Re-capitalisation: other vital ingredients


The central bank has minced no words in its determination to ensure that all the licensed universal banks increase their capital to a minimum of GHS400 million by 31st December 2018.

This comes on the heels of the plea from some of the indigenous banks for the president to step into the discussion. This has implications for the potential disturbance to the independence of the central bank from executive influence. The president has to ride a tight rope in his attempt to listen to the cries for leniency from the indigenous banks.

Capital adequacy for resilient banking

The adequacy of capital for running a bank cannot be disputed. The Basel accords reinforce this requirement so emphatically, with Basel 111 now focusing especially on the place of liquidity in bank management. It is also understandable when the central bank is seen to be resolute in digging its feet deep on the re-capitalisation issue, seeing how the inadequacy of capital has been the bane of the local banks that floundered lately.

This article seeks to shed light on other equally important dimensions of the re-capitalisation debate. These must be pursued with the same vigour as the insistence on the deadline for meeting the minimum capital requirement.

The depletion in the capital levels of the banks which have become defunct and those hanging loosely on inadequate capital must be seen to be an effect, rather than a cause of the distress. To this writer, the fundamental causes of the inadequate capital can be traced principally to bad corporate governance practices, regulatory inertia and, to some extent economic malaise reflecting in exchange rate instability.

The panacea to addressing the continuous decay in the financial might of the banks must therefore be focused on the real causes of the debacle rather than the symptoms or the effects of the decay. We have had to recapitalize from GHS. 60million at one time. This was found to be inadequate in no time, hence the raising of the bar to GHS120million.

Subsequent events have clearly demonstrated the need to raise the minimum capital further to GHS. 400 million to provide adequate shock absorbers and align with growth in the country’s GDP. It is suggested however, that no amount of re-capitalisation would be adequate unless we address the bad governance practices that permitted the defunct banks to engage in poor credit management practices and  culminated in the high non-performing loans.



Capital erosion

Drilling down to the causes of the high non-performing loans will reveal that the defunct banks had a penchant for funding diverse subsidiaries that were pampered with preferential loans against less rigorous credit evaluation criteria.

The other critical issue had to do with naked conflict of interest situations where facilities were granted to associates of board members or organizations in which directors had substantial interest. Against this background, which internal auditor or risk manager could gather the courage to   shoot down the loan proposals or point to signs of decay subsequently?

Even in the face of palpable decay, it would be preposterous for these officials who are supposed to be independent of executive management to point out flawed loan evaluations or visible signs of decay in the loan performance for critical remedial measures to be enforced. Compounding the scenario is the situation where the CEO or board chairman wields too much power or combines the roles of chief executive officer and board chairman simultaneously, while holding majority shares.

Another issue that affected the failed banks had to do with the lack of understanding of liquidity management and balance sheet appraisal. Where executives fail to appreciate the delicate balance between earning assets and non-earning assets, liquidity would be easily impaired. This was particularly evident in the scramble for properties in plush areas of the city, notably East Legon and Airport Residential Areas with management oblivious of the stark reality that the bank was dealing with relatively short-term deposits of customers. Establishing too many subsidiaries and pampering them with resources for pre-mature growth was another factor.

Even seemingly strong banks find it difficult to handle the heavy rental and other related expenses covering their corporate head offices in the plush areas of the city. In the absence of very strong and sustainable income streams, it is suicidal for a bank borrowing heavily in the inter-bank market for core operations to simultaneously hold on to too much non-earning assets, in the form of flamboyant corporate offices, other landed properties and other non-core banking assets. This usually comes with a fleet of operational vehicles too costly to maintain. Surprisingly the culprits in this observation are the same banks with weak balance sheets and low capital adequacy levels now pleading for leniency on the re-capitalisation deadline.

Regulatory lapses

Regulatory ineptitude also contributed significantly to the demise of the two banks and lately the employment of administrators to steer Unibank Limited out of stormy waters. The lessons in contemporary Ghanaian banking failures are similar to the issues that precipitated the American financial crises of 2006-2008, particularly regarding the creation of toxic assets.

The irony is that even in the face of the abundant literature on the causes of the crises, we in Ghana,(from the corporate board rooms of the individual banks and stretching to the corridors of the central bank), do not seem to have learnt enough from the crises and are still laboring under the same issues. The scourge of poor corporate governance practices and regulatory inadequacies still bedevil banking operations.

One cannot however ignore the measures that the central bank has instituted, especially in the corporate governance space to ensure that the right things are done going forward. However, considering the depth and width of the issues prevalent in the local banking landscape, one is forced to surmise that fixing attention predominantly to the raising of additional capital requirements, without vigorously pursuing the other equally pertinent factors that continue to weaken the financial landscape would be like chasing the wind.

Vigorous implementation of the guidelines is expected, especially in the area of sanctions for breach of policy; otherwise, even if all the banks were to miraculously come up with GHS.800 million as minimum capital, this would still be depleted in a few years. No amount of capital can insulate the banks from distress unless the underlying causes of the poor loan repayment, unethical boardroom practices and weak exchange rate regime are fundamentally tackled, with the people factor taking centre stage.

It is easy to conclude that the bigger the bank’s capital, the better it is positioned to absorb shocks. It must be recognised, however that shocks come in different frequencies and magnitude. These depend on the direction of the capital deployed, the risk profile of assets, board competencies and the prevalent business cycle.

Merge or die mantra

The suggestion for forced amalgamations between or among unwilling partners with different missions and visions appear to be simplistic. It is like marrying a partner out of pity or coercion. The result is not always harmonious. I am not against amalgamations per se. My worry lies in the spontaneity associated with the current suggestions. The views seem to ignore the real integration challenges embedded in the differing organizational cultures of the merged entities.

The “merge or die mantra” must recognize that mergers are not some mechanistic exercises that can cure all the ills plaguing the local banks. We must also appreciate how long it would take to stabilize the terrain after the merger under a coercive environment. Post integration challenges can be managed but we should not under estimate them in the current discussions.

Going forward, closer attention must be focused on strengthening the supervisory space to enable the regulator, especially the Banking Supervision Department and Research units of the central bank to deepen their policing mechanisms. It is helpful to charm the snake before it bites not afterwards. This requires inculcating strong corporate governance structures in the banks. This must be complemented by effective regulatory oversight to identify early warning signals that would stem practices which often lead to the erosion of the small banks’ capital bases.

Mechanisms must be in place to promptly identify signs of decay in the asset quality of the individual banks, their liquidity profiles, the direction and degree of risk exposures, even from the returns that are submitted, before on-site inspections are conducted to confirm observations.

It appears to this writer that much of the board room confusion about the adequacy of a bank’s capital revolves around how this risk indicator is measured. It is usual for internal management to risk weight their assets favourably.

The individual bank management and board thus, depend on their own economic capital computations with lower risk- weighting to run riot of their risk appetite levels, without considering that the regulatory capital, as computed by the central bank overrides the internal assessments.

If internal management and board were to appreciate how capital may be diluted by rising non-performing loans, they would be wary of extending generous facilities to associated companies, even when the latter are not performing to expectations.

Excessive ambitions

It is too early in the day, but this writer cannot fail to notice the seeming rush to acquire subsidiaries and imposing branch and office buildings by some of the late entrants to the banking community. Their penchant for speculative and flamboyant fixed properties across the city must take cognizance of the additional capital which they appear to be busy finding intercessors rather than looking inward to consider how even the current capital is being deployed.

Someone needs to tame the risk appetite of these banks and remind them that we have trod on this slippery slope before with disastrous consequences. If shareholders’ funds cannot fund these assets, customer deposits should not be used for such acquisitions. A strong and knowledgeable board should raise their oversight responsibilities to the next level and spare stakeholders any potential heart aches prematurely.

Organic, measured growth takes time but it is worthwhile in the end. At the risk of sounding patronizing, I would recommend the new entrants to the sustainable growth trajectory of CAL Bank Ltd. Meeting most of their additional capital requirements by ploughing back retained earnings reflects judicious management of resources. Similarly expanding branch networks by using part of the under-utilised spaces of the Ghana Post Company Limited by Fidelity Bank Ltd. appears to me to be a cost effective (capital conservation) strategy worth emulating.

In the current technological dispensation, investment in appropriate technology and skilled personnel by bank management should be paramount, not imposing buildings.

Interestingly we live in a financial community where the sheer flamboyance of bank branches rather intimidates a segment of the population (especially in the SME market). These potential customers   perceive that these “big” institutions are not meant for their “meager” deposits nor can they access facilities from these banks, Paradoxically the same banks spend huge sums of money to attract this group of potential customers.

Prudent banking

Core banking principles are principally about prudence, conservatism, optimal balance between risk and return, assets and liabilities matching, timing of cash flows and liquidity. An appropriate balance between earning and non- assets to protect capital, and a large dose of honesty and integrity to cement customer confidence are other enabling factors.

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