All over the world, in advanced economies and growing economies, a strong banking sector is a necessary driver for economic growth and development.
The more we say is better. Though that may not hold true for all aspects of life, it proves to be true for banks. The more cash they hold the better. Until now it looks as if banks in Ghana are not adequately capitalized to withstand shocks. Prior to the global financial crises, global banks thought liquidity was in bottomless supply and therefore got away with holding liquid assets as low as 6% of their assets. The crises was however to change everything and from then on a series of regulatory adjustments and more stringent stress tests to point where banks complain of over-regulation. Ghana is having our fair share of regulatory shake ups of our banking sector. First the closing of ailing banks and secondly the upward adjustment of their capital requirement.
Capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets.
The raise in minimum capital requirement is not a new thing to the sector; the first time in the last decade where banks in Ghana were required to raise their minimum regulatory capital was in 2008. The regulator increased the minimum regulatory capital from GHS7 million to GHS60 million. This time around the central bank is requiring all banks to recapitalize to GHS400 million (USD 100 million). This new measure by the regulator who among other reasons sets its primary objective of pursuing sound monetary policies aimed at price stability and creating an enabling environment for sustainable economic growth. This new figure of 400 million cedis represents 233 percent rise from the current 120 million cedis.
By end-December 2016, the sector comprised thirty-three (33) banks, of which sixteen (16) were domestically controlled and the remaining seventeen (17) were foreign-controlled. In total, the bank branch was 1,342 branches distributed across the ten (10) regions of the country. Some analysts believe this new minimum capital requirement will force some mergers and acquisitions which will see total number of banks in the country dropping. This will enable local banks to undertake some big ticket transactions.
Minimum capital is a concept used in corporate law and banking regulation to stipulate what assets the organization must hold as a minimum requirement.
According to the Bank of Ghana Banking Sector Report in January 2017; “The performance of the banking sector remained strong, underpinned by relatively strong asset growth and marginal improvement in liquidity in 2016. Asset growth was largely driven by increases in banks’ investment portfolio and foreign assets. Banks’ solvency, as measured by the Capital Adequacy Ratio (CAR) recorded no significant change and remained well above the required threshold over the review period. Asset quality, however deteriorated within the year, although the last quarter of 2016 reflected some improvement following the restructuring, reclassification and commencement of repayment of the energy related State Owned Enterprises (SOEs) debts owed banks.”
Samuel Bediako-Asante is a financial consultant and CEO of SAMBED Consult believes there should be a road map for banks to be meeting a quarter of the additional GHS280 million i.e. GHS 70 million quarterly basis from January, 2018 in order to meet the GHS 400 minimum capital by December, 2018. He believes the figure is lower and may hamper the goal of achieving mergers and acquisitions.
A credit consultant, Emmanuel Akrong asserts that an increased capital requirement is good for the sector. “Having more capital helps banks better absorb adverse shocks and thus reduces the probability of financial distress, more capital would also reduce bank risk-taking incentives and thus improve investment efficiency and overall welfare and A strong banking sector boost economic growth attracts foreign direct investment and increases business confidence.”
President of the Association of Bankers, Alhassan Andani, is also worried about banks that recently started operations and lower tier banks.
He said: “There are new banks that have come in and shareholders have come up with what they think they can afford and that might be an immediate stress.
Ghana Talks Business analyst however sees the push for good governance ahead of capital requirement adjustments. Much as the new capital requirement for banks is expected to bring more stability and capacity for big ticket transactions, the suspiciously weak ‘textbook’ governance of the industry could bring more devastating effects as bigger banks would now collapse. Another area to watch is the high probability of financial exclusion by the big. There is empirical evidence to prove that the ‘big’ banks don’t really do much about financial inclusion and can only be cited in areas of commercial rewards. The danger is for the neglect of the unbanked and possibly the SME sector who always carry higher risks. If this recapitalization is handled well banks will be in good position to play major roles in government’s flagship infrastructural drive- One District One Factory, there are some big oil projects in offing which will need some strong financial backing, a stronger local banking scene can capitalize on this. These move play in part to the expanding local economy and a measure like this by the regulator will sanitize the financial sector to take full advantage of for economic growth and development.