Foreign equity investment in rural banking; Nwabiagya blazes the trail

Introduction

Ensuring that the financial institutions are sound with clean portfolio and adequate capital,  has been a major concern of the central bank in recent times, and has become one of the initiatives which is being built on to enable the Central Bank introduce innovative financial products   to protect the depositor.

One of  Bank of Ghana’s primary objective is to protect depositors’ funds and for the financial institutions to maintain their liquidity. This will enable the institutions to meet the financial obligations claims of investors and customers as and when they fall due.

A directive from the Bank of Ghana to the universal banks to raise the minimum capital from GHS120 million to GHS400 million (representing an estimated 234% increase), is being pursued, with the end of December 2018 as the deadline. The inability to raise the said amount could result in a bank losing its license or have its status reduced.

Besides these developments, the Central Bank is also conducting a ‘cleanup’ exercise to ensure that these banks adhere to the acceptable legal and corporate governance procedures of banking as enshrined in the banking law Act 930 (2016).

So far, seven universal banks have been described as insolvent and were suffocated by liquidity challenges. This has resulted in revocation of the Bank of Ghana’s licences and thus consolidated into one bank.

These challenges in the banking industry among others have been attributed to poor corporate governance practices, coupled with financial malfeasance, resulted in some liquidity challenges rendering the banks insolvent.

The above cleanup is likely to be extended to the rural banks and shareholders and directors must begin to put together a workable strategy to build up their share capital which is currently pecked at GHS 1 million.

Potential growth and economic support of rural bank

Rural banks are owned by people in the community and have a key role in making a positive contribution towards reduction of poverty. They also act as one of the key channels to distribute funds to businesses in their localities and encourage the spread of sound entrepreneurial activity.

It is believed that rural and community banks (RCBs) can play a key role in the country’s economic development, ultimately acting as a catalyst in stimulating the rural economy by supporting micro and SME businesses based in the rural areas.

Developments in recent times and the sophistication in banking business has made it possible for the status quo to be changed to pave way for positive and relevant adaptation of modern business trends.

Rural banks were established to give financial inclusion to people in the rural communities as well as small income earners. People buy shares to own part of the business by way of investment to earn dividends on yearly basis. Minimum share capital has always been pegged far below that of commercial banks because of reasons peculiar to their line of operations.

Judging by the current circumstances in the banking industry and with the regulator busy “sharpening its teeth to bite harder”, rural and community banks must position themselves well to attract all the available legal equity injection which will make them much stronger and more profitable.

Thanks to the intervention of JCS Investments Limited, that is collaborating with key stakeholders in the industry, such as Mr Emmanuel Asiedu – Mante, a former first deputy governor of Bank of Ghana and one of the technocrats who developed the rural banking concept, the law that restricted foreigners to own shares in rural bank was amended and now foreigners can own a maximum of 20% shares in a rural bank.

Mr Asiedu-Mante has emphasized that if rural banks get foreign support obviously the capital base will be bigger and stronger and it also means that their single obligor limit will be higher. Single obligor is the maximum amount a bank is allowed to lend a single borrower or an individual in relation to the total shareholders’ fund of that bank. This means if a rural bank’s capital is stronger they can lend bigger amount of money.

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However, the directors’ control over the bank will be reduced as the foreign investor may even demand a seat on the board which means automatically that existing shareholders will be losing some control or power; and interest of the foreign investor may always be considered when decisions are being taken.

Impact of FDI equity investment in Nwabiagya Rural Bnak

In July 2011, Goodwell West Africa Microfinance Development Company (GWAMDC) Fund under the management of JCS Investments Ltd, invested in Nwabiagya Rural Bank (NRB) Limited a total amount of $1.0m in a mixture of equity and Convertible debt. Out of the $1.0m, $700,000 was used to purchase 20% ordinary shares in NRB and the remaining $300,000 was given as convertible debt to be repaid together with the equity investment when it expires in 2018.

Since the investment, NRB has improved substantially in all the financial indicators. Total assets have increased four-fold from GHS 32.03m to GHS 127.90m. Deposits have also quadrupled from GHS 23.84m to GHS 100.87m. Again loan portfolio has more than doubled from GHS 14.07m to GHS 35.83m. Total number of active clients also has almost doubled from 93,441 to 180,508 as at 31st March 2018.

The bank has maintained a steady revenue growth since the investment resulting in growth in its profitability over the years. This has resulted in the Shareholders’ Fund increasing from GHS 6.13m since the start of the investment to GHS 17.63m as at 31st March 2018 leading to the book value per share increasing from 33 pesewas to about 98 pesewas.

The Microfinance portfolio as a percentage of total loan portfolio, has increased from below 5% at the time of investment to over 25% currently. Microfinance clients have also increased substantially and women clients constitute about 65%. This investment has helped the bank to increase financial intermediation in the rural areas and has ensured that more people and small businesses have access to loans and financial products to expand their businesses. The bank by this action is thus helping to expand the economies in the rural areas, creating jobs and reducing poverty in these areas.

In November 2013, JCS Investments  Ltd , Goodwell BV and  and other stakeholders facilitated a capacity building program for NRB in which the shareholders, directors, management and staff were trained on share price calculation & fixing, corporate governance and consumer protection principles.

Position of JCS on the status of the investment

The CEO of JCS Investments Limited, Ms Patricia Safo sees FDI as a potentially important source of capital to the sector.

The JCS team has been at the forefront helping the bank in its growth and also helping to build the capacity if its personnel. Goodwell’s nominee, Agyeman Boakye (a senior manager at JCS), has been on the board of NRB since September 2011 attending monthly board meetings and monitoring the performance of the bank.

The representative of the foreign investor also served on the Administration and Procurement sub-committee of the board, helping to ensure that procurement processes are transparent, there is value for money, and that the recruitment of personnel was also efficient. He has leveraged his finance, banking and accounting background to help in the effective functioning of the board. JCS’s relationship with the bank has been cordial and over the lifetime of the investment.

Nwabiagya buys back foreign investment

Nana Sarfo Anwona II, who is the board chairman of Nwabiagya Rural Bank at the bank’s 30th Annual General Meeting officially, announced the exit of the foreign investor.

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According to him the agreement clearly spelt out three methods of redeeming the investment at the end of the sixty-month period. The first exit method was to sell the accrued shares on the stock exchange which is not applicable at the moment since Rural Bank shares cannot be traded on the stock exchange. The second option was for the investors to make their own arrangements to sell the shares to any interested or prospective investors. The third method was the buy-back plan to be implemented by the Bank.

In July 2016, the investors opted for the second method and, as a result, applied for a two-year extension to enable them look for investors who would suit the requirements of the general banking laws as well as the aspirations of the Nwabiagya Rural Bank.

Their application came in before the expiry date and the Board of the bank agreed to their request. At the expiry of the two-year extension period, the investors could not off load their shares to a new investor and as a result the bank had no other option than to buy-back the shares; and succeeded in paying the investors the amount involved fully as at the end of May, 2018.  Operational Content

The General Manager of the Bank, Mr Samuel Nuamah-Dankwa who is a professional banker and a chartered accountant with over 27 years in rural banking, has lauded the entire foreign capital injection process and its positive impact saying the initiative by JCS Investments Limited has been worthwhile.

According to him, the bank tried as much as it could to comply with all legal requirements as spelt out in the agreement and did all  financial, corporate governance and legal due diligence as demanded by the regulator.

The bank had to open a new branch solely for microfinance operations (Dunkirk branch at Kejetia) with special focus on women. A chuck of the funds was given to women petty traders to expand their businesses. The bank acquired a brand new vehicle (pick up) purposely for effective recovery exercise. Series of workshops were organized to train the staff, management and directors all for effective management of the fund.

Mr Nuamah believes that a strong capital base is the life line of every bank or a lending and borrowing house and so his colleague rural bank managers must put their house in order to attract such investment. This he believes will make the industry become more robust and much stronger and be able to deliver on its mandate by giving financial inclusion to the rural communities and contribute towards the reduction of poverty in their localities and encourage the spread of sound entrepreneurial activity.

Conclusion

In conclusion I would like to suggest that shareholders must begin to make some considerations to look for such opportunities to break the status quo to strengthen the capital base of their banks.

The good news is that, the law that restricted foreigners to own shares in rural banks has been amended and only 20% of the entire share portfolio can be owned by a foreigner and so the community ownership will be intact.

Considering the current situation in the Ghanaian banking environment, having a strong capital base is becoming an essential component of the banking business and rural banks must explore all legal avenues to satisfy this key requirement and also stand ready for any regulatory directive by the Central Bank.

Mr Asiedu – Mante has however advised that in achieving all these, directors of rural banks must be extremely mindful of the banking law since any breach may spell doom for them and their licence may be withdrawn.

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