An insight into the recent banks’ consolidation

Recently the banking sector in Ghana has undergone massive transformation which has resulted in some powerful banks acquiring others while others also consolidate.

For instance, in the year, 2012, two major acquisition took place: Ecobank Transnational Inc. (ETI) reported the acquisition of The Trust Bank Ghana Limited (TTB) and Access Bank Ghana acquired Intercontinental Bank.

Various reasons have accounted for this consolidation. The 2012 acquisitions were executed in anticipation that the merged banks would be better positioned to help the development and advancement desires and the expanding monetary necessities of the Ghanaian economy.

In August 2017, the Bank of Ghana (BOG) approved the acquisition of UT Bank and Capital Bank by GCB Bank under a Purchase and Assumption Agreement.  A year later in August 2018, the BOG has merged five banks (BEIGE, Sovereign, Construction, UniBank and Royal Bank) into a Consolidated Bank of Ghana Limited.

BOG as enshrined in the Bank of Ghana Act, 2002 (Act 612) and the new Banks and Specialized Deposit-Taking Institutions Act, 2016 (Act 930) is mandated to supervise and regulate all deposit-taking business in Ghana and also to prescribe the minimum paid-up capital for banks and specialized deposit-taking institutions (SDIs).

The 2017 U.T and Capital bank takeover by GCB became necessary because according to the BOG, there was a likelihood of severe impairment. The two banks were heavily deficient in capital and liquidity and their continuous operation would have posed a detrimental effect to their financial system and may put depositors’ funds at risk.

The 2018 consolidation of five banks into one according to BOG is due to numerous reasons ranging from some banks being undercapitalized, some others obtaining license through false pretense and high ratio of nonperforming loans[1] . With the 31st December ultimatum issued by BOG whereby banks in Ghana are required to keep a stated capital of not less than 400million cedis, it is predicted that numerous banks will not be able to raise the said capital and hence more consolidation and mergers are expected to occur in the Ghanaian banking sector.

A recent disclosure by the BOG governor on Monday July 23, 2018 revealed that at least nineteen (19) banks will have to resort to various options available to them to meet the minimum capital by the set deadline.

This means that these 19 banks in order to be in operations will have to either find ways to raise the said minimum capital or consolidate with other banks. The assertion by the BOG that only 19 banks might meet the capital requirements implies that the number of banks in Ghana will reduce from over 30 to a little over 15.

Consolidation may serve as an advantage to the banks involved because it can create both financial and cost synergy. Again, by consolidating the debt of the various banks involved, they will be able to restructure their payment plan into a longer period.

Despite the advantages that consolidation may bring, it is also likely that it will pose detrimental effects on the banking industry, customers of the banks as well as the economy as a whole. Therefore, in this article we delve on the challenges that breeds out from consolidation to the banking industry, customers and the general economy.

 

  1. Effect on Shareholders

Consolidation is likely to cause a dilution of voting powers as a results of increased number of owners. Whenever there is consolidation, all the shares of the various banks are merged.

The recent consolidation in the Ghanaian banking industry is likely to increase the number of shareholders at the consolidated bank thereby affecting the major shareholders voting rights prior to the consolidation.

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Secondly, since consolidation results in institutional operational changes, previous shareholders appointed as board of directors are likely to lose their jobs because the new administration will appoint new governing bodies.

The consolidation of 5 banks in Ghana means that there will be only one governing board as compared to previously different governing board for each bank. Another effect of consolidation on shareholders is the likelihood of shareholders losing their amount invested.

For takeovers and consolidation, regulators make sure that depositor’s funds are well protected. In the event that the available capital balance before the takeover would not be able to pay all depositors investments, the properties of the firm will be sold to offset depositor’s funds.

It is only after depositors have been considered that shareholders’ investments will be considered. This therefore means that there is a likelihood of shareholders losing their lifetime investments.

 

  1. Effects on Customers

On the part of customers, bank consolidation will reduce consumer choice of selecting a particular bank investment. After consolidation, the number of banks decrease leaving customers with fewer bank options to transact with.

The few surviving banks may have some monopoly rights which can lead to exploitation of customers. Customers can be exploited to pay higher prices for services. Fewer competitors in the market mean a business could potentially charge more.

For instance, with fewer banks, there is possibility that the remaining banks may implement coordinated price increases. With this, the surviving banks may agree to increase the service charges and also increase the minimum bank deposit.

Another way that customers could be exploited is the provision of poor service by surviving firms. With fewer firms surviving after consolidation, it is likely that there could be reduction in the quality of services provided.

This is so because surviving firms might think since customers have fewer options, they will definitely transact with them even if services being rendered does not meet the required standard.

Moreover, consolidation could cause customer dissatisfaction when customers are not given adequate answers to their questions. With the current happening in Ghana, most customers of the defunct banks will be trooping to the consolidated bank to demand answers to various questions.

There is the possibility of customers feeling dissatisfied especially when there are fewer customer service representatives to attend to them. Moreover, consolidation is likely to result in the use of new software and databases. This could also lead to frustration especially when it results in loosng customer data.

  1. Effect on the banking sector

On the part of the banking sector, the recent happenings is likely to discourage ambitious Ghanaians from setting up banking services on their own.

This is so because the Ghanaian financial sector is in still undergoing transformation and hence new policies emerges often. Ambitious people capable of establishing banks in Ghana might prefer to defer the establishment of the banks to later time when they feel the transformation is over and hence proper guidelines have been established or will prefer to invest in other sector of the economy.

This is likely to prevent the growth of banking sector and create long term monopoly right for the established ones as a result of lack of increase in the number of firms. Also, there is the possibility that people experienced in managing the banking sector will be discouraged from practicing in the country.

This is because sanctions are normally given to people who holds managerial roles at the time of business insolvency. To prevent future sanctions that practitioners will be exposed to, they might prefer working in other sectors which are well established.

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The long term effects of this will be brained drained as most of these professionals will leave the country and settle in other places where they can practice. Another effect on the banking sector is the likelihood of lack of support by the international community to the Ghanaian banking sector.

Most international banks and organizations will feel reluctant lending money to our local banks. The banking industry will end up being dominated by foreign banks who repatriate most of their profits to their parent companies who are outside the country.

 

  1. Effect on the Economy

On the part of the economy as a whole, the current consolidation will increase the rate of unemployment. It is not surprising that the consolidated has issue a 60-day probation period to assess the employability status of previous staffs of the defunct banks.

This is due to the fact that most of these consolidated banks were closely located and hence it will make sense to keep only one branch. Again it is prudent to close branches which were making extremely losses.

Furthermore, as stated by the BOG, the board of directors and managers of various defunct banks have already lost their jobs due to managerial competence. Another effect on the economy is the inability of the Government of Ghana (GOG) to raise enough money from domestic banks after this incident.

GOG sometimes raise internal funds by borrowing from banks to finance its projects. The banking sector accounted for about 35.2 % of domestic debt stock in 2017. Although there is a decrease in the domestic debt percentage of 17.5% when compared to 52.0% rate of domestic share in 2016, the figure still shows that the banking sector contributes significant amount to internal debt in Ghana[2].

Source: MoF

With the current bank consolidation in Ghana, there is the possibility that the government will find it very difficult in borrowing from domestic banks. This is so because government is likely to delay in loan repayment which may affect the working capital of firms.

Managers of domestic banks are likely to reduce the amount of money issued to the government in the form of loans. With domestic bank not willing to issue enough funds to the government, it will hinder the development of the country since a high percentage of government projects is currently being finance by local banks.

For instance, in the year 2017 the GOG   contracted two (2) domestic standard loans in the sum of US$12.3 million from Société Générale Ghana Limited for the Purchase of 275 vehicles for Members of 7th Parliament during the Parliamentary Life of 2017-2020 and also purchase of 24 Vehicles for Members of the Council of State

Conclusion

The coming days and months await lots of events to be unfolded in the banking sector as existing banks continues to find ways to raise 400million cedis stated capital. Irrespective of the Central Bank willingness to strengthen the banking industry with the setting up of minimum capital requirement, it is essential to also take into consideration the effect this consolidation may have on shareholders, customers, the banking sector and the Ghanaian economy.

In a more effective and transparent processes, this consolidation should take place bearing in mind these effects explained.

 

 

EVANS OPOKU-MENSAH

EVANS OPOKU-MENSAH is a researcher at University of Electronic Science and Technology of China. He specializes in research and development investments, stock price and merger and acquisition. You may contact him through: Email: evans@std.uestc.educn/ evamens89@gmail.com.

[1] https://www.bog.gov.gh/privatecontent/Speeches/GOVERNOR%27S%20SPEECH%20-%20GOVERNMENT%20ESTABLISHES%20NEW%20INDIGENOUS%20BANK%20%20BOG%20REVOKES%20LICENCES%20OF%205%20BANKS.pdf

[2] https://www.mofep.gov.gh/sites/default/files/reports/economic/2017-Annual-Debt-Management-Report.pdf

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