The future of banks that are majority owned by domestic private interest in Ghana can be challenged in the not distant future due to the strict application of the Basel II and III standards.
Research on local ownership of banks as against foreign ownership across Africa showed Cote D’Ivoire, Nigeria and South Africa as the only countries whose banks are owned by majority domestic investors.
Cote D’Ivoire had 100% local ownership, 80% by Nigerians and 76% locals owned assets of banks in South Africa. In Ethiopia state owned banks predominate and in Mozambique, Republic of Congo foreign owned subsidiaries hold the most assets.
Between 1992 and 2006, the local ownership of Banks in Ghana averaged 61% but that figure has fallen to an average of 48% between 2007 and 2016. In 2003 the local ownership was about 60% to 40% foreign ownership.
This fell to 54% local ownership to 46% foreign ownership by 2006 and further to 44% local ownership to 56% foreign ownership by 2011. It, however, averaged 46% for local ownership and 54% foreign ownership in the past six years.
This figure has dropped to 21% local ownership in Ghanaian banks for 2017 as published by the Africa Report No. 93 edition.
Although the deregulation of the financial sector resulted in an increase in the number of foreign banks, it can also be seen that generally, the increase in the minimum capital requirement for banks has guaranteed the survival of the foreign banks than local ones.
The Bank of Ghana, on September 10, introduced the Internal Capital Adequacy Assessment Process (ICAAP) under the Basel II framework. The ICAAP will require banks to more than treble their minimum capital to GHS400 by December 31, 2018.
This is the fourth time in about 15 years the BoG has increased the minimum capital requirement for banks, with the current increase being the second highest.
Early is 2003, BoG directed all banks to increase the minimum capital to GHS7million by the end of 2006.
In 2008 the bank lifted the minimum capital requirement from GHS7million to GHS60m giving foreign banks two years and local banks five years to comply with the rule. In 2012 it again raised it to GHS120 million, mostly on the reason of the expansion of the economy.
The Bank of Ghana announced that all banks must increase their minimum capital to GH¢400 million by December 2018. This is to increase the capital base of the banks as it is important for ensuring financial sector stability. It will also make it possible for banks to reduce cost through economies of scale leading to reduced borrowing cost.
Also, banks with large capital can easily diversify their investments to avoid being vulnerable, should some sectors of the economy take a turn for the worse. Aside this, large banks can easily be supervised by the regulator than many small banks.
On the other hand, the possibility that some banks, especially the local ones, are unlikely to meet the new capital requirement, presents the potential for increased concentration and decreased competition. This can erode the expected gains from the implementation of the new policy.
Strong indigenous financial institutions are integral to the development of every economy. It is believed that local banks have their survival tied closely to the growth of the local economy, hence a stronger commitment to help the country grow, unlike the foreign ones that make profits and often repatriate them to their mother companies and in many cases putting pressure on the local currency.
Additionally, local banks are prone to turn deposits into loans, especially for small scale enterprises, compared to big foreign banks that are likely to prefer to take minimum risk.
This can be deduced from the Bank of Ghana’s latest statistics on interest rates. Analysis of the figures shows that the first five highest base rate in the banking industry are offered by local banks whilst the first five lowest are offered by foreign banks.
This partly reflects the risks associated with their advances. Therefore, the private sector, which is dominated by small scale industries, will be the worst affected should the local banks fail to meet the new minimum capital requirement, leading to licenses withdrawals.
Most of the 17 local banks are likely to struggle to achieve the new minimum requirement because of their current financial position.
GCB Bank, CAL Bank, Fidelity Bank and ADB Bank, with significant income surplus, are however likely to meet the deadline because their stated capital exceed the GH¢120 million, according to their half year financial statement for 2017.
Seven of them are new entrants with GH¢ 120million but their income surplus position cannot support them adequately, hence they could lose their licenses.
This could further reduce the proportion of banks owned locally and their market share. The locally owned banks control less than 21% of the banking industry’s assets.
In other African countries such as Cote d’Ivoire, Nigeria, South Africa and Senegal, however, majority of the locally owned banks control 100%, 80%, 76% and 63% of the industry’s total assets respectively.
In the United Kingdom (UK), for instance, the National Westminster (NatWest) Bank and Lloyds Bank, which are all local banks, are considered to be those driving growth, while the Deutche Bank and Commerzbank AG are doing same in Germany.
Last year, NatWest launched a £1billion small business fund to help entrepreneurs start up. Also, as part of assisting Britain Prosper Plan, the Lloyds Bank committed to offer £4 billion in funding support to the manufacturing sector in four years to December 2017.
Which local bank is in the position to do these in Ghana? Which one is being groomed to be like the likes of Lloyds Bank? Why should BoG treat all banks in the same manner, knowing fully well that with the exception of the banks mentioned above, all the other local banks are likely to miss the deadline?
In 2007, for example, local banks were treated differently from the foreign banks in terms of the deadline for meeting the requirement. Majority of the foreign owned banks had two years while majority of the locally owned ones had five years to meet the deadline. The result was that all the banks were able to meet the deadline. When all the banks were treated in the same manner in 2012, some banks, especially the local ones, were still not able to meet the GH¢120 million requirement.
This is why the central bank, together with government, needs to do more for the local banks to ensure that they meet the requirement in order to continue to provide the financial services needed to achieve the economic and socio-political goals of the country.
It is no secret that the financial position of the local banks is poor and needs assistance from both government and the Bank of Ghana, if they are to survive. Therefore, government should have a programme, well-structured and aimed at bailing out the local banks.
This has been done in many countries. Using the UK, again, as an example; in 2008, the government injected about £37billion in three UK banks – Royal Bank of Scotland (RBS), Lloyds TSB and HBOS – to save them from collapse.
In 2016, the Italian government pumped around €6.5 billion into Monte Paschi, the country’s third biggest lender to rescue it. Today, the economies of these countries are benefiting immensely from these banks.
The Bank of Ghana, on its part, should not treat local banks and foreign banks equally in this matter, with the view that they are all operating in the same market. It should recognise that the survival of the local banks depends on its support and regulation while the survival of the foreign ones depends on it and others in other countries.
Therefore, universal treatment for the sector is unfair to the local banks. Like in 2007, the BoG needs to give different timelines to the local banks to afford them more time and opportunity to raise the money needed to meet the requirement.
It should also be firm on the management of these banks to submit their plans towards recapitalisation and ensure that the plans are followed strictly.
Finally, the banks, themselves, should improve on management efficiency to enhance profitability. Those that are listed on the Ghana Stock Exchange should consider floating more shares, if prudent, to increase their equity capital. They should also consider suspending payment of dividend to shareholders and review their investments to avoid losses.