SMEs could be biggest losers in stated capital increment - Economist

Although they are afraid to talk openly, officials of some SME-focused banks are restive about the GH¢400million stated capital increment for banks, saying it could hurt SMEs badly.

“Banks like us that want to do SMEs will now be forced to raise capital to do big-ticket or forced to merge, and the whole philosophy of serving the lower-end of the market will die. We may end up killing local banks,” the CEO of one indigenous bank told the B&FT.

The banker believes that despite more than 10 large banks touting their capacity to undertake SME banking, they are finding it difficult to offer the needed financing models to adequately serve the sector.

“We have to go the extra mile to serve these SMEs, and therefore these [SME-focused] banks are still needed. These big banks, no matter how they try to serve SMEs, will always choose the safer option of big-ticket transactions and leave SMEs in limbo,” the banker said.

Another local player noted that the idea behind moving the capital high to allow banks undertake bigticket transactions is not a bad one, but “What If I want to channel most of my resources to SMEs? Then I will be underutilising my capital. We will have excess capital that cannot be deployed efficiently”.

The central bank, a month ago, increased the stated capital of universal banks in the country from GH¢120million to GH¢400million - with a deadline of December 2018, which failure to meet will see licences revoked.

With the idea of creating bigger banks to support aggressive economic growth, the Bank of Ghana believes the current size of the banks in the country is too small - and therefore an increment in the minimum capital will be a first-step in the creation of larger banks.

While many foreign-owned banks have welcomed the move and believe it is a step in the right direction, a number of local banks have been fretting that it could leave the field to multinational banks which have the financial muscle of their global operations behind them.

The BoG’s Governor, Dr. Ernest Addison, recently told bankers, bluntly, that those which cannot meet the new stated capital should downgrade to savings and loans companies.

This comment, the local banker retorted, “was uncalled for”- saying there are several businesses universal banks do which savings and loans companies cannot do, including Treasury management, forex trading and international transactions.

SMEs have been and continue to be critical in the local economy’s growth. According to the latest edition of the Integrated Business Establishment Survey by the Ghana Statistical Service, SMEs - which constitute 90percent of companies in Ghana - employ 71.4 percent of the workforce and contribute about 70 percent to GDP.

SMEs therefore have a catalytic impact on economic growth, income and employment. Despite their contributions to economic growth, SMEs face a lot of challenges - including absence of adequate and timely banking finance, limited capital and knowledge, non-availability of suitable technology, and many more.

The growing number of SME-focused banks - mostly, new local banks and savings and loans companies becoming universal banks - believe that their emergence is now providing the full and total banking solutions SMEs deserve, which savings and loans and other non-bank financial institutions could not provide due to the nature or scope of their business.

“It is not easy to ask big banks to serve small businesses or SMEs, or those in the lower end of the market. If you turn it the other way around, we may end up with banks that may not have the strong expertise needed to serve the SME sector,” another banker added.

High capital could be catastrophic for industry

Also, the banker is of the view that raising the capital so high might not be the panacea to actually strengthening the banking sector, and if not handled properly it could be catastrophic for the industry.

“Yes, capital has been raised; but who says that people will not raise the money? GH¢400million is less than US$100million, and if you go to the global market where interest rates are near negative you will find it. There are people happy to bring in their capital to Ghana for 6 percent return on investment annually.

“But beyond capital you need the right people, the right systems before you do, for example, oil and gas. People may think that if they have the capital, then they can lend to anybody because they must generate the needed return on investment. This kind of leapfrogging to such levels can be catastrophic,” the banker stressed.

The best solution

To them, the right way to go is simple: The BoG should make sure that regulations are adhered to, and should insist that banks do not lend beyond their single obligor; and should insist on them meeting their capital adequacy ratios, which means banks that need to do more, or take more risk, will provide the capital needed to take such risk.

“We should strengthen regulation, rather than increasing capital. I hope this trend does not continue because the money will come, whether from local or foreign shareholders. And will this mean when the Bank of Ghana wants to cut down the numbers, it will then raise the capital to GH¢1billion?” one of the aggrieved bankers queried.