Ghana’s new banking regulations shake up sector
On 14th August, the Bank of Ghana (BoG), the country’s central bank, approved a deal which saw Ghana Commercial Bank (GCB) take over the deposits and some of the assets of UT Bank and Capital Bank.
The BoG announced that it had revoked the licences of the banks due to “severe impairment” of their capital. Their collapse sent shockwaves across the financial sector in the West African nation, with some analysts concerned that this was just the tip of the iceberg and other banks were at risk of contagion.
The BoG, which moved quickly to investigate the liquidity levels of the remaining 34 commercial banks in the country, found that seven banks failed to meet the minimum capital requirement of C120m ($26m). The vulnerable banks were eventually able, with the assistance of the BoG, to prove that they could recapitalise to the minimum requirements and avoid the same fate as the two liquidated banks.
However, following the scare, the Bank of Ghana mandated that all commercial banks in the country would need to set aside by the end of December 2018 a minimum of C400m in capital or have their licences revoked. This figure is three times more than the previous minimum capital requirement.
Only four banks – GCB, Zenith Bank, Barclays Bank and Standard Chartered Bank – currently have the required capital reserves to meet the target, and it is still unclear whether the other banks could raise the capital by the deadline, according to Sam Bediako-Asante, managing director of financial market consultancy firm Sambed Consult.
“The banks are currently meeting with their investors and shareholders to figure out if they can raise the capital,” he says. “If some of those smaller banks are not in the position to meet the figure then the only way is arranging for some of the bigger banks to acquire or merge with the smaller banks.
“In my opinion, this development would be a positive one for the sector because we already have too many banks and if we can get into a situation where we have no more than 10 strong banks, like in Nigeria and South Africa, then it will benefit our economy.”
Additionally, according to credit consultant Emmanuel Akrong, the new minimum requirements would have three main benefits for the sector: “Banks will be able to better absorb adverse shocks; there will be a reduction in bank risk-taking incentives; and a strong banking sector will boost economic growth and attract foreign direct investment.”
While many analysts have welcomed the BoG’s decision to ramp up the minimum capital requirements for banks, some voices have raised concerns that the changes could have negative unintended consequences.
Ready for change?
The changes currently underway in Ghana’s banking sector are the most significant in a decade. In 2008, the BoG increased the minimum capital requirement from C7m to C60m. Ghanaian banks last recapitalised in 2012, when the Bank of Ghana raised the capital levels from C60m to C120m.
The move to treble the capital level for banks has caught many of them unprepared and it could lead the financial institutions to adopt a more conservative approach, according to Vish Ashiagbor, senior country partner at professional services firm PwC in Ghana.
“The feedback received [from banking industry players] generally paints an image of an industry not quite ready for the implementation of the proposed risk-based method of capital management,” he warns in a statement. “As banks go through a transition phase during which they try to master the art of keeping their ships on an even keel, this new capital management regime may lead to banks being overly cautious resulting in suppressed credit growth.”
Ghanaian banks need to raise over C8.6bn ($1.9bn) by December 2018, according to Ashiagbor. There will be immense pressure on the country’s banking system over the coming year as the institutions seek to comply with the new regulations.
Among the various policies that the banks might adopt, enhancing their credit appraisal systems could have the most significant effect on the economy, as fewer borrowers – especially SMEs – will be able to secure loans. The stifling of credit growth could also scupper President Nana Akufo-Addo’s ambitious economic strategy, which has already faced setbacks related to the high level of public debt.
Risks to economic growth
When Akufo-Addo entered the presidency in January, the country’s total public debt stood at C122.3bn. But, only a month later, it was revealed that the public finances were in a worse state than expected due to the discovery of C7bn of unattributed spending by the previous administration.
The revelation immediately put a dent in President Akufo-Addo’s economic strategy to reduce debt, create jobs and boost the economy. Ghana was forced to secure a $918m IMF loan, which had a series of conditions including slashing public spending and ensuring the banks were properly capitalised.
The economy has stabilised over the year and some analysts are upbeat about the medium-term outlook for the country, especially after the August launch of the president’s flagship “One District, One Factory” programme, which aims to establish at least one factory or enterprise in each of Ghana’s 216 districts.
However, the ambitious programme, together with other policies such as the “Planting for Food and Jobs” scheme, will require significant capital flows and it is expected that the banking sector will provide a significant amount of the required capital. But if, as expected, the banks are going to tighten their lending policies, President Akufo-Addo’s grand economic scheme may collapse just as it is starting.
“There has been an attitudinal change on the part of business since Akufo-Addo has become president and the mood is positive,” Bediako-Asante says. “But if there is a major banking crisis then the mood will become pessimistic, which could cause our economy to slow down again.”