After banking sector recapitalisation, what next?

As the clock ticks to the December 2018 deadline for universal banks to increase their minimum paid-up capital, some banks are at the final stages of meeting this regulatory requirement.

The Bank of Ghana (BoG) in accordance with Section 28 (1) of the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930), revised upward the minimum paid-up capital for existing banks and new entrants from GH¢120 million to a new level of GH¢400 million from the effective date of 11th September 2017. The aim of the recapitalization according to the BoG is to “further develop, strengthen and modernise the financial sector to support the Government’s economic vision and transformational agenda”.

With this directive, banks have three options to raise additional capital thus;

a) Fresh capital injection.

b) Capitalization of income surplus.

c) A combination of fresh capital injection and capitalization of income surplus.

The Central Bank Governor, Dr Ernest Addison at the 85th MPC meeting held on 26th November 2018 hinted that ‘22 banks have virtually met the minimum capital requirements’. Despite the majority of banks meeting the regulatory capital requirement, the Central Bank has identified some challenges in the banking industry which includes; high Non-Performing Loans (NPL) ratios, relatively high level of concentration of exposures in a few banks. Others are; related party exposures, weaknesses in some specialized deposit-taking institutions, and the high level of interconnectedness both among group structures and across the various sub-sectors in the financial sector. These challenges need urgent attention to prevent future bank failures. The BoG has already revoked the licenses of 7 failed banks as a result of poor corporate governance practices, insider dealings, misreporting etc and appointed receivers for these banks.

Ghana’s Extended Credit Facility (ECF) program with the IMF has positively impacted the banking industry. In July 2016, Parliament passed the Banks and Special Deposit Taking Institutions Act 2016 Act 930. The law among others seeks to amend and consolidate the laws relating to deposit-taking and to regulate institutions which carry out deposit-taking business. It also re-emphasizes the authority of the BoG as the only entity responsible for the granting of licenses to enable deposit-taking business in the country. Linked to that is the passage of the Deposit Protection Act, 2016 (Act 931). This law among others seeks to provide a safety net for vulnerable depositors in the event of a bank failure.

Another landmark milestone is the amendment of the Bank of Ghana Act. In August 2016, Parliament of Ghana passed the Bank of Ghana Amendment Act 2016 Act 918 which was a key requirement for a successful fourth IMF review under the ECF program. The objective of the amendment is to significantly strengthen the Central Bank’s functional autonomy, governance and ability to respond to banking sector crises.

The question still remains; After the banking sector recapitalization; what next? In 2003, the BoG rolled out a Universal Banking licensing regime to replace the three-pillar banking model – development, merchant and commercial banking. The new licensing regime lifted the restrictions on the type of banking business that banks could do or the type of customers that they could engage while allowing all the banks to conduct retail banking. This also levelled the playing field, and opened up the system to competition, product innovation and entry. In practising the universal banking licensing regime for fifteen (15) years, can we conclude that it has achieved its objectives or otherwise?

In a World Bank report titled “Gains in Financial Inclusion, Gains for a Sustainable World” released in May 2018, 7,310,000 people in Ghana do not have any form of financial account (mobile money account or bank account). This estimate corroborates the Global Findex Database which also pegs the non-banked adult population in Ghana at 7 million. According to the BoG, there are 30 Universal Banks excluding ARB Apex Bank Ltd, 144 Rural and Community Banks, 484 Microfinance Institutions (MFIs). Comparing the number of financial institutions with the huge unbanked population, low disbursement of credit to the private sector coupled with high cost of credit, there should be significant regulatory reforms in the banking industry.

The BoG has a mandate to ‘formulate and implement the policy to achieve price stability, contribute to the promotion of and maintenance of financial stability and ensure a sound payment system’. The role of the monetary authority should augment and compliment that of the fiscal authority to spur economic growth. On that premise, permit me to pose these legitimate questions; How is government aligning its policy of industrialization and agriculture modernization to the current reforms in the banking industry? Again, are we going to see banks doing ‘business as usual’ without performing the essential duty of supporting productive sectors of the economy and financing big-ticket projects? After recapitalization, are we going to have strong indigenous banks that can expand outside of this jurisdiction as it happened after Nigeria’s banking sector recapitalization in 2005?

Another issue that is worthy of mention is the institutional collaboration between the BoG, Securities and Exchange Commission (SEC), National Insurance Commission (NIC), National Pensions Regulatory Authority (NPRA) to boost growth in the financial industry. Going forward, effective collaboration between these regulatory authorities and other stakeholders will consolidate gains made so far in reforming the banking industry. Banks don’t operate in isolation; it is indeed the fulcrum around which economic activities revolve. As Ghana enjoys macroeconomic stability, the current banking reforms should be a catalyst to consolidate the gains made so far.