Bankers divided over new capital requirement

The Deputy Governor, Mr Millison Narh interacts with banking chiefs, Mr Asare Akuffo (R) and Simon Dornoo (L)The Deputy Governor, Mr Millison Narh interacts with banking chiefs, Mr Asare Akuffo (R) and Simon Dornoo (L)Bankers and some analysts are divided over the exact purpose behind the new capital requirement for new banks into the economy and its appropriateness at this time.

While some bankers and analysts believe the move is timely and responsive to the changing economic conditions in the country, others think that it was inappropriate to use such policy to cause banks to merge rather than allowing market forces to achieve that feat.

The Managing Director of GCB Bank, Mr Simon Dornoo, welcomed the initiative, describing it as a step in the right direction.

The Managing Director of the HFC Bank, Mr Asare Akuffo, however, said it was better to allow market forces to cause banks to consolidate rather than using policies to achieve that.

“Mergers and acquisitions are a factor of the market; if the market wants it, it will happen,” Mr Akuffo said in a separate interview.

Mr Akuffo just handed over to Mr Donoo as the President of the Ghana Association of Bankers (GAB).

A banking analyst, Nana Otuo Acheampong,  said the move by the Bank of Ghana was in line with international atmosphere where all “deposit taking institutions (DTIs) are being encouraged to put more of their capital at risk rather than continue to put other people’s money at risk.”

Nana Acheampong, who is also the Head of the Osei Tutu II Centre for Executive Education & Research (OTCEER) in Kumasi, is among those that believe that the central bank was trying a subtle attempt to encourage banks to consolidate.

“If you take the latest statistics on the capital structure of the average Ghanaian universal bank, for every one Ghana cedis on hand, the bank’s own risk capital is 13 pesewas against other people’s risk capital of 87 pesewas. This is what we call the capital structure/leverage ratio,” he explained.

Consequently, Nana Acheampong noted, “globally, DTIs are being encouraged, a mild form of being forced, to increase the ratio of their own risk capital”.

In the week ending August 9, the Bank of Ghana hinted it would soon issue new directives to raise a minimum capital of new banks desirous of operating in the economy to GH¢120 million.

Although the central bank, which supervises banks and non-financial financial institutions in the country, said it would soon issue the directives to that effect, it is yet to set a definite deadline during which the policy will become effective.

The First Deputy Governor of the Bank, Mr Millison Narh, explained to the GRAPHIC BUSINESS in an interview that new non-bank financial service companies would also require GH¢15 million with existing ones expected to increase their capital base from GH¢7 million to GH¢15 million.

Mr Narh said microfinance companies must also increase the minimum capital from GH¢100,000 to GH¢500,000.

The BoG believes that the shoring up of stated capital would help in effective risk management and also ensure that banks operate sustainable businesses.

“We have taken measures to get the increases gazetted and that will done soon,” Mr Narh told the GRAPHIC BUSINESS, adding that the directive was in response to growth in the economy called for well capitalised banks that can withstand vulnerability.”

He, however, added that existing banks would not be affected by the directive.

Some analysts of the financial services industry believe that the directive for increased stated capital for new banks is a bait to cause existing banks to merge for increased capital base.

The BoG in 2007 started a process to make banks increase their capital base from the then GH¢10 million to GH¢60 million.

This follows a similar exercise earlier in Nigeria, which led to several mergers and acquisitions among the banks. However, Ghana’s exercise did not yield any mergers, except the take-over of Intercontinental bank by Access, which happened at their parent level in Nigeria.

The least it did for the local economy was the inflow of some capital from institutional investors as well as development finance corporations such as the French PROPARCO, Swiss FMO, the German DEG and the World Bank’s private sector lending arm, the International Finance Corporation (IFC).

Some financial analysts believe that the latest announcement by the BoG is the second round of attempts to cause shake-ups in the local banking industry, to orchestrate mergers among banks, which are considered too microscopic in a changing time to underwrite large transactions, such as those in the oil and gas sector.

Currently, a most of the funds for the country’s upstream oil and gas industry comes from abroad, with the downstream business mainly financed by the banks with offshore ownership.

Mr Dornoo, who is also the Managing Director of GCB Bank, cited the steady growth in the economy and the commercial production of oil and gas, as some of the factors that favoured a regime of banks with bigger balance sheets.

“Strong banks stand a better opportunity of doing bigger businesses and if that is what the central bank is aiming at, then I think its a good idea,” the GCB Bank managing director said.

“If you take the entire industry recapitalisation for instance, which is around US$2.2 billion, you will realise that it is just the recapitalisation of one bank in Nigeria,” Mr Donoo stated.

He, however, noted that the new directive could be aimed at getting banks to consolidate to reduce their numbers in the country.

“May be the Central Bank wants a situation where they will have less banks so that they won’t have to employ more people again and incur extra cost in their Banking and Supervision Department.

By Charles Benoni Okine, Samuel Doe Ablordeppey and Maxwell Adombilla Akalaare / Graphic Business / Ghana


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