data is interpreted. Some of the common analytical
techniques used in this report include ratio analysis, common-size analysis, and trend
analysis.
40
3.4.1 Ratio Analysis
Ratio analysis involves attempts to put ratios into perspective and make them more
meaningful. When seen in isolation ratios mean little so there is the need to interpret the
meaning in the context of other information. In some cases, the ratios in this report were
compared with those of the industry averages as put forward by the Bank of Ghana in the
periodic Financial Stability Reports and PricewaterhouseCoopers Ghana in their 2010
banking Survey Report. The ratios for the previous two years were considered in addition to
those of the current year in order to have a better view of the current year‘s performance and
also provide a basis for making projections into the future. The banking industry in Ghana is
generally considered stable and gathering from the bank‘s managing director‘s statement in
the 2009 annual report, the bank is not expected to make any acquisition or divestiture which
will significantly affect its business operations. Therefore, any forward looking analyses
based on the ratios calculated from the past years values could be assumed to be appropriate.
In evaluating the performance of EGH using ratios, the bank‘s goals concerning the various
risks it faces, the banking industry norms and the general economic conditions were taken
into consideration.
3.4.2 Common-Size Analysis
This analysis involved converting all financial statement items to a percentage of a given
financial statement item, such as total assets or total revenue. It revealed the composition of
the various financial statement items and presents the structure of the financial statements.
The compositions of financial statements are normally a result of risk management decisions
and are normally in response to the bank‘s business orientation, market environment, desired
customer mix or the general economic conditions. Therefore, in assessing the bank‘s risk
profile, common-size analysis was useful in analyzing the relative share of the various asset
and liabilities as well as the major sources of income and changes in the proportionate share
over time. Rapid increases in some items, for instance, could imply increase in risk and
therefore would raise questions as to whether the bank‘s risk management systems were
adequate to accommodate the increase in risk. In addition, a structural change in the balance
sheet revealed through common-size analysis could disclose a shift to another area of risk. A
review of the proportion of income earned in relation to the amount of energy invested
through the deployment of assets allowed for challenging assessment of risk versus reward.
41
3.4.3 Trend Analysis
Trend analysis technique was used to show whether there was an improvement or otherwise
in an amount or a ratio. It was used to provide useful information regarding the historical
performance and growth of the bank. The growth of the bank was assessed through the
expansion of its balance sheet and increase in its earning base. More importantly, trend
analysis revealed the growth in the individual balance sheet and income statement items
which gave an indication as to whether the growth was sustainable or was as a result of
extraordinary items. Also, whether the growth was healthy for the bank in terms of risk
absorption, could be identified from the rate of growth and commensurate growth in stable
sources funding. The analysis in this report incorporated both currency and percentage
changes for the last three years to ensure that significant currency changes are not hidden by
small percentage changes. Because the economic environment in Ghana could be said to be
generally stable, past trends could serve as good predictors of future behavior and thereby
being of great assistance as a planning tool.
3.5 ANALYTICAL COMPONENTS
The analysis of the EGH‘s risk profile was based the six main types of financial risks it is
exposed to, which are: Balance sheet structure, Income statement structure, Credit, Liquidity,
Interest rate and Currency risks. These risks are inter related as one can give rise to another or
a transaction aimed at reducing one of the risks can end up shifting the risk to another area. In
this regard, the analysis took cognizance of this interrelationship and adopted a holistic
approach. Figure 3.1 provides a conceptual representation of the financial risk types,
components and inter-relationships.
42
Figure 3.1: Diagrammatic representation of components of the bank‘s risk profile
Balance Sheet Risk Liquidity Risk
 Structure and  Liquidity Mismatch

Composition of Assets  Funding structure
and Liabilities  Cashflow Analysis
 Growth and Changes in
Assets and Liabilities
 Capital Adequacy
 Growth in Off-Balance
Sheet Items Interest Rate Risk
Bank
Risk  Interest Rate Gap
Analysis
Profile
Income Statement
Risk
Foreign Currency
 Profitability Levels Risk
 Stability /Quality of
Earnings  Currency Gap
 Operational Efficiency  Currency Structure
of Loan portfolio
and Customer
Credit Risk
deposits
 Size of Credit Exposure
 Concentration of
Loans: Borrower
groups, Industry
 Distribution of Loans
by Product
 Distribution of loans by
Tenor
 Loan Quality
 Related Party Lending
Source: Own Construction
43
CHAPTER FOUR - ASSESSMENT OF BANK RISK PROFILE
4.0 INTRODUCTION
This chapter assesses the risk exposures of Ecobank Ghana Limited. It considers the various
risks inherent in the assets and liabilities of the bank and the adequacy of the amount of
capital and reserves available to safeguard against solvency. The chapter also considers the
banks level of profitability and whether it provided adequate cushion for short-term
problems. Further, the level of credit and market risks the bank is exposed to is assessed.
4.1 BALANCE SHEET RISKS
4.1.1 Assets
It is important to evaluate the composition and structure of a bank‘s assets risk to ascertain
any inherent risks in them. Table D1 in the appendix depicts an expansion in Ecobank
Ghana‘s balance sheet by 50.94% over the year to GHS1,388,193. This was an improvement
of the previous year‘s growth of about 38%. This expansion was mainly due to the increase in
the amount of government securities held as well as the operating accounts balances and
placement with other banks. Meanwhile, the growth in the expansion of the Ghana banking
industry‘s balance sheet was relatively slower as the 31.3% growth it experienced in 2009 fell
behind the 37.2% growth it recorded in 2008. Analysts believe that this was largely
underpinned by a reduction in the growth rates of total loans and fixed assets 13. As at
December 2009, ―Held-to maturity investments‖ constituted the largest portion of the banks
assets with about 51%. This was in contrast with the case in 2007 and 2008 where the bank
adopted more aggressive strategies and grew its loans and receivables to total assets ratios to
43.2 % and 43.7% of respectively making it the biggest contributor to the bank‘s asset size.
The general industry trend also reflected a similar situation where banks‘ investments in bills
and securities in 2009 grew by 93% compared to the 13% growth in 2008, bringing their
stake in total assets to 21% from 15% in 2008 (see table D3 in appendix for assets and
liabilities structure of banking sector of Ghana).
13
Contained in the February 2010 edition of the Financial Stability Report of Bank of Ghana. Pp 9.
44
Consequently, the proportion of the industry‘s net loans and advances in total assets also
declined from 52% in 2008 to 44% in 2009. The shift in the allocation of resources from
credit purposes to investments was because the slowdown of the country‘s macro economic
condition resulted in deterioration of the bank‘s loan books. Meanwhile, returns on short term
instruments became attractive and for that matter captured the bigger chunk of the bank‘s
funds. This shift in growth and composition in assets resulted in the reduction in risk inherent
in the banks assets. A decrease in the proportion of loans and receivable reduces the level of
credit risks in the banks assets. Held-to-maturity investments are safer than loans and
receivables since the probability of default and variations in interest rates are lower.
Therefore shifting concentration from loans and receivables to customers, to investments in
more government securities and loans and advances to banks result in lower credit and
market risks whiles maintaining adequate liquidity cover for the bank. It appears therefore
that the bank was more cautious in its growth approach in 2009 and this is reflected in the
asset-liability and risk management decisions.
Figure 4.1: Changes in the composition of assets over the past three years.
Source: Own construction with data from comparative balance sheet in appendix B1
4.1.2. Liabilities
Total deposits of the bank accelerated in its growth by about 45% in 2009 compared to the
40% growth recorded in 2008. This was in contrast with the industry trend which saw an
aggregate slowdown in the growth of total deposits. The total deposits of the industry grew
by some 29.1% which fell short of the growth of 41.4% recorded in year 2008. It, however,
maintained its position as the main source of funding constituting 73% and 63% of both
EGH‘s and the industry‘s funding base respectively. Deposits from banks and other credit
45
institutions saw the highest growth rate of about 532% by year end 2009 even though it
contributed only about 6.5% to total liabilities and equity. Such funds are regarded as volatile
and prone to funding risks and therefore an increase in its volume and value over the past
year signified an increase in inherent funding risk but their relatively low proportion in the
bank‘s funding base kept the risk under control. The bank‘s largest contribution to funding
still came from deposits to customers with 66.4% even though the percentage contribution
fell below the 74% recorded in the previous year. As reported in the 2009 annual report, the
bank‘s twenty largest depositors constitute 20% of the total deposits at the year end. This is
lower than the 29% figure that the twenty largest depositors contributed the previous year
indicating that the bank is taking steps to reduce the reliance on large corporate deposits
which are less stable and expensive to effectively manage their concentration risk. The
reduction in the reliance on large corporate depositors and shifting to more retail and standard
deposits reduces uncertainty and liquidity risk associated with the deposits as well as cost of
deposits which involves active management and attracts higher rates of interest.
Figure 4.2: Changes in the composition of liabilities over the past two years.
Source: Own construction with data from comparative common-size analysis of balance sheet in appendix D1
A trend analysis of the balance sheet items (contained in appendix D1) confirmed a 33.5%
increase in the borrowings of the bank in year 2009. The banking industry in Ghana also
registered a general growth of 37.6% in total borrowings at the end of year 2009 compared
with 29.5% growth in 2008. The ratio of borrowings to total liabilities for EGH lagged
behind that of the industry with EGH recording 6% whiles the industry increasing in its
proportion to 13.3% from 12.7% (appendix D5). This general industry trend of a decline in
the dominance of total deposits coupled with the share of borrowings gradually gaining
prominence increases the likelihood of an increase in cost of intermediation. With respect to
EGH, the foreign currency denomination of such borrowing exposes the bank to foreign
46
currency risk even though it provides an indication of international confidence in the bank. It
appears from the liquidity gap analysis as presented in the 2009 Annual Report of the bank
that the bank is funding quite a substantial amount of its long term loans with short term
deposits which creates maturity mismatch and liquidity concerns. There is also indication of
currency mismatch due to the fact that deposits and borrowing in the various currencies
traded in by the bank are not adequate to fund the lending in those currencies. The value of
interest rate sensitive financial assets which matures within one to five years falls short
significantly of the value of interest rate sensitive financial liabilities giving rise to significant
interest rate risk.
4.1.3 Equity and Capital Adequacy
Shareholders‘ funds increased tremendously at a rate of 142% in 2009 compared to the 31%
growth recorded in the previous year. This increased its share in the bank‘s funding base in
the year under review to 14.8% from about 9% in the previous year (refer to appendix D1).
The bank took steps to boost its capital significantly through a rights issue in October 2009 in
its attempt to meet the new capital requirements of GHS60 million set by the Central Bank of
Ghana‘s for commercial banks operating in the country14. Consequently, the bank has been
able to maintain a good balance between regulatory capital requirements and its total assets
and risk-weighted assets. EGH‘s regulatory capital adequacy ratio (CAR) increased by about
37% to 22.6% in year 2009. This was significantly higher than the industry average capital
adequacy ratio of 18.2%. A 34% growth in the bank‘s core capital adequacy ratio (tier 1) in
year 2009 contributed hugely to its growth in regulatory CAR (Table 4.1).
Table 4.1: Capital adequacy and off-balance sheet measures

EGH Industry Growth
Capital adequacy & Off- 2007 2008 2009 2007 2008 2009 EGH Industry
balance sheet Items % % % % % % 2008 2009 2009
Core capital Adequacy (tier I
CAR) 13.10 12.57 16.82 15.70 12.80 17.00 -4.10% 33.83% 32.81%
Capital adequacy ratio (CAR) 18.06 16.48 22.62 13.60 13.80 18.20 -8.75% 37.26% 31.88%
Off-balance sheet items as a % of
total assets 9.76 14.49 16.79 18.67 16.37 10.53 48.44% 15.92% -35.69%
Risk-weighted assets/Total assets 71.96 71.93 81.34 73.20 78.10 69.80 -0.04% 13.08% -10.63%
Source: 2008 & 2009 annual reports of EGH & February 2010 Financial Stability Report of Bank of Ghana
14
This was contained in NOTICE NO.BG/GOV/SEC/2008/3 issued by the Bank of Ghana to all banks.
47
Table 4.1 also indicates that the ratios of off-balance sheet items and risk-weighted assets to
total assets of the bank increased marginally whiles those of the industry declined. This
means that the bank needed more capital than its peers to cover for contingent liabilities and
increasing levels of risk-weighted assets on its books. Though the increase in the level of
contingent liabilities presented the bank with additional financial risk, the corresponding
trade fees appeared to provide adequate compensation for it. Greater attention should
however be given to these items and adequate risk management system should be put in place
for such exposures to ensure they do not get out of hand.
4.2 INCOME STATEMENT RISKS
The income statement provides information on a bank‘s profitability, reveals the sources of
the bank‘s earnings and their quality and quantity.
Ecobank Ghana Limited is still enjoying high levels of profitability in 2009, recording a
growth of about 44% from the previous year‘s profit. Even though there was a slowdown in
the growth of its after tax profit in 2009, EGH still towered above it peers about 6 times in its
earning growth as average industry growth rate for the same period was about 7%. The
consistency in the bank‘s profitability growth enabled it to maintain a stable risk profile as
well as providing a cushion against short term problems. Profit margin (post tax) increased
marginally from 31% in 2008 to about 34% in 2009%. This performance was still about 4.5
times above the industry average of 7.5% which experienced a significant fall from the
previous year‘s figure of 28.5% as a result of the general decline in loan asset quality of
banks in Ghana. Return on Assets (ROA) remained stable over the past three years while
Return on Equity (ROE) saw a decline in the year under review from about 40% in 2008 to
26% in 2009 (figure 4.5). The marked decline in ROE was primarily as a result of the sharp
increase in the bank‘s equity through a rights issue undertaken at the later part of the year. It
is instructive to know that in the case of both after tax ROA and ROE, EGH surpassed the
performance of its peers with the average industry figures about 1.7% and 13.8% respectively
in 2009 (refer to table D8 in appendix).
About 51% of the bank‘s total income was obtained from interest on loans and advances in
2009. This performance fell below the average industry contribution of 58.7%15 but was an
15
Refer to D6 in appendix for details on industry composition of income.
48
improvement of the 2008 figure of 43%. Getting its main source of income from returns on
loans and advances ensured the stability of the bank‘s earnings. Fees and commission
incomes as well as trading income saw marginal increases in their contributions to total
earnings from about 18% to 26% (see appendix D2). This was good for the bank given that
there is no provision on non-funded income as opposed to interest on loans and advances
which can be provided for if those assets are impaired in future. Stiff competition in the
Ghanaian banking industry coupled with the drop in interest rates due to the reduction of the
prime rate by the Central Bank of Ghana, put pressure on interest income. This situation
compelled the bank to look at increasing its non traditional businesses like international trade
finance and trading operations as viable options to maintain its profitability. Emphasis on fee-
generating income reduces the bank‘s exposure to lending risk which is inherent in increasing
interest margins in a stable market environment as that of Ghana. There are however higher
levels of volatility surrounding these sources of earnings because they depend on general
economic conditions and trading performances. In addition to them being less stable, these
non-traditional sources of earnings are subject to market risk which can be substantial if not
closely monitored.
It appeared the bank had made some strides in its cost reduction effort as there was a slow
down in the growth in operating expenses resulting in operating expenses as a percentage of
gross operating income declining marginally to 49% in the year under review from 53% the
previous year. Though a further improvement would be preferred, this performance was quite
commendable as it fell below the 55% industry average. EGH has been efficient in the use of
its funds as it recorded an impressive increase in its return on loans and advances from 11%
in the previous year to 17% in 2009 which was also above the industry average of 14%. The
bank however lagged behind the industry performance in the utilization of its capacity in
generating interest income with the ratio of interest income to total assets of 5.9% compared
to 6.9% for industry. It is also worth noting that whiles the bank is increasing its loan
portfolio, the level of non performing loans is also increasing (appendix D9). This indicates
an increase in credit risk and the bank has responded by beefing up its remedial and
collections unit to intensify the recovery of doubtful debts.
49
Figure 4.3: Profitability & efficiency indicators
Source: Own construction with data from appendix D7
Ecobank Ghana‘s total cost of doing business increased due to significant increases in
operating expenses and taxation. The increase in operating expenses over the past year,
though at a reducing rate, was mainly due to increases in staff cost as a result of the banks
branch expansion drive. The enactment of the National Stabilisation Levy Act, 2009, brought
about the charging of an additional 5% levy on profit before tax and caused an increase in
taxation and levy significantly (about 82% of previous year). Since this class of cost cannot
be controlled by the bank, it will have to factor it into its expected expenditure and
consequently profit target. Operating income adequately covered operating expenses and with
the exception of year 2008, interest income has been enough to meet operating expenses
since 2007. This also confirmed the stability of the bank‘s profitability and shields the bank
from funding (liquidity) risk.
Figure 4.4: Sources of Income versus Operating Costs
Source: Own construction with data from comparative income statement in appendix B2
50
4.3 CREDIT RISK
The credit risk associated with Ecobank Ghana‘s operations is inherent in its credit
exposures. The risk areas have to do with concentrations and large exposures, diversification,
lending to related parties and over exposure to an economic sector. Another area also has to
do with making adequate allowances to absorb anticipated loss. In the worse case scenario,
total credit risk exposure to the bank as at December 2009 amounted to GHS1.57 billion
without taking into account any of the collateral held or other credit enhancements attached.
There has been a consistent increase in the amount of maximum credit risk exposure at a rate
of about 50% in the last three years due to the growth in the bank‘s operations and expansion
in its financial assets. This situation places greater responsibility on the bank‘s board and
management to strengthen the bank‘s systems and processes as well as personnel to manage
the risk well.
4.3.1 Size
About 57% of the total maximum exposure is derived from loans and advances to banks and
customers. The total loan portfolio of the bank increased by about 42% in year 2009 to
amount to GHS918 million. Whiles there was acceleration in this loan growth from 37% in
the previous year, there was slowdown in the growth rate in the industry loan portfolio as it
recorded a growth of 15.9% in 2009 compared the 43.9% recorded in the previous year.
Loans and advances to customers constituted 51.8% of the total loan portfolio after
experiencing a growth of 15% from year 2008. Compared to the ratio of customer loans to
bank loans (64%: 36%) in the previous year, the proportion of Ecobank Ghana‘s lending to
customers in the current year under review was not impressive (refer to chart D11 in
appendix). This situation was as a result of lower demand of credit by the local industries
than anticipated due to the fact that most of them had not recovered from the global economic
meltdown experienced in the years 2007 and 2008. The banks in Ghana were therefore forced
to do business amongst themselves and generate some returns on their idle funds leading to
higher levels of loans and advances to banks as well as deposits from banks. Additionally,
the slow down in credit also occurred as a result of the consolidation strategy adopted by the
Ecobank Group to focus on recoveries of bad debts to clean their books rather than growing
their assets.
51
4.4.2 Concentration
The 50 largest exposures by customers constitute 55% of the gross loans and advances to
customers in 2009 which was a marginal improvement of 2008‘s situation of 56%. This
means that the bank was still relying on a few large corporate clients to build its loan
portfolio thus any distress to these large clients posed a threat to its total loan size, loan
quality and profitability. This situation did not also appear healthy in terms of credit risk as it
exposed the bank to risk associated with sectoral over exposure. This is even more worrying
when the bank‘s fifty largest exposures are almost the size of the bank‘s qualifying capital,
which is the internal buffer of the bank to cater for losses in its operations.
Figure 4.5: 50 largest exposures
The high concentration of the 50 largest exposures in the total loan portfolio supports a
condition where, the bank is seen as supporting more corporate banking business than retail
business. It is worth noting that, whiles loans to wholesale borrowers grew by about 48%
from last year‘s figure, loans to retail customers decreased significantly by 28% leading to
wholesale loans to retail loan ratio of 73:27. This situation does not support the bank‘s
strategic transformation intent and drive towards positioning it as a predominantly retail bank
as opposed to its previous classification as a wholesale bank after the acquisition of its
universal license in 200316.
16
This statement is based on the bank’s strategic statement as contained at page 8 of the 2009 annual report.
52
Table 4.2: Customer loans distribution by borrower group

2007 2008 2009 Composition Growth
Loans to
Customers per
borrower group GH¢'000 GH¢'000 GH¢'000 2007 2008 2009 2008 2009
Wholesale 197,628 232,683 344,888 67.41% 56.35% 72.59% 17.74% 48.22%
Retail 95,526 180,224 130,224 32.59% 43.65% 27.41% 88.66% -27.74%
Gross Loans and
advances 293,154 412,907 475,112 100.00% 100.00% 100.00%
Source: Own construction with data from 2008 & 2009 Annual reports of EGH
With regards to economic sector concentrations, the services sector seems to get the greatest
portion of the bank‘s credit facilities as 36% of total credit went to that sector. This is
followed by the manufacturing sector which benefited from 19% of total credits. There was
however an inverse growth trend amongst the two sectors where the service sector‘s portion
of total loans increased by about 14% and the manufacturing sector‘s portion saw a decline of
also about 14%. The rather increasing proportion of total loans being benefited by the service
sector was due to boost in that sector of Ghana‘s economy coupled with dwindling of the
manufacturing sector resulting from the increase of cheap imports and high operating cost.
Commerce, which is the third highest beneficiary of EGH‘s total loans and advances, benefits
the most from the industry‘s total credit facilities taking up 31.6%. It is then followed by the
services and the manufacturing sectors in that order with 21% and 11.6% respectively (see
figure 4.8). Incidentally, the manufacturing, finance and commerce, construction as well as
transport, storage and communication sectors saw declines in the proportion of credit they
benefited with agriculture, forestry and fishing as well as electricity, gas and water sectors
picking up gradually in response to current policy initiatives by the government of Ghana to
promote agriculture and also position the economy to take advantage of the oil find in Ghana.
Figure 4.6: Sectoral allocation of loans

53
The shrinking of the proportion of credit benefits in greater parts of the Ghanaian economy in
favour of just a few created an unhealthy concentration of lending. It made the bank
vulnerable to weakness that could have arisen in the services sector resulting in significant
risks to the bank such as simultaneous failures amongst several clients in the services sector
for similar reasons which may lead losses to the bank.
4.3.3 Product distribution
A review of the various products that the bank lent out to its customers in reponse to market
demand indicated that, term loans and overdrafts were mainly the direct facilities used by the
bank‘s customers. These products are considered risky due to the fact that they involve a
direct outlay of funds and therefore a thorough assessment of the borrowers and the loan
requests should be done as well as adequate security be taken for such facilities. The increase
in the use of guarantees is also worth considering for potential credit risks. Even though these
bank products are considered as an indirect facility, defaults of commitments under them
results in payment of some obligations leading to losses. Therefore, as off-balance sheet item,
guarantees should be adequately assessed, secured and managed to avoid unexpected losses.
Figure 4.7: Customer loans by products
4.3.4 Customer loans distribution by tenor
The maturity structure of the bank loans to customers revealed that about 84% of them were
for short term periods in year 2009. This situation appeared to be as a result of a deliberate
attempt by the bank to reduce the probability of losses occuring as tenor of the loans
increases, hence the consistent increase in the proportion of short term loans. The increase in
short term loans also indicate that the banks customers sought for more short term loans to
54
support their working capital and other short term needs as opposed to seeking for funding
for infrustructural development which require long intallment credit facilities. The
macroeconomic conditions over the past three years has resulted in the shortage of long-term
funds to support funding of capital projects hence the decline in long term loans.
Figure 4.8: Distribution of Customer Loans per Tenor and Borrower Group
Source: Own construction with data from appendix D13 and table 4.1
4.3.5 Loan Quality
The bank also recorded some success in its efforts to improve the quality of its loan portfolio
and reduce the incidence of losses. In the first place, the growth in the level of non-
performing loans in the year under review has reduced to 8.5% from 11% in year 2008. The
resultant non-performing loan ratio saw a marginal decline to 3.41% in year 2009 from
3.62% in the previous year indicating a tightening of EGH‘s lending processes coupled with
intensified monitoring and debt recovery drives. This is in contrast with the current aggregate
industry trend which saw an acceleration of the growth in non-performing loans from a rate
of 72% in 2008 to about 126% in 2009. Industry non-performing loans ratio in the current
year under review consequently shot up to almost 15% from 7.7% in the previous year. Also,
the allowances for loan impairment and impairment charges increased consistently over the
past three years. EGH‘s rate of impairment allowance to gross loans and advances increased
from about 1.5% in 2008 to 4% in 2009 whiles the average rate for the industry jumped from
5% to 9.4%. Impairment charges made by EGH in respect of loans and advances, has also
increased consistently from 0.2% to 2% of gross loans and advances from 2007 to 2009.
55
Figure 4.9: Loan Quality
Source: Own construction with data from appendix D9 and D10
The situation buttressed the bank‘s desire to enhance its capacity to absorb losses by making
available adequate reserves for them in response to loan growth, prior loss experiences,
changes in business conditions and general economic conditions. This was made possible
with an improvement in the bank‘s management information systems which enabled it to
properly classify its loans. With a coverage ratio (collateral as a % of non-performing loans)
of 173% (see table 4.3), the bank made adequate collateral cover for its non-performing loans
to further reduce the incidence of loan losses.
Table 4.3: Loan loss coverage

2007 2008 2009
GH¢'00 GH¢'00 GH¢'00
0 0 0
Collateral 14,658 15,812 28,136
Non-performing loans 13,436 14,948 16,224
% % %
Collateral as % to Non-performing loans (Coverage
ratio) 109.09 105.78 173.42
Source: Own construction with data from 2008 and 2009 annual report of EGH
4.3.6 Related Party Dealings
The bank maintained dealings with its directors and key management personnel in the form
of receiving deposits from them as well as giving loans to them. A review of the information
contained in the bank‘s annual report indicates that the level of such financial relations
between the bank and its directors and key management staff has declined significantly. In
addition to that, for the past three years the amount of deposits from related parties has
outweighed the amount of loans given to them by the bank. Figure 4.12 provides a
diagramatic illustration of the situation. Even though there was inadequate information to
56
assess whether the regularity of the credit decisions concerning the loans as well as the
quality of the outstandings on such loans, the amounts involved were not very material to
significantly affect the bank‘s credit risk position. The bank also hadadequate capital to cover
the exposures to related parties as the amount of related party loans appears to be quite
negligible compared with qualify capital (Figure 4.12).
Figure 4.10: Related party information
4.4 LIQUIDITY RISK
An evaluation of the liquidity risk of Ecobank Ghana limited involves an assessment of the
bank‘s ability to efficiently accommodate the redemption of deposits and other liabilities and
to cover funding increases in the loan and investment portfolio. In addition to having enough
funding to serve as cushion for expected and unexpected fluctuations in the balance sheet, the
bank is said to have adequate liquidity if it is able to acquire needed funds promptly and at a
reasonable cost. Having adequate liquidity serves as a defence mechanism that protects the
banks‘ capital from loses on unscheduled asset sales which may become neccesary with
deposit runoffs. The assessment of the bank‘s liquidity risk includes the review of the
maturity profile of assets and liability (Liquidity Mismatches), the composition of the funding
structure, cashflow analysis and liquidity ratio.
4.4.1 Liquidity Mismatches
A review of the maturity ladder (see table 4.4) indicates that the bank has maintained its
positive liquidity profile in year 2009 with a total liquidity position of GHS 139,248.
However the huge negative mismatch in the very short term (one to three months) indicated
that the bank had problems funding all its contractual obligations during the period at a
57
reasonable cost. This situation was as a result of the bank not having adequate liquid assets
maturing during the period to meet deposits which are due for redemption in the same period.
The bank also had funding difficulties for its medium term liabilities, that is, those falling due
between one and five years. A greater portion of its long-term borrowings fell due during this
period and there were not commensurate assets to meet such obligations, creating a negative
net liquidity position. The large liquidity suplus in the previous maturity bracket helps
smoothen the shortfall and improves the net cummulative situation.
Table 4.4: Maturity Ladder
2007 2008 2009

Maturity Profile of Assets and Liabilities GH¢'000 GH¢'000 GH¢'000
Assets
1 - 3 months 434,727 581,591 767,720
4 - 12 months 93,998 206,183 335,501
1 - 5 years 135,811 119,938 73,807
Over 5 years 7,615 14,282 162,201
Total 672,151 921,994 1,339,229
Liabilities
1 - 3 months 333,721 575,402 866,044
4 - 12 months 224,344 172,715 167,686
1 - 5 years 58,351 38,095 116,207
Over 5 years 0 48,745 50,044
Total 616,416 834,957 1,199,981
Liquidity Mismatches Cumulative
1 - 3 months 101,006 6,189 -98,324 -98,324
4 - 12 months -130,346 33,468 167,815 69,491
1 - 5 years 77,460 81,843 -42,400 27,091
Over 5 years 7,615 -34,463 112,157 139,248
Total 55,735 87,037 139,248
Source: Own construction with data from 2008 and 2009 Annual reports of EGH
4.4.2 Structure of funding
Ecobank Ghana‘s direct portfolio is funded by a mix of sources as presented in Figure 4.13.
Its main funding source continued to be from customer deposits which constituted about 67%
of the total funding base.
58
Figure 4.11: Funding soucres
The significant contribution of customer deposits to the bank‘s funding base implied that the
soundness of the bank‘s liquidity management hinged on the stability and quality of its
customer deposit base. A review of the product types employed by the bank to mobilise funds
indcate that the greatest contribution to the bank‘s funding base was from current accounts. It
formed the bulk of the bank‘s core deposits and ensured greater stability and cheaper source
of funds for the bank. It however appeared that the majority of current accounts funds came
from large depositors and therefore reduced the level of stability since these depositors could
come for bulk funds without notice and may cause liquidity problems. Since all the banks are
after the same funds from these large depositors, the interest cost of these funds may be
higher than the interest on current account funds. The deposits of these corporates are also
dependent on the prospects of their business which fluctuates with response to both internal
and macro-economic developments making it volatile in nature.
Figure 4.12: Customer deposits by type
59
On the other hand, retail customer deposits especially those from individual salary workers
and private businessmen carry some level of stability with them since the probabilty of
having portions set aside towards the future for various reasons is high. Even though saving
accounts and time deposit accounts saw some growth in their absolute amounts over the last
year, they still constituted a small portion of the total customer deposit base. Amounts in cash
collateral saw a significant growth in its proportion of total customer base. These were mostly
taken to back letters or credit and guarantees issued on behalf of Small and Medium scale
customers who did not have the profile required by the bank for clean lending. The bank
therefore needs to intensify and restructure its deposit mobilisation and retention programme
with more focus on retail clients to increase the quality and stability of its deposits.
4.4.3 Cashflows and ratios
An analysis of the cashflow statement of Ecobank Ghana also showed that the bank had a
good record of generating enough cash internally to support its operations. Net increases in
cash and cash equivalent have remained positive and have consistently increased over the
past three years as depicted in figure 4.15. This situation had been sustained by net cash flows
from operating activities which had remained positive and have consistently increased over
the past three years. Even though there were deficits in net cashflow from financing and
investing activities in the previous years, except for the current year under review, the bank‘s
normal course of business operations had generated positive cashflows which provided some
level of dependability to the bank‘s liquidity situation.
Figure 4.13: Trend of Cash flows
To buttress the bank‘s sound liquidity position, it is significant to mention that the bank‘s
customer loans were fully funded from the bank‘s internally generated sources as customer
60
loans forms only about 49% of customer deposits. Customer loans as a percentage to core
deposits was also 57% indicating that a very high proportion of the bank‘s loan book were
funded with low-cost deposits. Loan assets are the core assets and also generally the most
illiquid assets class of the bank. Accordingly, they require a stable source of funding; hence
the importance of ensuring that growth in loans were proportional to growth in core deposits.
With the liquid assets to total deposit ratio increasing from 57% in 2008 to 80% in 2009, the
bank demonstrated its desir ofe ensuring that there was enough readily convertible assets
available to repay deposits on demand in case of a bank run. The bank performed better in
year 2009 compared to its peers as the industry average for liquid assets to total deposit ratio
was about 74%17. This was after it previously lagged behind the industry which had a ratio of
61% in 2008.
Liquid assets as a percentage of total assets of 61% indicated a positive sign from a liquidity
standpoint as it enabled the bank to easily liquidate some of its assets to meet unexpected
demands for funds. The bank‘s liquidity situation was more sound in this regard vis-à-vis
industry performance of 47% in 2009. With about 86% of Ecobank Ghana‘s liability structure
consisting of volatile funding, its short term investment were adequately catered for. Liquid
assets (short-term) were about 79% of the bank‘s volatile liabilities in 2009, indicating an
adequate cover for short-term investments. As represented by the volatility liability
dependency ratios, the bank relied heavily on volatile funds to support it long-term assets.
The high positive ratios (163% for 2009, 299% for 2008 and 221% for 2007) showed that the
bank was highly exposed to liquidity risk in times of financial stress or adverse changes in
market conditions which impacts on the bank‘s ability to retain these volatile finds.
17
Industry ratios for liquid assets as a % of total deposits and liquid assets as a % of total assets were taken
from the Liquidity ratios presented in the February 2010 Financial Stability Report of Bank of Ghana. Liquid
assets in that report are referred as the broad liquid assets.
61
Figure 4.14: Trends in liquidity ratios
4.6. INTEREST RATE RISK
An interest repricing schedule is used to generate simple indicators of the interest rate risk
sensitivity of both earnings and economic value to changing interest rates. It involves
evaluating earnings exposure of Ecobank Ghana to interest rate movements by subtracting
interest rate sensitive liabilities in different time bands from the corresponding interest rate
sensitive assets to produce a repricing "gap" for that time band. It is the responsibility of the
bank in this regard to strive to achieve a balance between reducing risk to earnings from
adverse movements in interest rates, and enhancing net interest income through correct
anticipation of the direction and extent on interest rate changes. An analysis of Ecobank
Ghana‘s interest repricing schedule (appendix D20) indicated that there was a positive or
asset sensitive gap of GHS 515,317 in the year 2009, notwithstanding the negative interest
repricing mismatches for the 1-5 years maturity bucket. This represented a 17% increase in
the situation in the previous year positive repricing gap. It meant that generally the bank‘s
interest income declined as a result of the decline in the average market interest rates 18. This
is because more assets were invested at lower market rates than liabilities during the period.
18
The fact of the general drop in market interest rates is contained in the 2010 Banking Survey published by
PricewaterhouseCoopers, Ghana.
62
Figure 4.15: Interest rates repricing gap
It would therefore have been a prudent strategy for the bank to have a negative interest
repricing mismatch which would have result in interest income of the bank increasing
because declining average market interest rates meant more liabilities would have been taken
on at lower market rates. In general, it appeared the bank‘s assets and shareholders equity are
significantly exposed to risk associated with movements in interest rate. The Gap to total
asset ratio of 38.5% for 2009 was still on the high side even though it experienced a decline
from about 49% from the previous year considering that general prudent limits are between -
15% to 15%. GAP to equity ratio was also about 251% in 2009 from a high of 518% in the
previous year. There was a significant decline in the ratio of interest rate sensitive assets to
interest rate sensitive liabilities from about 360% in 2008 to 217% in 2009 in response to the
falling market rates. The bank however could not react adequately to reverse the mismatch
situation to avoid losses in interest income basically because of the unpredictable nature of
the macroeconomic conditions in the country and the global financial situation.
4.7. CURRENCY RISK
Because Ecobank Ghana maintains correspondent banking relationships with foreign banks,
lend and borrow in foreign currency and supports customer transactions denominated in
foreign currencies, it is prone to currency risks. A review of the currency mismatch schedule
in appendix D22 indicated that the bank had positive net open currency positions for all its
currencies in year 2009. Also with the exception of USD liabilities whose percentage
contribution is more than USD assets, the contribution of the other currencies in the assets of
the bank adequately covered the contribution of the currencies to the liabilities. The currency
63
structure of the bank‘s loans and deposits were also encouraging as its funding capacity
provided by the deposit base in the various currencies exceeded its loan portfolio in the
various currencies significantly. In both the cases of loans and deposits, the bank kept a little
above 50% of its exposure in Ghana cedis with the greater portion of the remainder taken by
USD denominated exposures.
Figure 4.16: Currency Structure of Loan Portfolio and Customers Deposits
Basel Accord requires that certain capital charges be made for market risks including
currency risks. Currency exposure as a percentage of qualifying capital indicated that the
bank had adequate capital base to cover current currency risk exposures (refer figure 4.19).
Figure 4.17: Currency Risk : Currency Exposure as % of Qualifying Capital
64
CHAPTER FIVE - ASSESSMENT OF RISK MANAGEMENT

FRAMEWORK
5.0 INTRODUCTION
The risk management framework of Ecobank Ghana Limited comprises a comprehensive set
of policies, standards, procedures and processes designed to identify, measure, monitor and
report significant risk exposures in a consistent and effective manner across the bank. This
chapter assesses these tools employed by the bank in managing the credit, liquidity, market
(interest rate, currency) and operational risks it faces.
5.1 CREDIT RISK
5.1.1 Organisation
The responsibility for credit risk management in Ecobank Ghana Limited lies with the Board
of Directors, which is responsible for ensuring that an appropriate and conducive
environment has been created for managing credit risk. The board has done this by setting
comprehensive credit risk management policies and procedures as contained in the bank‘s
Credit Policy Manual. The manual contains an outline of the scope and allocation of the
bank‘s credit facilities and the manner in which the credit portfolio is managed, that is, how
loans are originated, appraised, supervised and collected at both the individual credit and
portfolio levels. It also outlines the governance structure with clearly defined responsibilities
and credit approval authority. The Board also periodically reviews and approves the bank‘s
credit risk strategy in addition to reviewing and approving all credits in excess of the policy
limit, through its Risk Committee.
The Board has, however, delegated the authority to approve credit within the policy limit to
individual credit officers based on their credit expertise, experience and independence of
judgment. All extensions of credit are approved by at least three credit officers, one of whom
must have an individual credit limit equal or greater than the amount of credit extension
being considered, and also at least one credit officer must come from the risk management
department. Operationally, the Country Risk Manager ensures that the bank has resources,
expertise and controls in place for the efficient and effective management of credit risk on a
65
day-to-day basis. The organisation of the bank‘s credit risk management structure and
process ensures that an appropriate environment is established to handle credit risk and that
the bank is operating under a sound credit granting process. These areas form part of the
principles for managing credit risks put forward by the Risk Management Group of the Basel
Committee on Banking Supervision in a consultative paper issued on 30 November 199919.
5.1.2 Risk identification
Ecobank Ghana believes in having effective systems in place to enable it acquire adequate
information on borrowers. This enables the bank to properly identify risks associated with
individual borrowers and credit portfolio. The bank‘s risk analysts work in partnership with
the sales function in the various business units
Table 5.1: EGH‘s internal risk rating system
(Wholesale Banking, Retail Banking, Treasury and Scales Interpretation
Financial Institutions, and Investment Banking) to
1 -6 Normal risk
identify risks associated with the individual
7 -8 Risk under watch
transactions from the onset. After an in-depth
review of the borrowers and the actual transactions 9 Substandard risk
being proposed to identify the inherent risks, risk 10 Risk of permanent default
ratings developed internally by the bank are
Source: 2009 Annual Report of Ecobank Ghana Ltd
assigned to both the obligor and the facility being
sought for. The rating system is based on a scale of 1 – 10 to rate commercial and industrial
obligors, financial institutions, and sovereign government as well as Small – and – Medium
– scale Enterprises. A rating of ―1‖ identifies obligors of the highest quality, comparable to
AAA on the scale of Standard and Poor‘s. A risk rating of ―10‖ is assigned to obligors of
lowest quality or highest risk, identical to D on the scale of Standard and Poor‘s. The ratings,
which are based on the identified inherent risks, inform the risk analysts‘ decision as to
whether the obligor and credit facility should be accommodated having in mind the limits set
in the bank‘s credit policy manual and other industry and regulatory standards.
The review of the proposed credit transactions includes a thorough examination of the
borrower‘s business activities, analysis of its financials and sometimes solicitation of opinion
of other banks, business partners, customers or external rating agencies all in a bid to have a
19
A summery of the principles are contained in Appendix E
66
good assessment of the possible inherent risks. This system of involving both risk analysts
and the sales function in the business units in the identification of potential inherent risks
ensures that risk considerations are factored in the process right from the beginning. It also
enables the two functions with diverse interests to work together at addressing any concerns
surrounding the credit request so that a timely decision can be taken and a response given to
customers without undue delays. The use of the risk ratings system also assists in the proper
classification of obligors and facilities in the bank‘s credit portfolio. The classification assists
in measuring credit exposures across different borrower groups, product types, geographies,
industry segments and other relevant risk factors using the same standards. The risks in the
bank‘s credit portfolio are therefore identified as unhealthy portfolio structures (over-
concentrations), and highlights deteriorating credit quality in certain classified groups.
5.1.3 Risk Measurement
Ecobank Ghana limited‘s credit risk management framework includes a methodology to

measure the average amount of expected credit loss inherent in its credit portfolio over a
period of time. This enables the bank to decide on how best to manage the credit risk in its
activities and portfolio, such as by setting aside the appropriate loan loss reserves or by
selling loans to reduce risk. The approach is designed to be consistent with the internal rating
based approaches in Basel II and it embraces estimates of the amount of exposure at default
(EAD), probability of default (PD) and the severity of loss in the event of default (loss given
default or LGD). In arriving at the credit risk measure at a particular point in time, the bank
determines the level of the statistical expected economic loss in the event of default, that is,
the bank‘s exposure at default. This figure measures the net present value of credit costs that
the bank would face from the time of default until the end of the recovery process. Credit
costs include all provisions taken against bad debts, write-offs, fully reserved interest earned
not collected and possible attorney fees incurred in the process of enforcing the bank's claims
in court.
The bank then proceeds by assigning risk ratings to credit facilities of all the obligors in the
credit portfolio. Their internal risk rating gives an indication of the severity of likely loss on
the exposure which is referred to as the loss given default (LGD). The specific rating
assigned to a credit facility is influenced by key transaction characteristics such as the
presence of collateral and the degree of subordination. The facility risk rating also have
67
corresponding loss norm which reflects the probability of default. The weighted average loss
norm provides a measure of the portfolio risk profile and portfolio risk rating. The amount of
credit exposure with a given facility risk rating is then multiplied by the corresponding loss
norms to arrive at a measure of loss in the event of default on the exposure involved. On a
portfolio level, the aggregate credit exposure with the portfolio risk rating is multiplied by
the weighted average of loss norm.
Figure 5.1: A diagrammatic illustration for measuring expected loss
Estimate of credit risk Expected Loss EL

=
exposure
=
What is the probability of a Probability of Default PD
Counterparty defaulting? =
X
If the counterparty defaults, to Expected Exposure EE
what extent are we exposure?
=
X
How much of the exposure
Loss Given Default LGD
amount do we expect to lose =
upon default?
Source: Adapted from an article by Jim Rich and Curtis Tange titled “Credit Risk
Management: Portfolio View”
5.1.4 Risk Monitoring and Control
The bank credit risk management policy also provides for an effective administration of their
credit portfolio. The Credit Administration Unit of the bank monitors the performance of
individual exposures on a daily basis to identify any signs of deterioration and ensure
adequate provision has been made for such. In addition to this, the unit ensures regularity or
credit approvals and line utilisations, authorise disbursements of credit facilities when
approval conditions are met, and perform periodical reviews of collateral. These are to
ensure that new credit risk exposures do not negatively affect the total credit portfolio of the
bank whiles existing credit facilities remain in good conditions and that the bank is well
68
protected from losses. Accounts showing distressed signals are isolated and reported. These
then receive the attention of the Remedial Management Unit which is well resourced and
have the specialised focus of managing problem credits. The unit helps develop effective
strategies and work out programmes to rehabilitate the troubled credits and advices
management on appropriate provisions to be made for them.
In addition to the Credit Administration Unit monitoring the performance of the credit
portfolio, the bank‘s Internal Control Unit also conducts periodic checks on credit granting
activities to ensure that they comply with prudential standards and the bank‘s credit policies
and procedures. Such audits also help to identify areas of weaknesses in the credit
administration process, policies and procedures as well as any exceptions to policies,
procedures and limits.
5.1.5 Risk Reporting
Various internal risk management reports are regularly sent to management and the board
from the Risk Management function. These provide detailed information on the bank‘s credit
exposure (portfolio) and helps management and the board ensure that the portfolio performs
in accordance with approved concentration limits and overall risk profile. The reports also
serve as early warning systems designed to monitor troubled exposure and credit process
problems.
5.2 MARKET RISK
5.2.1 Organisation
The board of Ecobank Ghana Limited articulates statements of market risk direction and
appetite through the bank‘s market risk management policy which is developed and
approved by the board. The market risk management policy contains the framework for
managing market risk in a consistent manner across the bank in order to stabilise earnings
and capital under a broad range of market conditions. The Risk Committee of the board, the
Chief Executive of the bank and the Country Risk Manager coordinate, facilitate and oversee
the effectiveness and integrity of the bank‘s market risk management framework. The
supervision and management of market risk in the bank is however vested on the Asset and
Liability Committee (ALCO) who meet monthly and anytime market conditions warrant it.
69
The committee is responsible for recommending specific strategies to address market risks in
the light of macroeconomic and industry changes as well as the bank‘s risk tolerance level.
The committee reviews the bank‘s liquidity and funding needs and the structure and pricing
of the bank‘s assets and liabilities. It also articulates the bank‘s interest rate view and decides
on the required maturity profile and mix of incremental assets and liabilities.
Since market risk is mostly absorbed in the treasury function, the Country Treasurer is
responsible for market risk taking activities and managing market risk on a day-to-day basis
within approved limits by the board. In addition, he implements the bank‘s liquidity
contingency and capital plan when the need arise. In consultation with a market risk manager
within the risk function, the Country Treasurer also organises training for the staff and
publicises relevant knowledge on market risk to create awareness and understanding at all
levels of the bank. To ensure effective coordination and aggregation of efforts in the
management of market risks in the bank, the Market Risk Manager plays a facilitating and
enabling function. He is also responsible for analysing and reporting to management and the
board the market risk profile of the bank. The structure put in place by the bank to manage
market risk as enumerated above ensures a good governance mechanism for its management
as has been strongly recommended by regulators including Basel II.
In addition to ensuring a good governance structure to manage market risk, another essential
requirement for a strong market risk management framework is that it creates a good
atmosphere for its management. In this regard, the bank‘s framework prescribes limits within
which market risks should be absorbed and prescribes procedures to handle exceptional
activities. For instance, the market risk management policy provides for limits on positions
(long, short, or net positions in markets and products) and these limits are set with regards to
the capital available to cover market risk, that is, the limits are tied to qualifying capital.
There are also limits on lowest tolerable loss level (stop loss exposure), presence of new
markets and trading in new financial instruments. These enable the bank to avoid huge loses
as well as allowing the bank to properly assess new market prospects in the light of the
bank‘s risk profile and risk management strategy. The bank is also able to build adequate
personnel and system capacity to accommodate additional risk that may come with the use of
new financial instruments and entering new markets. A review of the bank‘s IT platform also
reveals that its technological capacity is of the highest standard with state-of-the-art
computer programmes supporting the timely and accurate delivery of information and
70
execution of transactions. Such a system is necessary for prompt risk evaluation of

transactions as the exact nature of inherent risks is identified.
5.2.2 Risk Identification
Market risks in Ecobank Ghana are identified through daily monitoring of levels, and profit
and loss balances of trading and non trading positions. This is made possible because the
trading units maintain blotters for recording movements and balance sheet positions of
trading instruments. Market risks are spotted by the Market Risk Manager and officers of the
internal control department when daily trading activities do not conform to approved
strategies and resulting risk exposures from such activities exceed approved price limits and
the overall risk tolerance level set by the board. Risks that may arise from changes in market
risk factors which may affect the value of trading and non-trading positions as well as
income streams on non-trading portfolios are also monitored and identified by local ALCO
members on a daily basis.
Generally, Ecobank Ghana Limited applies the Value at Risk methodology (VAR) to its
trading and non trading portfolios to estimate the market risk of positions held and the
maximum losses expected based on a number of assumptions for various changes in market
conditions. This methodology provides a statistical estimate of potential loss on the current
portfolio from adverse market movements. It expresses the maximum amount that the bank
might lose but at a confidence level of 98%. There is therefore a 2% chance that actual loss
could be greater than the VAR estimate. The VAR model used also assumes a holding period
of 10 days until positions can be closed and that market movements occurring over this
holding period will follow a similar pattern to those that have occurred over the preceding
10-day period. The bank assesses the past movements in rates, prices, indices, etc. over the
previous five years and applies the trend directly to its current positions using the historical
simulation method. On a regular basis, actual outcomes are then monitored to test the
validity of the assumptions and the parameters/factors used in the VAR calculation.
The benefit of using VAR is that it is forward-looking and expresses market risk in a form
that anybody can understand, that is, currency. The use of this model however does not
71
prevent losses outside of these limits in the event of more significant market movement. The
board sets limits on the value of risk that may be acceptable for the bank, trading and non-
trading separately.
Table 5.2: VAR limits at various levels

2009 2008
Low Average High Low Average High
Interest Rate Risk 20 240 1217 88 214 537
Foreign Exchange Risk 90 115 163 5 7 12
Equity Risk 236 303 428 127 1 333
Source: 2009 Annual Report of Ecobank Ghana Limited
5.2.2.1 Liquidity Risk
Ecobank Ghana uses the liquidity gap schedule (maturity ladder) to identify and measure the
potential future funding shortfalls which are an indication of liquidity risk. In its
methodology, the bank matches cash flows payable under non-derivative financial liabilities
and assets held for managing liquidity risk by remaining contractual maturities. This exercise
results in either positive or negative mismatches over various time horizons. The resulting
gaps from this model may just be seen as a starting point for quantifying the bank‘s liquidity
risk. With a comprehensive system of assessing future cash flows from all material assets,
liabilities, off balance sheet items as well as other business activities of the bank, it however
serves as useful tool for managing liquid risk in the bank. In order to provide a more in-depth
indication of the liquidity situation, the bank also checks the degree of diversification of the
sources of funds. This is to ensure that they correspond with the bank‘s risk profile, in line
with the bank‘s liquidity risk management strategy and also meet prudential requirements
Since liquidity risk arises during short unexpected periods of time, the bank constructs
maturity ladders on very short (weekly) intervals which are then consolidated into monthly
and quarterly time horizons. This ensures that the liquidity gap schedule remains an effective
instrument for risk identification and measurement.
72
5.2.2.2 Interest Rate Risk
The bank uses gap analysis to measure its exposure to interest rate risk where it compares the
values of interest rate sensitive assets and interest rate sensitive liabilities that mature or
reprice at various time periods in the future. In cases where some assets and liabilities do not
have specific contractual maturity or repricing dates, the bank makes judgemental
assumptions about their behaviour. This method enables the bank estimate the effect of
interest rate changes on its near-term reported earnings. It presents the bank with a single
numeric result for each time period, repricing or maturity and therefore provides a
straightforward target for hedging purposes. Its static nature however does not give a
complete picture of interest rate risk. By focusing on reported earnings in estimating rate
sensitivity, this approach to evaluating interest rate risk tends to ignore the effect of
mismatches among medium-or long-term positions.
The ultimate target of interest rate management, which is the level of net interest margin, is
normally determined by the relative yields and volumes of balance sheet items, the ongoing
dynamics of which cannot be addressed by a static model. Also, the gap model may fail to
predict the impact of a change in funding strategy on the net interest margins because it
assumes that funding decisions in the future will be similar to the decisions that resulted in
the bank‘s original repricing schedule. Further, gap analysis does not take into account
variations in the characteristics of different positions within a time band because all positions
are assumed to mature or reprice simultaneously. Ideally, a bank‘s interest rate risk
management system should take into account the specific characteristics of each interest-
sensitive position and capture in detail the range of potential movements.
5.2.2.3 Foreign currency risk
Foreign currency risk is taken on by the bank when there are fluctuations in the prevailing
foreign currency exchange rates on its financial positions and cash flows. The actual impacts
of such mismatches are measured through the income statement as foreign exchange gains or
losses. The bank‘s foreign exchange risk management is based on mismatch analysis which
helps it to determine imbalances between maturing foreign assets and liabilities. These
imbalances are then evaluated in the light of current and expected exchange rates, domestic
and international market interest rates and acceptable risk return profiles.
73
The treasurer of the bank has the responsibility of monitoring the market risk situation on a
regular basis. He/she monitors interest rates through daily, weekly and monthly reviews of
the structure and pricing of assets and liabilities. The treasurer also checks the open foreign
currency positions to ensure that they are kept within approved overnight and intraday price
limits. Liquidity risk is monitored through the gap analysis and ensures that the deposit base
is well diversified in line with the Credit Policy. The Market Risk Manager also constantly
reviews the market risk exposures with the view of ensuring they are within prudential limits
at all times. At their monthly meetings, ALCO also examine various reports, tracking major
activities giving rise to market risk and also analyses the impact of unlikely but not
impossible events by means of scenario analysis to enable them gain a better understanding
of the risks that the bank faces under extreme conditions. On semi-annual and annual basis,
the bank‘s internal control department undertake thorough and objective assessment of the
entire risk management framework to ascertain assurance regarding its continuing
appropriateness and adequacy in the light of current macroeconomic developments and
industry practices.
With market risk being monitored and controlled from different angles and levels, the bank
is assured of an effective system of ensuring that market risk is kept within acceptable limits.
With an elaborate information management system embedded in its IT platform, the

management of Ecobank Ghana limited is provided with timely information on market risk
exposures. Scheduled reports on the bank‘s position are also provided by the treasury
deportment to assist in decision making. Independent reviews of the bank‘s positions and
procedures by the Audit and Compliance Unit to the board gives the board an objective view
of the market risk situation.
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5.3 OPERATIONAL RISK
5.3.1 Organisation
Due to the complex and diverse nature of operational risk, Ecobank Ghana Limited‘s main
strategy for managing risk, is to develop a strong operational risk culture20 amongst its entire
staff and has therefore committed significant resources to it in the last two (2) years. Most of
the efforts towards this have been in the form of sensitising and training staff on how their
daily work activities can contribute to operational risk and what they can do to avoid
potential losses. The bank has also invested in an operational risk management application
(Oprisk Management System) developed for it by HSBC to assist in identifying lapses in
every aspect of the bank‘s activities which can result in operational losses. The bank‘s
reward system has also been adjusted to include recognition for being operational risk
conscious. The Board of Directors and the Managing Director of Ecobank Ghana Limited
have keen interest and are directly responsible for the management of operational risk in the
bank. They set the appropriate environment necessary for handling operational risk in the
bank by approving the framework and strategies for managing it.
The responsibility for executing the framework and implementing the strategy is however
vested in all heads of units and departments since the sources of operational risks cuts across
the entire operations of the bank. To assist in coordinating the effort of all the staff and
management working within or managing operational business units of the bank, there is an
operational risk manager within the risk function who ensures that adequate knowledge,
systems and resources are available to handle operational risks. He also participates in
preparing, testing and reviewing the business continuity and disaster recovery plan of every
business unit.
5.3.2 Risk Identification
In line with Basel II operational risk framework, Ecobank Ghana Limited categorises its
operational risk into seven loss event categories based on their primary cause: internal fraud,
external fraud, employment practices and workplace safety, dispute with clients, damage to
physical assets, business disruptions and systems failure, and execution, delivery and process
20
This fact is stated clearly in the 2009 annual report of ETI (the parent company of Ecobank Ghana Limited).
75
management. These categories formed the foundation of the design and construction of the
bank‘s operational risk management software and therefore capture information along those
lines. The process of operational risk identification is mostly based on self assessment
exercises by all staff in the various units and departments in a form responding to a set of
questions or checklist relating to their individual work schedules. In addition to the regular
assessments of business activities to identify potential inherent risks, risk indicators such as
thefts, failed trades, errors in funds transfer or loan disbursements are immediately
highlighted and brought to the attention of management in other to initiate steps to reduce the
impact of potential losses.
With the help of scorecards, the Operational Risk Manager is able to translate the qualitative
assessments from the various units to quantitative metrics to give a clearer picture of the
different types of operational risk exposures. Loss events are also recorded and the amount
of potential or actual inherent losses are stated and reported to the appropriate management
level by the heads of units and departments. Internal loss events are categorised into actual
loss (an incident that has resulted in a financial loss), potential loss (an incident that has been
discovered, that may or may not ultimately result in a financial loss) and near miss events. A
near miss event is an incident that was discovered through means other than normal
operating practices and that, through good fortune or focused management action, resulted in
no loss or a gain.
Through its risk and control self assessments system enabled by its operational risk
management application, Ecobank Ghana Limited is able to track internal loss data for
monitoring and control purposes. Business units are thus able to monitor the key operational
risk exposures and their underlying causes against the thresholds set by the Bank. The
Operational Risk Manager is also able to have access to real time data on the levels and
trends of loss events and therefore help in monitoring to ensure that they are within
acceptable levels set by the board. The Bank analyses the impact of unlikely, but not
impossible events by means of scenario analysis, which enable management to gain a better
understanding of the risks that it faces under extreme conditions. Both historical and
76
hypothetical events are tested. Regular monitoring activities ensure that deficiencies in the
operational risk management policies, processes and procedures are quickly detected and
corrected to reduce the incidence of loss events. Any indication of potential loss triggers
mitigation measures if the loss is beyond the bank‘s acceptable level. There are clear
sanctions for flouting the processes and procedures established to ensure control over
operational to ensure strict compliance. The bank‘s Internal Control Unit and its external
auditors also provide independent assurance and challenge across all business functions in
respect of the integrity and effectiveness of the operational risk management framework in
general.
It is the responsibility of the Operational Risk Manager to periodically (quarterly) report on

aggregate risk profile, risk control effectiveness and corrective actions taken during the
period. He reports operational loss events to management. The Internal Auditor of the bank
submits detailed reports of their investigations of operational loss events, including causes
and remedial actions to be implemented to management. Further, the Board requires
immediate escalation to the Risk Committee and Board of all instances of unauthorised
deviations from any of the standards set out in this risk policy statement; and likely or actual
breaches of thresholds agreed by the Risk Committee and the Board.
5.4 SUMMARY
This chapter looked at the risk management framework employed by Ecobank Ghana limited
to enable it achieve an appropriate balance between risk and reward. The framework is
basically structured to handle credit risk, market risk and operational risk which the bank
considers to be the major risks inherent in its business activities. The bank has a
comprehensive Credit Policy Manual which has been reviewed over the years to reflect new
developments in the banking industry (both local and international). Even though the bank is
yet to develop such a comprehensive policy manual for managing market and operational
risks, it has adopted various guidelines fashioned along the lines of the recommendations by
the Risk Management Group of the Basel Committee on Banking Supervision which seeks to
ensure sound management practices of various risks in the banking industry.
77
The bank‘s risk management framework mainly seeks to establish an appropriate

environment for managing risk as well as put in place necessary tools for the actual
management process. In line with establishing an appropriate environment for managing
risk, the framework ensures that there is a solid governance structure in place with clear
obligations and authority assigned to all who have responsibilities in the risk management
process. The framework also outlines various procedures, processes and techniques for
handling risks. With respect to the actual risk management activities, the framework
provides guidance on the approaches for identifying, measuring, monitoring and controlling
as well as reporting on the various risks the bank is exposed to. To ensure compliance to the
tenet of the bank‘s risk management framework, portions of the banks reward system have
been tied to the level of risk consciousness of all staff.
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CHAPTER SIX - CONCLUSION AND RECOMMENDATIONS
6.0 INTRODUCTION
This chapter provides concluding statements on Ecobank Ghana Limited‘s financial risk
condition as at the end of its 2009 financial year and the adequacy of its risk management
framework in handling the risks confronting it. The conclusions are supported by a summary
of the results from the analysis on the bank‘s risk profile and the evaluation of the
components of its risk management framework vis-à-vis recommended structures by the
Basel Committee on Banking Supervision. The chapter also contains a couple of
recommendations aimed at improving the bank‘s risk management system.
6.1 CONCLUSION
The impressive financial performance of the Ghanaian banking industry coupled with the
absence of any major complaints or adverse finding against banks in Ghana gives the
impression that the banks are generally stable. The implications of this belief are that the
banks have relatively good risk profiles as well as sound frameworks for managing risks
inherent in their business activities. The extent to which this can be verified relies on
thorough assessments of the nature and quantum of risks confronting the various banks in the
country and an evaluation of their risk management structures and systems. I have no
knowledge of any previous work on Ghana bank‘s in this area of study and therefore this
study provides an initial contribution to this exercise with a focus on Ecobank Ghana
Limited. It provides an empirical indication of the types and levels of risks the bank is
exposed to and its capacity to effectively manage them as at the end of the financial year
2009. The evidence from the study suggests that the risk profile of Ecobank Ghana Limited
was good based on the following observations:
i. Though there was a significant expansion of the size of the bank‘s balance sheet, the
resulting structural changes lead to a healthy asset mix balancing liquidity with
profitability. The consecutive approach taken by the bank in 2009 saw its investments
in government securities constituting the largest portion of its asset mix so as to avoid
increasing lending risk. The growth in assets was also backed by stable funding
79
sources from customer demand deposits and adequate capital base which saw a huge
increase through additional capitalization by shareholders.
ii. The profitability level of the bank was also high which provided a cushion for short
term liquidity problems and a stable source of capital generation. This was fueled by
significant growth in the bank‘s main revenue streams; net interest income and fee-
based incomes. The bank‘s demonstration of high levels of efficiency in the use of its
potential (assets) and in its operations, indicated in the stable Return on Assets and
relatively high Net Income as a percentage of Gross Loan and Advances ratios,
provides confidence of its ability to sustain profitability.
iii. Expanded credit exposure with significant concentration levels to few large corporate
in the service sector of the economy creates some worry for the bank‘s credit risk.
However, the loan quality improved as the level of non-performing loans in the loan
portfolio declined with tightened lending processes and increased monitoring and
recovery activities. The bank‘s capacity to absorb credit losses was also improved
with adequate collateral cover and allowance made for impairments.
iv. The high level of profitability ensured that the bank had enough liquid assets to meet
unexpected short term mismatches. With a funding structure dominated by core
customer deposits coupled with majority of its cash flow generated from operating
activities, the liquidity situation of the bank was health as at the end of financial year
2009.
v. By keeping more short term interest sensitive assets compared to short term interest
sensitive liabilities in the face of falling interest rate levels, the bank incurred loss of
interest income. The level of the bank‘s exposure to interest rate risk was further
revealed by the high GAP to total assets ratio which even fell outside the general
prudential limits. The bank however appears to have adequate equity to cushion it
against any threats from adverse interest rate movements.
vi. Finally, EGH had adequate funding in foreign currency to back foreign currency loans
and meet demands for foreign currency transactions shielding it from adverse foreign
currency risk exposure.
The study also revealed that Ecobank Ghana Limited had adequate risk management
structures to ensure sound management of credit, liquidity, interest rate, currency and
operational risks. This is premised on the fact that:
80
a. An appropriate environment has been established for managing risk. This included a,
solid governance structure with clear obligations and lines of authority and policy
documents approved by the board containing procedures, processes and techniques
for handling various risks.
b. Relevant tools and management information systems have been provided to ensure
adequate and consistent identification, measurement, monitoring and controlling as
well as reporting on the various risks the bank is exposed to.
c. Effective controls have also been put in place to ensure compliance to the tenet of the
bank‘s risk management framework by linking portions of the banks reward and
punishment system to the extent of adherence to risk issues.
d. Strong risk culture in the bank as all staff are conscious about the risks inherent in
their activities are always on the lookout to avoid or minimise the incidence of risk.
This has been made possible through extensive regular education and training on risk
issues in the bank coupled with the central role risk awareness play in the
performance base remuneration system.
These interventions made by the bank to ensure sound risk management are also in line with
internationally accepted principles for managing risks as put forward by the Basel Committee
for Banking Supervision and expected to be implemented by all banks operating in Ghana as
they have incorporated in the Ghana Banking Act 2004, Act 67321.
6.2 RECOMMENDATIONS
Despite a fairly good risk management framework in place to adequately manage the various
types of risk EGH faces, I would like to make a couple of recommendations which I believe
would help strengthen it risk management system and make it more competitive. These are
primarily related to interest rate risk measurement and risk integration and aggregation.
6.2.1 Interest Rate Risk Management
Currently, EGH applies the Maturity Gap Analysis method where assets and liabilities are
categorised by their repricing dates to identify mismatches within specific time periods, for
estimating interest rate risk. An alternative which will help address the shortfalls in this
21
This information was confirmed by the Deputy Governor of Bank of Ghana, Mr. L. Van Lare Dosoo at the
Regional Seminar on Risk-based supervision on 24 April, 2006 in Accra.
81
accounting approach of evaluating interest rate risk will be one which focuses on estimating
the interest rate sensitivity of the economic value of a bank's on- and off-balance-sheet
positions. Economic Value Analysis (EVA) can serve as a good indicator of quality of net
interest margins over a long term and help identify risk exposures such as changes in market
conditions not evident in the analysis of short term. This can help the bank to avoid strategies
that maximize current earnings at the cost of exposing future earning to great risk. Two such
approaches which have been recommended in recent times are the simulation technique and
duration analysis.
Simulation involves the use of sophisticated computer models to generate the effects of a
wide array of interest rate scenarios on a bank's financial condition. The measures it generates
can address both the accounting and economic perspectives of EGH‘s interest rate risk
exposure. However, simulations are highly data intensive, and the results rely heavily on
assumptions as with many computer modeling techniques. Moreover, these assumptions on
target variables such as net interest income it is difficult to objectively isolate the influence of
changing interest rates on the measures. In the light of these, duration analysis is highly
recommended to EGH to maintain a balance between simplicity and results. Duration is the
measure of the sensitivity of the present value (economic value) of the assets and liabilities to
changing interest rates. Duration analysis therefore helps in estimating the durations of assets,
liabilities, and off-balance-sheet positions. Through this, EGH can estimate the net duration
of its portfolio and the interest sensitivity of the present value of its net worth. In this sense,
duration analysis offers a more comprehensive approach to measuring interest rate risk by
incorporating the entire spectrum of a bank's repricing mismatches. It expands the basic
maturity gap approach to assess the effects of changes in rates on the present value of all
future earnings, not just on next year's book earnings.
6.2.2 Adopting an integrated approach to risk management
Currently, the structure of EGH‘s risk management framework allows for specific risk-related
decisions to be multiple levels of the bank. Also different approaches are used in managing
the different risk types at various units in the bank. This result in fragmented risk
management practices and a disjointed approach for dealing with the risks the bank is
exposed to. There is therefore the need for the bank to develop an integrated system which
ensures a systematic and comprehensive approach to managing risk across the bank. An
82
integrated risk management system is necessary because as its business activities becomes
more varied, the likelihood of having more than one type of risk inherent in an activity or one
type of risk triggering other risks is quite high. Management will therefore need a portfolio
view of all the various risks and developing a strategy to manage them with the view of
benefiting from diversification effects. Such an integrated approach can help senior
management see the relationships between the various risk exposures as well as their
multidimensional effect on the bank. The possibility of some risks not being appropriately
covered is reduced.
EGH‘s risk management function should champion this due to the enormous authority it
wields in issues of risk management as well as its significant responsibility of coordinating
and facilitating unit risk management activities. The bank‘s Risk Management Committee
should be expanded to include the heads of other departments with some responsibilities for
some risks such as IT, Operations, Internal Control the three business segments (Wholesale
Banking, Retail Banking and Treasury). The expanded committee can be used to promote an
integrated framework of policies, procedures and defined processes for bank-wide risk
management with the view of ensuring accountability for decisions related to the
management of risk. Frank discussions can also take place between the owners of these risks
about how their activities affect each others and increase their risks. The various strategies
being used to manage the various risks can be synchronized to ensure more efficiency and
effectiveness in the risk management process. Risks should be defined uniformly across the
firm no matter where they appear and common sets of metric should be adopted to capture
them. Synchronising these bank-wide metrics for risk with the bank‘s information technology
system will aid accurate data capture, analysis and reporting.
The bank should also aim at developing aggregate measures for its risk exposure. The idea is
to incorporate multiple types or sources of risks into a single quantitative risk measure. Such
a measure with give the management of the bank an idea of what its aggregate risk exposure
at any point in time. In this regard, the bank should consider the use of the economic capital
methodology22. An economic capital method attempt to assess the amount of capital needed
to support a given set of business activities or risks. When stress testing or scenario analysis
22
This is in line with the growing trend in the whole over amongst financial institutions. This is carried in a
report by the Joint Forum‘s Working Group of the Basel Committee on Banking Supervision (August, 2003).
83
are incorporated in the economic capital method, it can be used to aggregate the different
types of risks it face such as credit risk, market risks and operational risk. The common
outcome of these risks is the possible lose of net asset value which economic capital seeks to
safeguard against. There are various ways by which EGH can go about aggregating its risk.
The best approach will be to use the ‗building block‘ approach that aggregates risk at
successive levels in an organization. The aggregation is first done across the bank‘s business
lines by risk type before subsequent aggregating the risk types at the bank wide level.
The above approach will enable EGH to know the risk profile of each of its business units in
addition to getting the bank-wide total exposure. EGH can now set aside an amount of money
(economic capital) with the help of statistical tool such as VAR (for market risk). The
economic capital will be the amount the bank believes will be necessary to absorb potential
losses from each risk type, business unit and the bank under extreme market conditions after
all the various individual risks and their related effects on each other has been accounted for.
Aggregation of risks and estimation of economic capital can assist EGH in its risk
management efforts in many ways. It can assist the bank in risk control, in that, the amount of
economic capital allocated to business unit constraints the risks it takes. Also it can help in
performance measurement as it is use in well-known measures like risk-adjusted return on
capital (RAROC) and return on risk-adjusted capital (RORAC) which can be used to evaluate
performance across the various business lines in the bank. EGH can also vary the amount of
economic capital allocated to a business unit from time to time to promote or discourage
certain activities sometimes in response to business cycles shifts. For instance it can allocate
more economic capital to units with low RAROC so that those units may reduce their
activities when macro economic conditions are too volatile and thereby save the bank from
probable huge losses.
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APPENDIX A: Glossary of key financial terms and ratios

Capital adequacy ratio is the ratio of adjusted equity base to risk adjusted asset base as required by
the Bank of Ghana (BoG), i.e. Total regulatory capital / Total risk weighted assets.
Core capital adequacy ratio (Basel I capital adequacy): Total tier 1 capital / Total risk weighted
assets.
Cash assets include cash on hand, balances with the central bank, money at call or short notice, and
cheques in course of collection and clearing.
Core Customer Deposits includes current accounts, cash collateral account, individual consumer
savings, and money market accounts.
Cost income ratio = Non-interest operating expenses / Operating income.
Interest Rates Sensitive Assets refers to assets principally of loans with maturity within a year.
Interest Rates Sensitive Liabilities refers to liabilities principally of deposits with maturity within a
year.
Liquid assets include cash assets and assets that are relatively easier to convert to cash, e.g.,
investments in government securities, quoted and unquoted debt and equity investments, equity
investments in subsidiaries.
Loan loss provisions = (General & specific provisions for bad debts for + Interest in suspense) /
Gross loans and advances.
Long term Assets includes securities which mature beyond one year, other real estate owned and net
loans
Net interest income = Total interest income - Total interest expense
Net interest margin = Net interest income / Average assets
Non-performing loans refers to loans and advances with payments of interest and principal past due
by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or
delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to
doubt that payments will be made in full.
Profit after tax margin = Profit after tax / Total income
Profit before tax margin = Profit after extraordinary items but before tax / Total income
Qualifying capital includes share capital, regulatory risk reserves, statutory reserves, retained
earnings, non controlling interest, subordinated debt and other reserves.
Return on assets = Profit after tax / Average total assets
Return on equity = Profit after tax / Average total shareholders' funds
Risk-weighted assets refer to banks assets adjusted for risk.
Shareholders' funds comprise paid-up stated capital, income surplus, statutory reserves, and capital
surplus or revaluation reserves.
Short term Investments includes government securities + loans to bank with maturity less than 1
year + trading assets + investments securities.
Volatile Liabilities refers to short term borrowed funds and short term non-core deposits normally
from institutional investors.
Volatile Liability Dependency ratio = (Volatile liability - Short Term Investments) / (Long Term
Assets)* 100
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APPENDIX B: Comparative Financial Statements of EGH for 2007 - 2009
ECOBANK GHANA LIMITED

B1. BALANCE SHEET
2007 2008 2009
ASSETS GH¢'000 GH¢'000 GH¢'000
Cash and Cash Balances with central bank 48,273 69,797 104,162
Financial assets held for trading - Equity instruments 8,234 5,092 2,540
Available-for-sale financial assets - Equity instruments 5,804 35,182 24,363
Loans and receivables 288,694 401,531 456,159
Held-to-maturity investments
Debt instruments 86,468 89,679 268,534
Loans and advances 177,580 232,609 442,806
Derivative financial instruments 3 0 0
Tangible assets - Property, Plant and Equipment 16,932 24,381 44,015
Intangible assets - License for corporate software 0 2,190 3,630
Tax assets - Deferred tax assets 970 918 1,319
Other assets 35,791 58,316 40,665
TOTAL ASSETS 668,749 919,695 1,388,193
LIABILITIES GH¢'000 GH¢'000 GH¢'000
Deposits from banks and other credit institutions 59,801 14,261 90,127
Borrowings 55,661 61,782 82,499
Deposits from customers 437,951 682,705 922,077
Tax liabilities 4,724 4,341 3,374
Other liabilities 45,946 71,868 84,703
TOTAL LIABILITIES 604,083 834,957 1,182,780
EQUITY GH¢ GH¢ GH¢
Stated capital 16,400 16,400 100,000
Income Surplus Account 23,496 41,619 59,041
Revaluation Reserves 1,602 1,595 15,491
Statutory Reserve Fund 18,747 22,965 29,654
Regulatory Credit Risk Reserve 4,421 2,781 2,716
Capital and Equity attributable to parent equity's
Equity holders 64,666 85,360 206,902
Non-controlling interest 0 -622 -1,489
TOTAL EQUITY 64,666 84,738 205,413
TOTAL LIABILITIES AND EQUITY 668,749 919,695 1,388,193
Contingency liabilities and commitment 65,268.00 133,237.00 233,129.00
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B2. INCOME STATEMENT

2007 2008 2009
GH¢'000 GH¢'000 GH¢'000
Interest Income
Available-for-sale financial assets - Equity instruments 13,393 16,203 42,452
Loans and receivables 27,915 44,860 76,545
Held-to-maturity investments - Placements & ST funds 10,471 11,691 12,382
(Interest Expense)
Demand deposits -1,348 -2,399 -8,667
Time deposits -12,083 -13,304 -11,808
Borrowed funds -2,627 -6,678 -19,313
Savings 0 -4,224 -9,134
Fees and Commission Income
Trade finance fees 5,027 4,879 17,626
Credit related fees and commission 3,089 3,746 6,231
Cash Management 1,073 9,186 16,419
Other fees and commissions 7,824 3,067 3,928
(Fees and Commission Expenses) -501 -1,107 -2,052
Realised gains on financial assets & liabilities not
measured
at fair value through profit or loss, net - finance lease 2,878 4,310 5,066
Gains on financial assets and liabilities held for trading,
net
- net trading income 6,907 35,309 28,148
Gains on financial assets and liabilities designated at fair
value through profit or loss, net - Dividend income 328 613 448
Other operating income
Profit on sale of equipment 8 13 148
other income 1,559 1,024 1,469
Total Income 63,913 107,189 159,888
Operating Expenses -33,143 -57,505 -77,681
Impairment charge on loans and advances -591 -5,793 -9,518
Profit before income tax 30,179 43,891 72,689
Income tax expenses -7,830 -10,312 -17,195
National stabilisation levy 0 0 -1,641
Profit for the year 22,349 33,579 53,853
Attributable to:
Equity holders of the parent entity 22349 34,085 54,720
Non controlling interest 0 -506 -867
22,349 33,579 53,853
87
B3. CASHFLOW STATEMENT

2007 2008 2009
GH¢'000 GH¢'000 GH¢'000
Cash flows from operating activities
Interest paid -16,059 -26,606 -42,681
Interest received 50,542 72,205 125,710
Net fees and commissions receipts 16,512 19,254 42,152
Other income received 1,568 1,037 1,617
Dividend received 328 614 448
Net trading income 9,533 29,993 23,354
Lease income 2,878 4,310 4,662
Payments too employees and suppliers -28,471 -53,389 -69,730
Tax paid -6,438 -11,903 -19,360
Cash flow from operating activities before changes in
operating assets and liabilities 30,393 35,515 66,172
Changes in operating assets and liabilities
Loans and advances -126,513 -118,631 -54,628
other assets 37,015 -22,470 17,651
Investment securities 0 -29,378 -10,819
Customer deposits 102,314 244,754 239,372
Other liabilities 42,537 57,328 -14,604
Mandatory reserve requirement 0 -5,041 -24,329
Net Cash generated from operating activities 49,548 126,562 152,643
Cash flow from investing activities
Purchase of property and equipment -8,887 -13,147 -11,418
Purchase of software 0 -2,351 -2,870
Proceeds from sale of sale equipment 310 19 161
Purchase of Government securities 2,382 3,211 -59,180
Net cash used in investing activities -6,195 12,268 73,307
Cash flow from financing activities
Dividend paid -10,859 -13,384 26,574
Proceeds from right issue 0 79,500
Repayment of borrowed funds 0 -9,578
Proceeds from borrowed funds 6,122 6,122 21,135
Net cash generated/(used in) from financing activities -4,737 -7,262 64,483
Net increase in cash and cash equivalents 69,009 144,236 209,991
Cash and cash equivalents at beginning of year 97,132 166,144 310,377
Cash and cash equivalents at the end of year 166,141 310,377 520,368
Source: 2008 and 2009 Annual Reports of Ecobank Ghana limited
88
APPENDIX C: Bloomberg L. P ratings and Stock Trends

C1: Ratings for short-term and Long-term credits.
Source: Bloomberg L. P
C2: Table annual share price performance of EGH on the Ghana Stock Exchange
Share Price Performance of EGH

Trading Date Stock Price
11-Jul-06 1290.0
03-Jan-07 1352.0
11-Jul-07 1456.2
04-Jan-08 2050.0
11-Jul-08 4100.0
02-Jan-09 4500.0
10-Jul-09 2060.0
05-Jan-10 2800.0
09-Jul-10 3300.0
Source: Own construction with data compiled by Gold Coast Securities Limited
89
APPENDIX D: Tables and Charts for Risk Profile Assessment

D1: Common Size and Trend analysis of Balance Sheet of EGH
BALANCE SHEET Composition Growth
2007 2008 2009 2008 2009
ASSETS % % % % %
Cash and Cash Balances with central bank 7.22 7.59 7.50 44.59 49.24
Financial assets held for trading - Equity instruments 1.23 0.55 0.18 -38.16 -50.12
Available-for-sale financial assets - Equity instruments 0.87 3.83 1.76 506.17 -30.75
Held-to-maturity investments 39.48 35.04 51.24 22.06 120.72
Loans and receivables 43.17 43.66 32.86 39.09 13.60
Tangible assets - Property, Plant and Equipment 2.53 2.65 3.17 43.99 80.53
Other assets 5.50 6.68 3.29 67.08 -25.74
Total Asset 100 100 100 37.52 50.94
LIABILITIES & EQUITY
Deposits from banks and other credit institutions 8.94 1.55 6.49 -76.15 531.98
Borrowings 8.32 6.72 5.94 11.00 33.53
Deposits from customers 65.49 74.23 66.42 55.89 35.06
Tax & other liabilities 7.58 8.29 6.34 50.40 15.57
Equity 9.67 9.21 14.80 31.04 142.41
Total 100 100 100 37.52 50.94
Source: Own construction with data from comparative balance sheet
D2: Common Size and Trend analysis of Income statement of EGH

Composition Growth
INCOME STATEMENT 2007 2008 2009 2008 2009
Net Interest Income 55.89% 43.05% 51.57% 29.19% 78.68%
Fees and Commission Income 25.84% 18.44% 26.36% 19.74% 113.20%
Realised gains on finance lease 4.50% 4.02% 3.17% 49.76% 17.54%
Net trading income 10.81% 32.94% 17.60% 411.21% -20.28%
Dividend income 0.51% 0.57% 0.28% 86.89% -26.92%
Other operating income 2.45% 0.97% 1.01% -12.93% 25.15%
Total Income 100.00% 100.00% 100.00% 67.81% 48.73%
Operating Expenses 79.74% 77.59% 72.67% 73.51% 35.09%
Impairment charge on loans and advances 1.42% 7.82% 8.90% 880.20% 64.30%
Profit before tax 45.44% 65.61%
Taxation and levy 18.84% 13.91% 17.62% 31.70% 82.66%
Profit for the year 50.25% 60.38%
Profit attributed to Non controlling interest 0.00% 0.68% 0.81% 0.00% 71.34%
Total Cost 100.00% 100.00% 100.00% 78.32% 44.24%
Source: Own construction with data from comparative income statement
90
D3: Balance Sheet and growth trend of Deposit Money Banks in Ghana
Key Developments Deposit Money Banks' Balance Sheet Growth
2008 2009 2008 2009
ASSETS GH¢'000 GH¢'000 % %
Foreign Assets 978,800 1,526,200 54.9 55.9
Domestic Assets 9,713,400 12,512,400 35.6 28.8
Investments 1,547,900 2,989,300 12.8 93.1
Bills 993,000 1,798,300 111.3 81.1
Securities 529,700 1,131,700 -40.0 113.6
Net Advances 5,593,900 6,917,600 42.7 23.7
of which foreign currency 1,510,400 1,655,200 52.1 9.6
Gross Advances 5,966,800 6,917,600 43.9 15.9
Other Assets 506,600 763,600 14.5 50.7
Fixed Assets 344,600 424,200 42.6 23.1
Total Asset 10,692,200 14,038,600 37.2 31.3
LIABILITIES & EQUITY GH¢'000 GH¢'000 % %
Total Deposits 6,949,000 8,968,600 41.4 29.1
of which foreign currency 1,804,700 2,749,200 77.6 52.3
Total Borrowings 1,360,000 1,871,700 29.5 37.6
Foreign liabilities 905,900 1,103,400 35.8 21.8
Short-term borrowings 341,900 518,400 2.0 51.6
Long-term borrowings 372,200 349,700 59.9 -6.0
Deposits of non-residents 191,800 235,200 93.6 22.6
Domestic liabilities 8,590,500 11,144,300 36.5 29.7
Short-term borrowings 547,600 877,800 55.3 60.3
Long-term borrowings 98,300 125,800 -24.3 28.0
Deposits of Deposits 6,757,200 8,733,500 40.3 29.2
Other Liabilities 1,262,800 1,375,700 32.2 8.9
Paid-up capital 445,800 1,103,700 60.0 147.6
Shareholders' Funds 1,112,800 1,762,800 38.1 58.4
Source: February 2010 Financial Stability Report
91
D4: Income Statement and growth trend of Deposit Money Banks in Ghana
Deposit Money Banks' Income Statement Growth
2007 2008 2009 2008 2009
GH¢'000 GH¢'000 GH¢'000 % %
Interest Income 772,100.0 1,185,200.0 1,831,400.0 53.5 54.5
interest Expenses -269,500.0 -481,500.0 -858,100.0 78.7 78.2
Net Interest Income 502,600.0 703,600.0 973,300.0 40 38.3
Fees and Commissions (Net) 234,700.0 303,100.0 366,000.0 29.1 20.8
Other Income 83,100.0 215,800.0 272,500.0 159.7 26.3
Operating Income 820,400.0 1,222,500.0 1,611,800.0 49 31.8
Total income 1,640,800.0 2,445,000.0 3,223,600.0
Operating Expenses -461,900.0 -736,300.0 -939,500.0 59.4 27.6
Staff Cost -180,000.0 -303,400.0 -376,900.0 68.6 24.2
Other Operating Expenses -281,900.0 -432,900.0 -562,600.0 53.6 30.0
Net Operating Income 358,500.0 486,200.0 672,300.0 35.5 38.3
Total Provision (Loan losses, Depreciation & Others) -114,300.0 -188,100.0 -330,100.0 64.6 75.5
Monetary Loss 1,000.0 3,200.0 -1,200.0 0 0.0
Income Before Tax 245,200.0 301,300.0 341,000.0 22.9 13.2
Tax -68,300.0 -74,100.0 -97,900.0 8.5 32.1
Net Income 176,900.0 227,300.0 243,100.0 28.5 7.0
Source: February 2010 Financial Stability Report
D5: Table of growth in capital adequacy and off-balance sheet item

Composition of components in Total Assets
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
ASSETS % % % % % % % % % %
Cash and due from banks 25.5 25.2 28.9 29.5 27.0 20.7 23.5 23.3 25.2 26.3
Investments 24.2 28.0 31.7 27.7 27.7 26.9 23.3 17.6 14.5 21.3
Net advances 39.6 37.7 30.4 305.2 35.6 43.0 45.0 50.3 52.3 43.8
Other assets 8.0 5.7 5.7 4.8 6.3 6.5 5.2 5.7 4.7 5.4
Fixed assets 2.7 3.4 3.3 2.7 2.7 3.0 3.1 3.1 3.2 3.0
LIABILITIES & EQUITY
Total deposits 61.4 58.3 60.0 62.7 64.2 64.8 65.2 63.0 65.0 63.9
Total borrowings 12.7 8.4 7.5 8.0 7.4 9.0 11.3 13.5 12.7 13.3
Other liabilities 13.6 19.5 19.0 16.7 15.5 13.4 10.7 12.2 11.8 9.8
Shareholders' funds 11.9 13.1 12.6 12.5 12.6 12.8 11.7 10.3 10.4 12.6
Source: February 2010 bulletin of the Financial Stability Report by Bank of Ghana
92
D6: Chart of income composition
Source: Own construction with data from common-size analysis of income statement and 2010 Financial
Stability Report of Bank of Ghana
D7: Asset invested compared with income sources
Source: Own construction with data from common-size analysis of balance sheet and income statement
D8: Table of profitability and efficiency ratios

EGH Industry
Profitability and Efficiency 2007 2008 2009 2009
Profit margin (post tax) 34.97% 31.33% 33.68% 7.54%
Return on assets (pre-tax) 4.51% 4.77% 5.24% 1.73%
Return on average equity (post tax) 34.56% 39.63% 26.22% 13.79%
Net interest income as a % of total assets 5.34% 5.02% 5.94% 6.93%
Operating expenses as a % of total assets 4.96% 6.25% 5.60% 6.69%
Net interest income as a % of Gross loans and advances 12.19% 11.18% 17.36% 14.07%
Operating expenses as a % of gross operating income 51.59% 53.34% 48.45% 29.14%
Source: Own construction with data from comparative balance sheet and income statement
93
D9: Table of credit risk measures for EGH

2007 2008 2009 Growth
Credit Risk Measures GH¢'000 GH¢'000 GH¢'000 2008 2009
Total maximum exposure to credit risk 683,238 1,025,443 1,572,358 50.09% 53.33%
Gross loans and advances to customers 293,154 412,907 475,112 40.85% 15.07%
Gross loans and advances to banks 177,580 232,609 442,806 30.99% 90.36%
Total Loan Portfolio 470,734 645,516 917,918 37.13% 42.20%
Qualifying capital 86,926 109,006 255,443 25.40% 134.34%
Collateral 14,658 15,812 28,136 7.87% 77.94%
Non-performing loans 13,436 14,948 16,224 11.25% 8.54%
Impairment Charge 591 5,793 9,518 880.20% 64.30%
Allowance for impairment 4,460 9,641 18,952 116.17% 96.58%
50 largest exposure to customers (non
banks) 160,355.24 230,155.52 261,311.60 43.53% 13.54%
Customer loans as a % to total loan
portfolio 62% 64% 52%
Bank loans as a % of total loan
portfolio 38% 36% 48%
50 largest exposure as % to gross loans
and advances 54.70% 56.00% 55.00%
50 largest exposure as % to qualifying
capital 184.47% 211.14% 102.30%
50 largest exposure as % to Total credit
risk exposure 23.47% 22.44% 16.62%
Collateral as % to Non-performing
loans (Coverage ratio) 109.09% 105.78% 173.42%
Non-performing loans as % of Gross
loans and advances 4.58% 3.62% 3.41%
Impairment Charge as a % of Gross
loans and advances 0.20% 1.40% 2.00%
Allowance for impairment as % of
Gross loans and advances 1.52% 2.33% 3.99%
Source: Own construction with data from comparative balance sheet and income statement
D10: Table of credit risk measures for Ghana banking Industry

Credit Risk Measures for the Ghanaian Banking Industry Growth
2007 2008 2009 2008 2009
GH¢'000 GH¢'000 GH¢'000 % %
Total Loan Portfolio 414,648 596,680 691,765 43.90% 15.94%
Non-performing loans 266,000 458,100 1,034,100 72.22% 125.74%
% % %
Non-performing loans as % of Gross loans and advances 6.90% 7.70% 14.90%
Allowance for impairment as % of Gross loans and advances 4.70% 5.10% 9.40%
Source: February 2010 of Financial Stability Report of Bank of Ghana
94
D11: Ratio of non-bank to bank loans
Source: Own construction with data from table of credit risk measure computations
D12: table of industry concentration of customer loans

Composition Growth
EGH Industry EGH
Industry Concentrations 2007 2008 2009 2009 2008 2009
Construction 5.84% 10.60% 9.29% 7.80% 160.40% -3.03%
Agriculture, forestry and fishing 0.04% 0.87% 2.77% 4.70% 2931.40% 251.83%
Mining and quarrying 6.58% 4.05% 3.78% 2.70% -11.66% 3.36%
Manufacturing 17.73% 24.95% 19.30% 11.60% 101.83% -14.34%
Electricity, gas and water 5.69% 0.07% 8.33% 6.30% -98.18% 12694.06%
Commerce and finance 18.03% 17.15% 15.78% 31.60% 36.43% 1.84%
Transport, Storage and communication 7.92% 7.88% 5.07% 3.90% 42.71% -28.80%
Services 38.16% 34.42% 35.68% 21.20% 29.39% 14.76%
Miscellaneous 0 0 0 10.20% 0 0
Total 100.00% 100.00% 100.00% 100.00% 43.45% 10.71%
D13: Table of customer loans distribution by products

2007 2008 2009 2008 2009
Customer Loans by product GH¢'000 GH¢'000 GH¢'000 % % % % %
Term Loans 184,874 230,870 325,565 51.58 42.41 45.97 24.88 41.02
Overdrafts 87,114 148,849 111,923 24.30 27.34 15.80 70.87 -24.81
Finance leases 15,882 18,448 17,465 4.43 3.39 2.47 16.16 -5.33
Staff loans 5,140 9,078 13,823 1.43 1.67 1.95 76.61 52.27
Mortgage 144 3,747 6,335 0.04 0.69 0.89 2502.08 69.07
Guarantees 61,263 100,166 223,062 17.09 18.40 31.50 63.50 122.69
Loan commitments & other
credit related liabilities 4,005 33,237 10,067 1.12 6.11 1.42 729.89 -69.71
Total 358,422 544,395 708,240 100.00 100.00 100.00
95
D14: Table of customer loans distribution by maturity

Maturity of Loans to 2007 2008 2009 2008 2009
customers GH¢'000 GH¢'000 GH¢'000 % % % % %
1 - 3 months 168,449 239,048 215,284 58.95 59.53 47.19 41.91 28.86
4 - 12 months 16,779 60,011 167,068 5.87 14.95 36.62 257.66 178.40
1 - 5 years 92,929 89,662 73,807 32.52 22.33 16.18 -3.52 -17.68
Over 5 years 7,615 12,810 0 2.66 3.19 0.00 68.22 -100.00
Net Loans and advances 285,772 401,531 456,159 100.00 100.00 100.00
D15: Table of related party information

Growth
Related Party Information 2007 2008 2009 2008 2009
Amount of loans (GH¢'000) to Directors & Key Mgt Personnel 236 172 152 -27.12% -11.63%
Amount of deposits (GH¢'000) to Directors & Key Mgt Personnel 454 290 119 -36.12% -58.97%
Amount of loan as % of Qualifying Capital 0.27% 0.16% 0.06%
D16: Chart of Liquidity Mismatches
Source: Own construction with data from table of customer loans distribution tables
D17: Table of composition and trends in funding sources

Funding Sources GH¢'000 GH¢'000 GH¢'000 2007 2008 2009 2008 2009
Deposit from banks 59,801 14,261 92,831 9.01% 1.56% 6.62% -76.15% 550.94%
Deposit from customers 437,950 682,705 935,991 65.95% 74.58% 66.72% 55.89% 37.10%
Other liabilities 45,946 71,868 84,703 6.92% 7.85% 6.04% 56.42% 17.86%
Borrowings 55,661 61,782 83,990 8.38% 6.75% 5.99% 11.00% 35.95%
Shareholders funds 64,666 84,738 205,413 9.74% 9.26% 14.64% 31.04% 142.41%
Total funding base 664,024 915,354 1,402,928 100.00% 100.00% 100.00%
96
D18: Table of liquidity risk measures

2007 2008 2009
Liquidity Ratios GH¢'000 GH¢'000 GH¢'000
Total Assets 664,536 921,994 1,339,229
Liquid assets 252,165 397,177 818,042
Total Liabilities 616,416 834,957 1,199,981
Volatile Liabilities 558,065 748,117 1,033,730
Customer Deposits 437,950 682,705 935,991
Customer Loans 285,772 232,609 456,159
Interbank Deposits 59,801 14,261 92,831
Interbank Loans 86,312 232,609 442,806
All deposits type 497,751 696,966 1,028,822
Core Customer Deposits 360,206 590,621 795,248
Short term Investment 257,359 352,980 576,042
Long term Assets 135,811 132,241 280,023
Customer loans as a % of customer deposits 65.25% 34.07% 48.74%
Customer loans as a % of core deposits 79.34% 39.38% 57.36%
Interbank loans as a % of interbank deposits 144.33% 1631.08% 477.00%
Volatile Liability Dependency ratio 221.42% 298.80% 163.45%
Liquid assets as a % of total assets 37.95% 43.08% 61.08%
Liquid assets as a % of volatile liabilities -
Volatility coverage 45.19% 53.09% 79.13%
Volatile Liabilities as a % of total liabilities 90.53% 89.60% 86.15%
Liquid assets as a % of all deposits type -
Bank Run 50.66% 56.99% 79.51%
20 largest deposits as a % total customer deposits 29.00% 20.00%
D19: Table of cash flow summary

2007 2008 2009 Growth
Cash Flows GH¢'000 GH¢'000 GH¢'000 2008 2009
Net cash operating from/(used in) activities 49,548 126,562 152,643 155.43% 20.61%
Net cash used in investing activities -6,195 -12,268 73,307 -98.03% 697.55%
Net cash (used in)/generated from financing activities -4,737 -7,262 64,483 -53.30% 987.95%
Net increase in cash and cash equivalents 69,009 144,236 209,991 109.01% 45.59%
Source: Own construction with data from cash flow statement
97
D20: Table of interest rate risk measures

2007 2008 2009
Interest Rate Repricing/Maturity dates GH¢'000 GH¢'000 GH¢'000
Assets
1 - 3 months 427,954 436,778 639,985
4 - 12 months 83,505 171,056 315,927
1 - 5 years 13,063 112,054 73,807
Non-Interest bearing 126,222 173,236 309,510
Total 650,744 893,124 1,339,229
Liabilities
1 - 3 months 302,601 122,410 301,155
4 - 12 months 203,112 46,118 139,440
1 - 5 years 20,102 83,056 163,446
Non-Interest bearing 73,543 576,418 575,365
Total 599,358 828,002 1,179,406
Interest Repricing Mismatches
1 - 3 months 125,353 314,368 338,830
4 - 12 months -119,607 124,938 176,487
1 - 5 years -7,039 28,998 -89,639
Non-Interest bearing 52,679 -403,182 -265,855
Total 51,386 65,122 159,823
Interest rate sensitive assets 511,459 607,834 955,912
Interest rate sensitive liabilities 505,713 168,528 440,595
Gap 5,746 439,306 515,317
Interest rate sensitive assets/Interest rate sensitive liabilities 101.14% 360.67% 216.96%
Interest rate sensitive assets / Total assets 78.60% 68.06% 71.38%
Interest rate sensitive liabilities / Total Liabilities 84.38% 20.35% 37.36%
Gap / Total assets 0.88% 49.19% 38.48%
Gap / Total equity 8.89% 518.43% 250.87%
D21: Chart of interest rate ratios
Source: Own construction with data from table of interest rate risk measures
98
D22: Table of currency risk measures

2007 2008 2009 Composition
Currency Analysis GH¢'000 GH¢'000 GH¢'000 2007 2008 2009
Assets
Cedis 368,724 548,072 695,380 55.14% 59.59% 51.78%
USD 244,884 318,639 564,473 36.62% 34.65% 42.04%
EUR 34,181 33,790 50,734 5.11% 3.67% 3.78%
GBP 17,322 9,692 1,695 2.59% 1.05% 0.13%
Other 3,638 9,502 30,577 0.54% 1.03% 2.28%
Total 668,749 919,695 1,342,859 100.00% 100.00% 100.00%
Liabilities
Cedis 312,541 473,013 578,462 51.74% 56.65% 49.05%
USD 249,335 314,509 540,445 41.27% 37.67% 45.82%
EUR 27,823 33,261 41,749 4.61% 3.98% 3.54%
GBP 11,864 9,548 0 1.96% 1.14% 0.00%
Other 2,520 4,626 18,750 0.42% 0.55% 1.59%
Total 604,083 834,957 1,179,406 100.00% 100.00% 100.00%
Net Open Currency Position
Cedis 56,183 75,059 116,918
USD -4,451 4,130 24,028
EUR 6,358 529 8,985
GBP 5,458 144 1,695
Other 1,118 4,876 11,827
Total 64,666 84,738 163,453
Qualifying capital 86,926 109,006 255,443
Currency Risk Exposure as % of Qualifying Capital:
Cedis 64.63% 68.86% 45.77%
USD -5.12% 3.79% 9.41%
EUR 7.31% 0.49% 3.52%
GBP 6.28% 0.13% 0.66%
Other 1.29% 4.47% 4.63%
Total 74.39% 77.74% 63.99%
Composition
Currency Structure of Loan Portfolio : 2007 2008 2009
Loans in Cedis 171,552 203,442 263,078 60.03% 50.67% 57.67%
Loans in USD 108,150 187,784 181,869 37.84% 46.77% 39.87%
Loans in EUR 5,817 10,272 11,124 2.04% 2.56% 2.44%
Loans in GBP 253 33 88 0.09% 0.01% 0.02%
Loans in other currencies 0 0 0 0.00% 0.00% 0.00%
Total 285,772 401,531 456,159 100.00% 100.00% 100.00%
Currency Structure of Customer deposits : 2007 2008 2009
Deposits in Cedis 250,101 394,423 471,947 57.11% 57.77% 51.18%
Deposits in USD 151,734 248,710 424,551 34.65% 36.43% 46.04%
99
Deposits in EUR 23,691 27,528 15,608 5.41% 4.03% 1.69%

Deposits in GBP 10,371 9,401 0 2.37% 1.38% 0.00%
Deposits in other currencies 2,053 2,643 9,971 0.47% 0.39% 1.08%
Total 437,950 682,705 922,077 100.00% 100.00% 100.00%
D23: Chart of currency structure of Assets and Liabilities, Current Period
Source: Own construction with data from table of currency risk measures
100
APPENDIX E:International Recommended Principles for

ensuring Sound Risk Management
E1. Corporate Governance for Banking Organizations (Enhancing Corporate
Governance for Banking Organizations)
Principle 1: Board members should be qualified for their positions, have a clear
understanding of their role in corporate governance, and be able to exercise sound judgment
about the affairs of the bank.
Principle 2: The board of directors should approve and oversee the bank‘s strategic objectives
and corporate values that are communicated throughout the banking organization.
Principle 3: The board of directors should set and enforce clear lines of responsibility and
accountability throughout the organization.
Principle 4: The board should ensure that there is appropriate oversight by senior
management consistent with board policy.
Principle 5: The board and senior management should effectively utilize the work conducted
by the internal audit function, external auditors, and internal control functions.
Principle 6: The board should ensure that compensation policies and practices are consistent
with the bank‘s corporate culture, long-term objectives and strategy, and control
environment.
Principle 7: The bank should be governed in a transparent manner.
Principle 8: The board and senior management should understand the bank‘s operational
structure, including where the bank operates in jurisdictions, or through structures, that
impede transparency (that is, ―know-your-structure‖).
Source: Basel Committee on Banking Supervision (February, 2006)
E2. Signs of a Distorted Credit Culture
I. Self-dealing: An overextension of credit to directors and large shareholders, or to their

interests, while compromising sound credit principles under pressure from related
parties. Self-dealing has been the key issue in a significant number of problem banks.
II. Compromise of credit principles: Arises when loans that have undue risk or are
extended under unsatisfactory terms are granted with full knowledge of the violation
of sound credit principles. The reasons for the compromise typically include self-
101
dealing, anxiety over income, competitive pressures in the bank‘s key markets, or
personal conflicts of interest.
III. Anxiety over income: A situation in which concern over earnings outweighs the
soundness of lending decisions, underscored by the hope that risk will not materialize
or lead to loans with unsatisfactory repayment terms. This is a relatively frequent
problem because a loan portfolio is usually a bank‘s key revenue-producing asset.
IV. Incomplete credit information: This indicates that loans have been extended without
proper appraisal of borrower creditworthiness.
V. Complacency: This is a frequent cause of bad loan decisions. Complacency is
typically manifested in a lack of adequate supervision of old, familiar borrowers,
dependence on oral information rather than reliable and complete financial data, and
an optimistic interpretation of known credit weaknesses because of survival in
distressed situations in the past. In addition, banks may ignore warning signs
regarding the borrower, economy, region, industry, or other relevant factors or fail to
enforce repayment agreements, including a lack of prompt legal action.
VI. Lack of supervision: Ineffective supervision invariably results in a lack of knowledge
about the borrower‘s affairs over the lifetime of the loan. Consequently, initially
sound loans may develop problems and losses because of a lack of effective
supervision.
VII. Technical incompetence: This includes a lack of technical ability among credit
officers to analyze financial statements and obtain and evaluate pertinent credit
information.
VIII. Poor selection of risks: This tendency typically involves the following:
a. The extension of loans with initially sound financial risk to a level beyond the
reasonable payment capacity of the borrower. This is a frequent problem in unstable
economies with volatile interest rates.
b. Loans where the bank-financed share of the total cost of the project is large relative to
the equity investment of the owners. Loans for real estate transactions with narrow
equity ownership also fall into this category.
c. Loans based on the expectation of successful completion of a business transaction,
rather than on the borrower‘s creditworthiness, and loans made for the speculative
purchase of securities or goods.
d. Loans to companies operating in economically distressed areas or industries.
e. Loans made because of large deposits in a bank, rather than on sound net worth or
collateral.
f. Loans predicated on collateral of problematic liquidation value or collateral loans that
lack adequate security margins.
Source: Commercial Bank Examination Manual Board of Governors Federal Reserve System
Division of Banking Supervision and Regulation (December, 1985)
102
E3 Principles for the Assessment of Banks’ Management of Credit Risk
A. Establishing an appropriate credit risk environment
Principle 1 - The board of directors should have responsibility for approving and periodically
reviewing the credit risk strategy and significant credit risk policies of the bank. The strategy
should reflect the bank‘s tolerance for risk and the level of profitability the bank expects to
achieve for incurring various credit risks.
Principle 2: Senior management should have responsibility for implementing the credit risk
strategy approved by the board of directors and for developing policies and procedures for
identifying, measuring, monitoring and controlling credit risk. Such policies and procedures
should address credit risk in all of the bank‘s activities and at both the individual credit and
portfolio levels.
Principle 3: Banks should identify and manage credit risk inherent in all products and
activities. Banks should ensure that the risks of products and activities new to them are
subject to adequate procedures and controls before being introduced or undertaken, and
approved in advance by the board of directors or its appropriate committee.
B. Operating under a sound credit granting process
Principle 4: Banks must operate under sound, well-defined credit-granting criteria. These
criteria should include a thorough understanding of the borrower or counterparty, as well as
the purpose and structure of the credit, and its source of repayment.
Principle 5: Banks should establish overall credit limits at the level of individual borrowers
and counterparties, and groups of connected counterparties that aggregate in comparable and
meaningful manner different types of exposures, both in the banking and trading book and on
and off the balance sheet.
Principle 6: Banks should have a clearly-established process in place for approving new
credits as well as the extension of existing credits.
Principle 7: All extensions of credit must be made on an arm‘s-length basis. In particular,

credits to related companies and individuals must be monitored with particular care and other
appropriate steps taken to control or mitigate the risks of connected lending.
C. Maintaining an appropriate credit administration, measurement and monitoring

process
Principle 8: Banks should have in place a system for the ongoing administration of their
various credit risk-bearing portfolios.
103
Principle 9: Banks must have in place a system for monitoring the condition of individual
credits, including determining the adequacy of provisions and reserves.
Principle 10: Banks should develop and utilise internal risk rating systems in managing credit
risk. The rating system should be consistent with the nature, size and complexity of a bank‘s
activities.
Principle 11: Banks must have information systems and analytical techniques that enable
management to measure the credit risk inherent in all on- and off-balance sheet activities. The
management information system should provide adequate information on the composition of
the credit portfolio, including identification of any concentrations of risk.
Principle 12: Banks must have in place a system for monitoring the overall composition and
quality of the credit portfolio.
Principle 13: Banks should take into consideration potential future changes in economic
conditions when assessing individual credits and their credit portfolios, and should assess
their credit risk exposures under stressful conditions.
D. Ensuring adequate controls over credit risk
Principle 14: Banks should establish a system of independent, ongoing credit review and the
results of such reviews should be communicated directly to the board of directors and senior
management.
Principle 15: Banks must ensure that the credit-granting function is being properly managed
and that credit exposures are within levels consistent with prudential standards and internal
limits. Banks should establish and enforce internal controls and other practices to ensure that
exceptions to policies, procedures and limits are reported in a timely manner to the
appropriate level of management.
Principle 16: Banks must have a system in place for managing problem credits and various
other workout situations.
E. The role of supervisors
Principle 17: Supervisors should require that banks have an effective system in place to
identify measure, monitor and control credit risk as part of an overall approach to risk
management. Supervisors should conduct an independent evaluation of a bank‘s strategies,
policies, practices and procedures related to the granting of credit and the ongoing
management of the portfolio. Supervisors should consider setting prudential limits to restrict
bank exposures to single borrowers or groups of connected counterparties.
Source: Basel Committee on Banking Supervision (Issued on November 30, 1999)

104
E4 Principles for the management and supervision of liquidity risk
A. Fundamental principle for the management and supervision of liquidity risk
Principle 1: A bank is responsible for the sound management of liquidity risk. A bank should
establish a robust liquidity risk management framework that ensures it maintains sufficient
liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a
range of stress events, including those involving the loss or impairment of both unsecured
and secured funding sources. Supervisors should assess the adequacy of both a bank's
liquidity risk management framework and its liquidity position and should take prompt action
if a bank is deficient in either area in order to protect depositors and to limit potential damage
to the financial system.
B. Governance of liquidity risk management
Principle 2: A bank should clearly articulate a liquidity risk tolerance that is appropriate for
its business strategy and its role in the financial system.
Principle 3: Senior management should develop a strategy, policies and practices to manage
liquidity risk in accordance with the risk tolerance and to ensure that the bank maintains
sufficient liquidity. Senior management should continuously review information on the
bank‘s liquidity developments and report to the board of directors on a regular basis. A
bank‘s board of directors should review and approve the strategy; policies and practices
related to the management of liquidity at least annually and ensure that senior management
manages liquidity risk effectively.
Principle 4: A bank should incorporate liquidity costs, benefits and risks in the internal
pricing, performance measurement and new product approval process for all significant
business activities (both on- and off-balance sheet), thereby aligning the risk-taking
incentives of individual business lines with the liquidity risk exposures their activities create
for the bank as a whole.
C. Measurement and management of liquidity risk
Principle 5: A bank should have a sound process for identifying, measuring, monitoring and
controlling liquidity risk. This process should include a robust framework for
comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet
items over an appropriate set of time horizons.
Principle 6: A bank should actively monitor and control liquidity risk exposures and funding
needs within and across legal entities, business lines and currencies, taking into account legal,
regulatory and operational limitations to the transferability of liquidity.
105
Principle 7: A bank should establish a funding strategy that provides effective diversification
in the sources and tenor of funding. It should maintain an ongoing presence in its chosen
funding markets and strong relationships with funds providers to promote effective
diversification of funding sources. A bank should regularly gauge its capacity to raise funds
quickly from each source. It should identify the main factors that affect its ability to raise
funds and monitor those factors closely to ensure that estimates of fund raising capacity
remain valid.
Principle 8: A bank should actively manage its intraday liquidity positions and risks to meet
payment and settlement obligations on a timely basis under both normal and stressed
conditions and thus contribute to the smooth functioning of payment and settlement systems.
Principle 9: A bank should actively manage its collateral positions, differentiating between
encumbered and unencumbered assets. A bank should monitor the legal entity and physical
location where collateral is held and how it may be mobilised in a timely manner.
Principle 10: A bank should conduct stress tests on a regular basis for a variety of short-term
and protracted institution-specific and market-wide stress scenarios (individually and in
combination) to identify sources of potential liquidity strain and to ensure that current
exposures remain in accordance with a bank‘s established liquidity risk tolerance. A bank
should use stress test outcomes to adjust its liquidity risk management strategies, policies,
and positions and to develop effective contingency plans.
Principle 11: A bank should have a formal contingency funding plan (CFP) that clearly sets
out the strategies for addressing liquidity shortfalls in emergency situations. A CFP should
outline policies to manage a range of stress environments, establish clear lines of
responsibility, include clear invocation and escalation procedures and be regularly tested and
updated to ensure that it is operationally robust.
Principle 12: A bank should maintain a cushion of unencumbered, high quality liquid assets
to be held as insurance against a range of liquidity stress scenarios, including those that
involve the loss or impairment of unsecured and typically available secured funding sources.
There should be no legal, regulatory or operational impediment to using these assets to obtain
funding.
D. Public disclosure
Principle 13: A bank should publicly disclose information on a regular basis that enables
market participants to make an informed judgment about the soundness of its liquidity risk
management framework and liquidity position.
106
E. The role of supervisors
Principle 14: Supervisors should regularly perform a comprehensive assessment of a bank‘s

overall liquidity risk management framework and liquidity position to determine whether
they deliver an adequate level of resilience to liquidity stress given the bank‘s role in the
financial system.
Principle 15: Supervisors should supplement their regular assessments of a bank‘s liquidity
risk management framework and liquidity position by monitoring a combination of internal
reports, prudential reports and market information.
Principle 16: Supervisors should intervene to require effective and timely remedial action by
a bank to address deficiencies in its liquidity risk management processes or liquidity position.
Principle 17: Supervisors should communicate with other supervisors and public authorities,
such as central banks, both within and across national borders, to facilitate effective
cooperation regarding the supervision and oversight of liquidity risk management.
Communication should occur regularly during normal times, with the nature and frequency of
the information sharing increasing as appropriate during times of stress.
Source: Basel Committee on Banking Supervision (September, 2008)
E5 Sound Practices for the Management and Supervision of Operational Risk
A. Developing an Appropriate Risk Management Environment
Principle 1: The board of directors4 should be aware of the major aspects of the bank‘s
operational risks as a distinct risk category that should be managed, and it should approve and
periodically review the bank‘s operational risk management framework. The framework
should provide a firm-wide definition of operational risk and lay down the principles of how
operational risk is to be identified, assessed, monitored, and controlled/mitigated.
Principle 2: The board of directors should ensure that the bank‘s operational risk management
framework is subject to effective and comprehensive internal audit by operationally
independent, appropriately trained and competent staff. The internal audit function should not
be directly responsible for operational risk management.
Principle 3: Senior management should have responsibility for implementing the operational
risk management framework approved by the board of directors. The framework should be
consistently implemented throughout the whole banking organisation, and all levels of staff
should understand their responsibilities with respect to operational risk management. Senior
management should also have responsibility for developing policies, processes and
procedures for managing operational risk in all of the bank‘s material products, activities,
processes and systems.
107
B. Risk Management: Identification, Assessment, Monitoring, and Mitigation/Control
Principle 4: Banks should identify and assess the operational risk inherent in all material
products, activities, processes and systems. Banks should also ensure that before new
products, activities, processes and systems are introduced or undertaken, the operational risk
inherent in them is subject to adequate assessment procedures.
Principle 5: Banks should implement a process to regularly monitor operational risk profiles
and material exposures to losses. There should be regular reporting of pertinent information
to senior management and the board of directors that supports the proactive management of
operational risk.
Principle 6: Banks should have policies, processes and procedures to control and/or mitigate
material operational risks. Banks should periodically review their risk limitation and control
strategies and should adjust their operational risk profile accordingly using appropriate
strategies, in light of their overall risk appetite and profile.
Principle 7: Banks should have in place contingency and business continuity plans to ensure
their ability to operate on an ongoing basis and limit losses in the event of severe business
disruption.
C. Role of Supervisors
Principle 8: Banking supervisors should require that all banks, regardless of size, have an
effective framework in place to identify, assess, monitor and control/mitigate material
operational risks as part of an overall approach to risk management.
Principle 9: Supervisors should conduct, directly or indirectly, regular independent evaluation

of a bank‘s policies, procedures and practices related to operational risks. Supervisors should
ensure that there are appropriate mechanisms in place which allow them to remain apprised
of developments at banks.
D. Role of Disclosure
Principle 10: Banks should make sufficient public disclosure to allow market participants to
assess their approach to operational risk management.
Source: Basel Committee on Banking Supervision (February, 2003)
108
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109
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Risk Management and Supervision‖, Bank for International Settlements, Basel.
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Internet Links
 2009 Annual Report of Ecobank Ghana Limited:

http://ecobank.com/upload/20100428060727184928F94BDgEKVH.pdf
 Ghana Banking Act 2004, Act 673:
http://www.bog.gov.gh/privatecontent/File/IDPS/Banking%20Act%20673.pdf
 2009 Annual Report of Bank of Ghana:
http://www.bog.gov.gh/privatecontent/public/File/Research/Annual%20Reports/AnnRep2009
/Bank%20of%20Ghana%20Annual%20Report%202009.pdf
 2010 Ghana Banking Survey by PricewaterhouseCoopers in collaboration with Ghana
Association of Bankers: http://www.pwc.com/en_GH/gh/pdf/ghana-banking-survey-2010.pdf
 BBC: http://news.bbc.co.uk/2/hi/8208932.stm
 Central Bank of Nigeria: www.cenbank.org
 Gold Coast Securities Limited: http://www.gcsinvestments.com/fin-
GhanaStockHistory.php?companyid=33
112

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A RISK-BASED ASSESSMENT OF

ECOBANK GHANA LIMITED (EGH)

Master’s Thesis towards the award of

Master of Science degree in Economics and Business Administration

(CMFSM - Finance & Strategic Management)

at Copenhagen Business School

Author of paper: KWASI MENAKO ASARE-BEKOE

Counselor: JENS BORGES, External Lecturer

I thank all my friends and well-wishers. God be with you all.

TABLE OF CONTENT ............................................................................................................. 3

LIST OF TABLES ..................................................................................................................... 7

LIST OF FIGURES ................................................................................................................... 8

EXECUTIVE SUMMARY ....................................................................................................... 9

CHAPTER ONE - INTRODUCTION..................................................................................... 11

1.0 BACKGROUND OF STUDY .................................................................................. 11

2.0 INTRODUCTION ..................................................................................................... 17

2.7 THE PLACE OF CORPORATE GOVERNANCE IN THE MANAGEMENT OF

3.0 INTRODUCTION ..................................................................................................... 38

4.0 INTRODUCTION ..................................................................................................... 44

4.6. INTEREST RATE RISK .......................................................................................... 62

5.0 INTRODUCTION ..................................................................................................... 65

6.0 INTRODUCTION ..................................................................................................... 79

APPENDIX B: Comparative Financial Statements of EGH for 2007 - 2009 ......................... 86

APPENDIX C: Bloomberg L. P ratings and Stock Trends ..................................................... 89

APPENDIX D: Tables and Charts for Risk Profile Assessment ............................................. 90

REFERENCES ...................................................................................................................... 109

Table 3.1: Ratios in assessing bank risks ................................................................................. 39

Table 4.1: Capital adequacy and off-balance sheet measures.................................................. 47

Table 4.2: Customer loans distribution by borrower group ..................................................... 53

Table 4.3: Loan loss coverage ................................................................................................. 56

Table 4.4: Maturity Ladder ...................................................................................................... 58

Table 5.1: EGH‘s internal risk rating system........................................................................... 66

Table 5.2: VAR limits at various levels ................................................................................... 72

Figure 4.3: Profitability & efficiency indicators ...................................................................... 50

Figure 4.4: Sources of Income versus Operating Costs ........................................................... 50

Figure 4.5: 50 largest exposures .............................................................................................. 52

Figure 4.6: Sectoral allocation of loans ................................................................................... 53

Figure 4.7: Customer loans by products .................................................................................. 54

Figure 4.9: Loan Quality .......................................................................................................... 56

Figure 4.10: Related party information .................................................................................... 57

Figure 4.11: Funding soucres ................................................................................................... 59

Figure 4.12: Customer deposits by type .................................................................................. 59

Figure 4.13: Trend of Cash flows ............................................................................................ 60

Figure 4.14: Trends in liquidity ratios ..................................................................................... 62

Figure 4.15: Interest rates repricing gap .................................................................................. 63

Figure 4.17: Currency Risk : Currency Exposure as % of Qualifying Capital ........................ 64

Figure 5.1: A diagrammatic illustration for measuring expected loss ..................................... 68

CHAPTER ONE - INTRODUCTION

1.0 BACKGROUND OF STUDY

1.1 JUSTIFICATION OF CHOICE OF INSTITUTION

Table 1.1: Summary of EGH‘s performance in Ghanaian banking industry

Figure 1.1: Performance of Ecobank Ghana Limited on Ghana Stock Exchange

1.2 INTRODUCTION OF COMPANY

1.3 STATEMENT OF THE PROBLEM

1.4 OBJECTIVE OF THE STUDY

1.5 SIGNIFICANCE OF THE STUDY

1.6 SCOPE AND LIMITATION OF THE STUDY

In conducting a risk-based analysis of Ecobank Ghana Limited, information was mainly

1.7 ORGANISATION OF THE STUDY

CHAPTER TWO - LITERATURE REVIEW

2.1 RISK MANAGEMENT IN BANKING

Risk management is described as the performance of activities designed to minimise the