Bank of Ghana tightens rules on financial outsourcing

ACCRA, GHANA—The Bank of Ghana (BoG) recently released a directive aimed at all Regulated Finance Institutions (RFIs) in the country. The directive provides guidelines on how to manage the risks associated with outsourcing activities effectively. 

This move comes as financial institutions increasingly turn to third-party service providers to reduce costs and enhance operational efficiency.

Concerns over increased outsourcing in financial sector

According to the BoG, RFIs — which include banks, specialized deposit-taking institutions, financial holding companies, and development finance institutions — have increasingly outsourced various functions. 

Initially, outsourcing was limited to non-core activities like payroll processing. However, the BoG noted that this trend has expanded to critical areas such as information technology (IT), human resources, accounting, and even financial technology (FinTech) services.

In its 50-page directive, the BoG stated that “RFIs are adapting their business models, processes, and systems to embrace such technologies.”

The central bank emphasized that while outsourcing can offer operational benefits, it also introduces significant risks.

Key risks highlighted by BoG

The BoG’s directive warns that outsourcing IT and data services can expose RFIs to various risks, including information security threats, weakened internal controls, and challenges in data management and protection. The central bank stressed that outsourcing critical functions—especially to unregulated or overseas entities—could increase an institution’s risk profile.

“Outsourcing must not lead to a situation where an RFI becomes an ‘empty shell’ that lacks the substance to remain licensed,” the BoG cautioned.

Board oversight and risk management

To mitigate these risks, the BoG has instructed RFIs to ensure that their boards and senior management fully understand the risks involved in outsourcing. 

Effective risk management policies must be implemented to oversee these arrangements. The central bank will also assess the impact of outsourced services during its risk evaluations of RFIs.

“In view of the foregoing, the BoG will consider the impact of outsourced services when conducting a risk assessment of an RFI,” the directive noted.

Alignment with international standards

The new guidelines align with Principle 25 of the Basel Core Principles for Effective Banking Supervision (BCP), which focuses on operational risk and resilience. The BoG’s directive aims to ensure that RFIs maintain robust internal controls while leveraging external services for operational efficiency.

By issuing this directive, the BoG seeks to safeguard the financial sector from potential systemic risks posed by increased reliance on third-party service providers.

Global concerns over financial outsourcing risks

Ghana is not the only country issuing directives against outsourcing risks in the financial sector. In November 2023, Switzerland’s Financial Market Supervisory Authority (FINMA) flagged outsourcing as a principal risk facing financial institutions. In its Risk Monitor 2023 report, FINMA warned that transferring essential functions to third parties introduces significant operational dangers, particularly in cybersecurity. Outsourcing critical systems to vendors may also limit visibility into IT controls and incident response capabilities.

Similarly, earlier this year, the European Central Bank (ECB) issued a stern warning about banks’ growing reliance on external service providers. The ECB emphasized that banks must better manage outsourcing risks, especially concerning personal data handling and supply chain complexities. The ECB also highlighted concentration risks from over-reliance on a limited number of vendors.

In July 2024, India’s Reserve Bank Deputy Governor M. Rajeshwar Rao echoed similar concerns about increasing third-party dependencies in financial services. Rao warned that inadequate management of these relationships could lead to vendor lock-in situations and heightened cybersecurity risks.

By issuing this directive, the BoG joins a global effort to safeguard financial institutions from potential systemic risks posed by increased reliance on third-party service providers.