There appears to be a general agreement within the expert community for Bank of Ghana (BOG) to raise the minimum capital requirements for commercial banks in Ghana. The Bankers Association, civil society groups, economists, business executives and many others have all added their voice to the call.
The reasons given for this call have become known to us: increased minimum requirements will make the banks more resilient; enable the banks underwrite large ticket transactions; push the banks to lend long-term; and just by reason of simple best practice in respect of comparison of the number of banks in other economies in Africa and the World.
So there is a general agreement. The only area of little differences is just the figure to be used as the new capital requirements. Various figures have been thrown into the debate including GHC200m, GHC250m and some have even proposed GHC500m, GHC 800m and GHC1bn with the simple reason that some of the banks are already operating with capital in the region of GHC200m-GHC250m.
But this article is absolutely not about challenging the expert opinions. I am generally also in agreement with the experts and I believe BOG itself triggered the debate and they appear inclined to an increase in the minimum capital requirements.
This article aims to caution that there are long term grave implications for continuously increasing the minimum capital requirements without any special consideration in respect of the local banks. Quite paradoxically, our dream of industrializing the Ghanaian economy may be difficult to realise if we continue to incessantly increase minimum capital requirements. Such moves will eventually hand over our financial services industry to foreigners. Look here, the profit targets given to CEOs/MDs of foreign banks are denominated in foreign currencies notably the British Pound, Euro and US Dollar. These banks are, thus, overly hungry for interest income. Interest income is a function of the size of the advances book and interest rates. Have you wondered why we have not been able to succeed at influencing banks to reduce lending rates for businesses? The much touted Policy Rate has unsurprisingly failed in influencing banks to reduce their lending rates. Recently there was lots of expectations of reduction in lending rates when BOG reduced the Policy Rate by 200 basis points. What has become of that? Foreign banks’ hunger for interest income to meet their foreign currency denominated profits targets will not allow them to give significant cut in their interest rates. For example Barclays Bank Ghana Ltd posted a profit of about GHC300m for the 2016 financial year. This may sound big but it is only about GBP 55.6m ( @ 5.4 /GBP). The bank posted interest income of about GHC560m, interest expense of about GHC93m and net interest income of about GHC467m meaning a gross margin of 83.4%. Tell me what business in this world you will do to post this gross margin. Their Net Profit of about GHC300m gives a net margin of about 54%. Again tell me which legitimate business in the corporate world delivers this kind net margin. But I still even pity them because all this results might not mean much when converted into British Pound Sterling.
So as long as foreign banks continue to dominate the banking industry in Ghana, our hope of industrializing this economy might continue to elude us. Cost of credit (assuming the credit is even available) has always remained among the top three challenges facing industry in this country. Until 2016 when high cost of utilities, multiplicity of taxes and steep depreciation of the currency became the leading concern of industry, cost of credit has always remained among the top three over the years as a key challenge facing industry. Many have even called for government intervention in compelling banks to reduce their lending rates.
As a nation, continuous increase in Policy Rate means we are on a path to hand over the financial sector to the hands of foreigners. Once we complete this hand over, our dream of industrialization is buried. Local business development will continue to be a challenge. Their justifiably hunger for interest income to meet their foreign currency denominated profits targets will not allow them to follow prime rate, or at least follow it if it suits them.
Does this mean raising minimum capital requirements for banks is a bad idea? Not exactly. But we need to take a special look at local banks. There are two things we can do. First we can learn from the universities which have different fees for foreigners and local students. This means having different capital requirements for foreign and local banks. We can even take it further to talk about adequate capital that covers your business underlying risks.
The second thing we can do and which is my preferred option is to use tax payers’ money to heavily capitalize local banks. This will be a better indirect investment for the tax payer than all the billions of cedis wasted every fours years on Toyota Land cruiser V8s and through unthinkably bloated projects. Over the years we have spent billions of cedis constructing cocoa roads and we are still on it. We could sacrifice some of such funds and capitalize every local bank to a minimum of GHC2.0bn. This is not much and we can do it in a span of 2 to 3 year period. Once we heavily capitalize these local banks, they have every muscle to use competition to drive down the lending rate because the profits targets of local banks are cedi denominated. They can lend long and at rate which properly reflects their average cost of funds and business risks. Once rates are driven down and foreign banks declare scanty foreign currency denominated profits, shareholders of these banks may get disinterested in our markets and sell their shares to local banks. The financial service industry now becomes in the hands of locals. I believe this is how a nation should set an implicit agenda to reverse foreign dominance in any sector back to locals. Let us remember that these local banks have taken a lot of risks, lending to unchartered, non- traditional areas whilst large foreign banks stay in their comfort zone. All of these local banks have burnt their fingers badly in their attempt to support undeveloped indigenous businesses. Yet they continue to learn, understand and lend.
Let us understand that foreign dominance in our financial services sector has long term negative business development implications. For example once banks continue to lend short and at such high rates, locally produced goods will continue to be expensive. Industry cannot borrow at such astronomical rates and expect to price their products competitively. As a result we will continue to consume foreign goods and thereby keep creating jobs for youth of foreign nations whilst unemployment keeps starring at us. The new government has enumerated several industrial development initiatives. For the long term sustainability of these industries, we as a state should begin a strategy to heavily capitalize our local banks using tax payers’ money. In any case, even advanced economies have spent hundreds of billions of tax payers’ money to bail out ailing banks. They had their own objective to achieve with the bail plan. Our objective is different; but the source of the capital is tax payers’ money. The high unemployment in this country is more linked to the attitude of banks than the so much talked about low quality graduates churned out by our universities.
Author: Jacob K. Ganye