After banking sector recapitalisation, what next?

As the clock ticks to the December 2018 deadline for universal banks to increase their minimum paid-up capital, some banks are at the final stage of meeting this regulatory requirement. The Bank of Ghana (BoG), in accordance with Section 28 (1) of the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930), revised upward the minimum paid-up capital for existing banks and new entrants from GH¢120million to a new level of GH¢400million from the effective date of 11th September 2017.  The aim of recapitalisation, according to the BoG, is to “further develop, strengthen and modernise the financial sector to support government’s economic vision and transformational agenda”.

With this directive, banks have three options to raise additional capital, thus;

  1. a) Fresh capital injection
  2. b) Capitalisation of income surplus
  3. c) A combination of fresh capital injection and capitalisation of income surplus

The central bank Governor, Dr. Ernest Addison, at the 85th MPC meeting held on 26th November 2018 hinted that “22 banks have virtually met the minimum capital requirement”.  Despite the majority of banks meeting the regulatory capital requirement, the central bank has identified some challenges in the banking industry which include: high Non-Performing Loans (NPL) ratios; relatively high level of concentration of exposures in a few banks.

Others are related party exposures; weaknesses in some specialised deposit-taking institutions; and the high level of interconnectedness both among group structures and across the various sub-sectors in the financial sector. These challenges need urgent attention to prevent future bank failures. The BoG has already revoked the licences of 7 failed banks as a result of poor corporate governance practices, insider dealings, misreporting etc., and appointed receivers for those banks.

Ghana’s Extended Credit Facility (ECF) programme with the IMF has positively impacted the banking industry. In July 2016, Parliament passed the Banks and Special Deposit-Taking Institutions Act 2016 Act 930. The law, among others, seeks to amend and consolidate the laws relating to deposit-taking and to regulate institutions which carry out deposit-taking business. It also re-emphasises the BoG’s authority as the only entity responsible for granting licenses to enable deposit-taking business in the country. Linked to this is passage of the Deposit Protection Act, 2016 (Act 931): this law among others seeks to provide a safety-net for vulnerable depositors in the event of a bank failure.

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Another landmark milestone is amendment of the Bank of Ghana Act. In August 2016, the Parliament of Ghana passed the Bank of Ghana Amendment Act 2016, Act 918, which was a key requirement for a successful fourth IMF review under the ECF programme. The objective of the amendment is to significantly strengthen the central bank’s functional autonomy, governance and ability to respond to banking sector crises.

The question still remains ‘After banking sector recapitalisation; what next?’  In 2003, the BoG rolled out a universal banking licencing regime to replace the three-pillar banking model – development, merchant and commercial banking. The new licencing regime lifted restrictions on the type of banking business that banks can do or the type of customers that they can engage, while allowing all the banks to conduct retail banking. This also levelled the playing field and opened up the system to competition, product innovation and entry. In practicing the universal banking licencing regime for fifteen (15) years, can we conclude that it has achieved its objectives or otherwise?

In a World Bank report titled ‘Gains in Financial Inclusion, Gains for a Sustainable World’ released in May 2018, it is reported that 7,310,000 people in Ghana do not have any form of financial account (mobile money account or bank account). This estimate corroborates the Global Findex Database, which also pegs the non-banked adult population in Ghana at 7 million.

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According to the BoG, there are 30 Universal Banks excluding ARB Apex Bank Ltd., 144 Rural and Community Banks, and 484 Microfinance Institutions (MFIs). Comparing the number of financial institutions with the huge unbanked population, low disbursement of credit to the private sector coupled with high cost of credit, there should be significant regulatory reforms in the banking industry.

The BoG has a mandate to ‘formulate and implement policy to achieve price stability, contribute to the promotion of and maintenance of financial stability, and ensure a sound payment system’. The role of the monetary authority should augment and complement that of the fiscal authority to spur economic growth. On that premise, permit me to pose these legitimate questions:

“How is government aligning its policy of industrialisation and agriculture modernisation to the current reforms in the banking industry? Again, are we going to see banks doing ‘business as usual’ without performing the essential duty of supporting productive sectors of the economy and financing big-ticket projects? After recapitalisation, are we going to have strong indigenous banks that can expand outside of this jurisdiction, as happened after Nigeria’s banking sector recapitalisation in 2005?”

Another issue that is worthy of mention is the institutional collaboration between the BoG, Securities and Exchange Commission (SEC), National Insurance Commission (NIC), National Pensions Regulatory Authority (NPRA) to boost growth in the financial industry.  Going forward, effective collaboration between these regulatory authorities and other stakeholders will consolidate gains made so far in reforming the banking industry. Banks don’t operate in isolation; they are indeed the fulcrum around which economic activities revolve. As Ghana enjoys macroeconomic stability, the current banking reforms should be a catalyst to consolidate the gains made so far.

Emmanuel Amoah-Darkwah Ch.E

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