All too soon, December 31 2008 is here with us. The deadline for banks to recapitalize to a minimum of GHS.400 million elapsed a few days ago.
Various permutations were seen in the banking space as banks raced to meet the deadline. Those who could transfer retained earnings into capital did so with their shareholders’ approval. Some found favour with the deep pockets of their foreign principals. Others found themselves in marriages of convenience, nicely termed mergers and acquisitions. Yet others have transformed Tier 1 debt into equity with the agreement of the debt holder. This gives rise to a plethora of financing options, providing the corporate finance student a glimpse of alternative financing options. One bank chose to fold up through appropriate legal processes.
The implications on profitability and return on equity would be varied as beneficiary banks get away with crunching interest payments, only to be confronted with expectations of higher dividends from shareholders.
It was obvious that many banks sourcing additional capital at the same time was going to be problematic, both within the local and external environment. This was against the backdrop of a badly muddied financial terrain with inappropriate governance measures, leading to negative capital and catastrophic liquidity levels in some banks.
For those banks which may find themselves being dropped from mainstream universal banking into the Savings and Loans space, they should positively re-invent themselves; at least that arena has less formidable requirements in terms of the maze of regulatory issues to comply with.
Confidence in the financial system was severely battered, leading to panic withdrawals, exacerbating losses in some non-bank institutions in schemes exhibiting all the signs of ponzi schemes, but still patronized by seemingly “smart investors” .
It is refreshing, though to learn of a Special Purpose Vehicle (The Ghana Amalgamated Trust Limited) that is being structured to raise GHS.2 billion to assist some solvent local banks to meet the new minimum capital requirement. While the modalities are still being worked out, I find the arrangement to be timely and worthwhile given my view that the indigenous banks need to be assisted to play their peculiar roles in the country’s financial intermediation processes, under enhanced regulatory oversight.
The weak understanding and application of risk management, particularly the segments of corporate governance, internal and external audits are largely to be blamed for the unfortunate debacle we find ourselves in now.
Non adherence to corporate governance structures and practices, especially in the indigenous banks, have contributed largely to the insidious mis-management of the collapsed banks; this time by otherwise respected captains of industry, commerce and religion. One is left bewildered trying to understand when this self- centredness, greed and avarice found root in our corporate culture.
The panacea to addressing the continuous decay in the financial might of the banks must 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. 60 million at one time . This was found to be inadequate in no time, hence the increment to GHS.120 million.
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 while providing the necessary shock absorbers required by the Basel accords.
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 and other unethical practices which culminated in the high non-performing loans and attendant liquidity challenges .
Non-performing loans ratio across the industry is still too high even in comparison with other African countries. We need to recognize that granting loans is inherently risky but that is a core banking function. Some of these factors are internal, premised on the rigours associated with the entire credit delivery processes.
In spite of all the due diligence embedded in credit delivery by many banks’ boards and managements to ensure that all credits go through most, if not all the steps in credit delivery, it is realistic to expect that not all the facilities granted would be fully recovered.
Loan default usually comes from two principal reasons; capacity to pay or the sheer reluctance to pay, even where the capacity exists. The banks’ initial processes with credit delivery would have dealt with the capacity to pay, through necessary appraisals and referencing from appropriate institutions, ceteris paribus. To some extent, the willingness to pay, based on the character and history of the loan applicant helps a great deal in determining the “approve or decline” decision.
It would be unfair to exclusively blame bank management for the high levels of non-performing loans which bedevil the banking space in this country without dealing with the external factors beyond the control of bank management.
The banker is not a magician to be able to determine all the elements of credit administration with one hundred percent accuracy. Sadly the media- loving prophets who predict the death of celebrities and other VIPs, cannot be relied upon in this case.
To ring-fence the additional capital which the banks have labored to mobilize, key external factors which influence the depletion of this capital requires critical appraisal. A lot has been said about internal corporate governance architecture, conduct and culture. These would, hopefully receive the necessary attention by the Regulator, while we also address the national identification, addressing and credit referencing systems.
To this writer, a key prescription for maintaining the enhanced capital is how the judicial system would be re-engineered to deal with loan repayment infractions. For far too long, recalcitrant customers have tended to take solace from the slow, cumbersome and expensive court system should the banker resort to the court for redress in retrieving unpaid loans. They are thus emboldened in their refusal to pay bank loans under the canopy of the state.
Law enforcement has been the bane of indiscipline in many aspects of our social and economic lives. If habitual loan defaulters know that they could easily lose the security offered as collateral for bank loans, their penchant for loan default would diminish significantly and the wheels of credit creation will be lubricated enough for economic growth and maintenance of bank capital bases.
As it operates now, Ghana’s legal system, tends to embolden loan defaulters to blatantly refuse to pay bank loans since the consequence of default is mild, thanks to the state’s unconscious support for such negative practices. Customers have developed a culture of defaulting on loan repayments in view of their assurance that the court system would invariably take so long to adjudicate on loan repayment.
To compound the bankers’ predicament, collateral security for the loan cannot also be instantly realized in most cases due to the same slow, complex, corruption- ridden court processes. In many cases, the security may have lost significant value during the long period during which the case hung in court, with provisions depleting the banks’ capital and liquidity suffering impairment while interest on deposits cannot be suspended. The least said about difficulties at the land registry and the less than optimal credit referencing agency the better.
Under such conditions which appear pervasive in Ghanaian banking, but even more devastating in the micro- finance sector, no amount of re-capitalization would sustain the operations of the financial institutions.
Internally, the boards and management of the various banks must be alive to the provisions of the Basel accords as far as provisioning for diverse risk exposures is concerned. This is particularly the case with the new requirements for risk-based supervision.
Bank management must recognize that the nature and quantum of the risk assets they finance would determine the level of additional capital which the Regulator would force them to hold. They must also make provisions for various operational risk categories. It is also important to underscore the power of the Regulator to review the quality of the loan portfolio and even off -balance sheet exposures in determining a bank’s total exposures and compliance with regulatory capital.
While the individual bank’s economic capital may place them in a comfort zone to further expand credit, the Regulator’s discounting (weighting) of the quality of the loan portfolio would suddenly require a freeze on further loan expansion or a requirement to inject additional capital, even beyond the regulatory minimum of GHS.400 million because the minimum capital adequacy level of 10% has been breached.
It is easy to conclude that the bigger the bank’s capital, the better it is positioned to absorb shocks. It must still be recognised that shocks come in different frequencies and magnitude, depending on the direction of the capital deployed, board competencies, the prevailing business climate and regulatory inertia.
Congratulations to all the banks that have survived the shocks of 2018. My optimism remains unshaken for the growth of the banking and financial sector, especially in the wake of the establishment of the Financial Stability Council and efforts by the regulator to sanitise the system even further.
We must, however brace ourselves to real challenges associated with management of the diverse corporate cultures coming on the heels of the mergers and acquisitions and particularly shareholder expectations which need to be moderated to ensure that any shocks would be met with appropriate cushions.
What is needed is strong corporate governance structures in the these banks, complemented by effective regulatory oversight to identify early warning signals that would stem practices that often lead to the erosion of the banks’ capital bases. Increased exports and a moderation in imports would help to stabilize the exchange rate to permit some certainty in business planning.
Much is expected of the indigenous banks which must be nurtured to grow to perform their crucial roles of deepening financial inclusion among the SME market and rural areas which the foreign banks would tactically avoid.
Let us remind ourselves that the biggest banks in South Africa are indigenous banks. The Africa Report No. 93, September 2017 depicts that Cote d’Ivoire, Nigeria, Senegal, South Africa, Malawi and Kenya are among the African countries where indigenous banks pre-dominate. This is no accident of history. Such an environment must be consciously created as part of strengthening national sovereignty and pride. The implications for deepened financial inclusion cannot be lost sight of, especially where compliance to exchange control regulations and potential capital flight are concerned.
We can and must find innovative ways of nurturing indigenous banks. A huge responsibility rests on them collectively to exorcise themselves of the negative governance practices to enable us have a better story to tell post 2018.
The writer is a Fellow of the Chartered Institute of Bankers, a farmer and an adjunct lecturer at the National Banking College, and also author of “Risk Management in Banking” textbook.