Banking sector to go under foreign care

The new minimum capital requirement announced by the Central Bank of Ghana (BoG)could lead to the demise of 10 local banks and put the sector in foreign hands, banking sector analysts have warned.

The BoG recently announced an increase in the minimum capital requirement for banks from GHC 120million to GHC 400million, ostensibly to strengthen the banking sector.

B&FT’s analysis of current paid-up capital of banks and income surpluses of all 34 universal banks operating in the country show that apart from GCB - which has a total paid-up capital of GH?703million, GH?100million being paid-up capital and GH?603million in income surplus as at July 2017 - local banks with capital shortfall will have to find millions to recapitalise.

All other indigenous banks, except uniBank, have a capital shortfall of between GH?50million and GH?320million that must be remedied by the December 31, 2018 deadline or risk being classified as an undercapitalised bank - a tag that may lead to the loss of significant business and ultimately their demise.

uniBank’s task at recapitalising is fairly simple, as it has a paid-up capital of GH?310million and an income surplus of some GH?52million…leaving it just about GH?38million shy of the new minimum capital requirement of GH?400million.

This has led to calls by banking sector analysts who believe that, given the current dynamics in the banking sector, local banks must be supported by government using various investment and financing tools so they can stay in business.

Large state-owned enterprises that are performing well, they contend, could be made to invest in local banks - given that the profits from any such endeavour would stay in-country and enable the local banks generate more employment.

Indigenous financial institutions, some have argued, must be made to handle big-ticket government transactions to build their capacity and truly transform them into enablers of growth.

“I think there must be a deliberate national policy to build the capacity of Ghanaian banks. Just as we talk about buying made-in-Ghana goods, people forget that it is important to talk about buying made-in-Ghana financial services as well.

“How do you do that? Just like in the oil sector, where there is a percentage for local content and the rest goes to others who have the capacity, I think government should not hide on the back of ‘they are too small to handle this transaction’ and give local banks the opportunity. Government can say ‘We want local banks to handle national interest transactions’,” John Awuah, Chief Executive Officer of UMB, has advocated.

The plurality of banks has over the last decade led to more innovation for the benefit of consumers. They are more electronic-based products on the market now than ever before; cost of credit is more competitive, and accessibility to physical bank branches across the country has improved.

The current universal banks have been preparing for the next half-decade since 2014. Indeed, PwC’s 2014 Ghana Banking Survey noted that: “Many of the [banking] executives have already begun a switch from a ‘watch and see’ mode to a ‘position and grow’ mode in anticipation of changes in the banking sector in the coming five years.”

This clearly shows that local banks have a deep understanding of the market and what it holds in the future, despite their limited financial muscle.

Some have also argued that the current banking penetration rate is too low, and that existing banks should rather be strengthened to help rope more people into the banking sector.

However, others contend that the current number should be trimmed down to the barest minimum, given the relatively small population size of 28million, as occurred in Nigeria.

Nigeria, a nation of almost 200million inhabitants with a GDP in excess of US$500billion, after a challenging time in its banking sector trimmed the number of banks from 81 in 2004 to about 20 within a short period.

However, one must note that during Nigeria’s banking reforms there were more local banks than foreign ones, and that made it fairly easy for the rapid consolidation of the few banks in the system.

Ghana’s case is the opposite. There are more foreign banks, backed by their international parent banks, than Nigeria had. There are 17 foreign banks and 17 local ones.

Ghana’s banking sector is dominated by foreign and African-owned banks from the United Kingdom, France, South Africa, Nigeria and other parts of the continent.