The banking industry has seen progressive development since the adoption of the universal banking license in 2003. At that time, the banking sector was smaller with limited deal-making capacity. In the last sixteen years, the banking industry has gone through three recapitalization programmes; first in 2007 when banks were tasked to recapitalize to GH¢70m, then in 2013 when banks were directed to recapitalize up to GH¢120m and in 2017 when it was increased to GH¢400m. Quite systematically, these recapitalization programmes have been aimed at making the banks stronger, more viable and resilient to support the Ghanaian economy.
It is an incontrovertible fact that the banking sector is a key engine for growth in any economy, due to its function of financial intermediation.
Given the difficulties experienced by banks in providing financing for bigger deals, the need for banks to have a strong capital base cannot be overemphasized. It was therefore necessary to have a focused strategy for banks to ensure that they are competitive and capable of supporting the banking and financial system and the economy at large. At the end of December 2018, the number of Ghanaian Banks reduced to 23 licensed universal banks, after the inability of the remaining 11 banks to meet the Bank of Ghana’s recapitalization directive.
An assessment of the current bank recapitalization programme is necessary to take stock of what happened; its rationale, the advantages and disadvantages associated with the recapitalization programme, the key issues and challenges, and what the programme portends for stability of the banking sector.
The State of the Banking Sector before the Recent Capitalization
Before the Bank of Ghana embarked on the recent recapitalization programme, there were a number of debilitating factors that affected the banking sector.
These included high non-performing loans, poor corporate governance structures, risk management issues, insolvency, non-compliance by banks and illiquidity which affected the safety and soundness of the sector and threatened the stability of the entire financial system. Banks also had challenges relating to liquidity management and this restricted their financial intermediation role. The non-performing loans negatively impacted on the Banks supply of credit to the productive sectors of the economy.
The Recapitalization Programme
The Bank of Ghana (BoG) in accordance with Section 28 (1) of the Banks and Specialized Deposit-Taking Institutions Act, 2016 (Act 930), revised upward the minimum paid-up capital for existing banks and new entrants from GH¢120 million to GH¢400 million with effect from September 11, 2017 with a deadline of December 31, 2018. The aim of the recapitalization was to further develop, strengthen and modernize the banking sector to support the economic development of Ghana, restore confidence in the sector and help banks to become more resilient to withstand shocks and underwrite bigger ticket transactions.
The Cost of Recapitalization
According to the Bank of Ghana, the total cost of the recent recapitalization was estimated at GH¢11billion. Even though it was an expensive exercise, the benefits far outweigh the costs judging from the gradual but sure recovery of the banking sector. The banking sector has become highly competitive and banks will have to be innovative and have differentiated value propositions to succeed. This implies that banks with weak business models will not survive the competition.
It is important to emphasize that bank failures have major impacts on the economy because of the risk of contagion. The question of who bears the cost of bank failures in an economy has been lingering in the minds of many Ghanaians for some time now. In theory, the answer has always been easy: the costs should be borne by those who took the risk in the first place and secondly by those who earned the returns. In other words, the shareholders and management of banks. In practice, however, the answer is different. It is the taxpayer who bears the cost of bank failures. Looking ahead, it is paramount for the Bank of Ghana to come up with a funding mechanism for resolving failed banks, without endangering the stability of the financial system and without putting the burden on the taxpayer.
Benefits of The Recapitalization
The bank recapitalization has resulted in a strategic positioning of banks to compete. In order to increase their deal-making capacity to transact bigger volumes of business, banks are developing innovative products and services to serve their target market segments. One of the main advantages of the recapitalization programme is that it has resulted in greater economic efficiency in the form of lowering operational cost and boosting productivity of Banks.
Perhaps the greatest benefit associated with the recapitalization programme lies in banks having the ability to leverage on opportunities to provide support to new market segments and businesses within the economy as more loanable funds become available. Small and Medium Scale Enterprises (SMEs) could be supported by banks to play important role in the transformation of the Ghanaian economy.
Stability of the Banking Sector
The key indicators for measuring the financial soundness of the banking sector include liquidity, capital adequacy ratio and asset quality. What does all these mean to the banking sector? In the first place, an increase in capital adequacy will help banks to absorb a reasonable amount of loss and achieve regulatory compliance with the Bank of Ghana’s capital requirements. The banking industry’s capital adequacy ratio was 21.9% in December 2018 as a result of the recapitalization programme. This was against the capital adequacy ratio of 18.5% recorded in December 2017. A good capital adequacy ratio will make banks stronger to withstand internal and external shocks.
One other indicator which has seen improvement in the banking sector since the implementation of the bank recapitalization programme is liquidity. The banking sector remains liquid and this has bolstered customer confidence. Also, more liquidity implies that banks have sufficient funds to pay depositors when their investments mature. As a result of the excess liquidity banks currently have , they are able to attract more deposits. The industry’s liquidity position improved to 28.4% in December 2018 mainly as a result of the recapitalization programme. This guarantees confidence that banks can create new loans without having to call on the existing ones.
As a result of the loan-write off directive issued in June 2018 by the Bank of Ghana, asset quality in the banking sector generally improved whilst industry loans witnessed growth. The total assets of the banking sector stood at GH¢107.34billion at the end of December 2018, recording an annual growth rate of 14.7% as against December 2017 growth rate of 13.3%. The ratio of the industry’s non-performing loans to gross advances, improved to 18.2% in December 2018 from 21.6% in December 2017.Total assets of the banking sector improvedfurther to GH¢109.9 billion as at April 2019. Also, credit allocation to the private sector grew from 5.6 percent in April 2018 to 19.8 percent in April 2019 with the industry’s non-performing loans reducing to 18.9% in April 2019.
It is also important to note that following the issuance of the new Corporate Governance Directive from the Bank of Ghana and the Fit and Proper Test, the governance structures of banks have been substantially improved.This could promote sound corporate governance as most banks have clear succession plans and good structures and this would also contribute in no small measure to restoring confidence in the banking sector. A stable banking sector reduces the cost of bank failures by protecting society and customers. To this end, every stakeholder (banker, investor, shareholder, director and manager) affects the stability of the banking sector in one way or the other. As an industry, we cannot backtrack the progress and the successes we have chalked. The journey has been tough and rugged with surprises, twists and turns, but the banking sector remains stable, safe, resilient, profitable and sustainable after the recapitalization programme.
The improvement in the banking industry has created the platform for banks to positively impact on the Ghanaian economy. Banks are now in a better position to contribute to economic growth. We should continue to strive for a banking sector that is profitable and stable. Profitability means that all banks offer banking products and services in a socially responsible manner and serve the needs of the Ghanaian economy. Stability implies that banks can play their roles effectively and can withstand any shocks.
At the same time, we must encourage competition in the Ghanaian banking sector by promoting new and alternative forms of financing for the major sectors of the economy. The bank recapitalization programme has been supportive of Ghana’s wider economic development. All the key stakeholders have critical roles to play to make the banking industry relevant and responsive to the needs of the Ghanaian economy. Overall, Ghana has an improved banking sector that will be able to propel economic growth. In a nutshell, the recapitalization programme has paved the way for banks to continue to develop winning strategies for growing shareholders’ value, market share and profitability.
The Chartered Institute of Bankers (Gh) – CIB (Gh) was registered in 1978 under the Professional Bodies Decree of 1973 (NRCD 143) with 30 professional members and 11 corporate members. Having successfully carried a diligent expansion programme, the Institute can now boast of 26 corporate members, 574 professional members and over 5,000 student members.
The Institute serves as a professional body for banks and financial institutions with an aim to provide stimulus for the development of competent and more qualified human resources that will enable the banks to offer efficient and competitive services to meet modern-day sophisticated demands and satisfaction. Its course content and structure is streamlined along the requirements of Alliance of African Institutes of Bankers (AAIOB) for global recognition. CIB (Gh) is also a member of World Conference of Banking Institute (WCBI), now operating as the Global Banking Educational Standards Board (GBEStB)
0302 541 309 /0302 541 308
0302 541 614
For information enquiries: