Institute for Fiscal Studies backs calls for tiered recapitalisation for banks

Business News of Tuesday, 1 August 2017



Dr John Kwakye, Head of Research at the IFS

Policy think-tank, the Institute for Fiscal Studies (IFS), has asked the Bank of Ghana (BoG) to reconsider plans to announce a common stated capital for banks, explaining that the segmented nature of the economy required that banks are strategically positioned to play in each segment.

As a result, it has asked the central bank to replace its uniform recapitalisation directive with a tiered system that will ensure that banks with a focus on smaller projects are not overstretched to raise huge sums of money that they may not need.

The tiered form of recpitalisation will also help prepare the banks to lend to other secluded areas that have hitherto been neglected, the Head of Research at the IFS, Dr John Kwakye, told the GRAPHIC BUSINESS on July 27.

The Nigerian model

His concerns on the uniform capital for banks are similar to those expressed by the Chartered Institute of Bankers (CIB).

In June, this year, the CIB, a network of bankers that have chartered, advised the BoG to create a tier system that can cater to the needs of the various banks.

The tiered form of recapitalisation, it said was needed to ensure that the country fully benefited from recapitalisation. Dr Kwakye shared in that opinion in a separate interview.

Given that banks are not of equal standing and size, he said “setting the same minimum capital for all banks is problematic,” hence the need for BoG to find a new form of recapitalisation that ties the stated capital to the financial standing of the lenders.

This, he said could be a starting point to the creation of a tiered banking model, similar to what pertains in neighbouring Nigeria.

There, the country’s banking model, introduced in 2011, requires that the Central Bank of Nigeria (CBN) licences banks to operate either as regional, merchant or commercial banks.

Beyond having different roles in the financial intermediation business, banks in each of the categories have different stated capital requirements, making it possible for regional banks to hold less capital compared to those in the commercial and merchant category.

IFS’s Head of research said BoG could consider applying same to the banking sector.

“Here, BoG says every bank is a universal bank and I have a problem with that because some banks are smaller. Since they are smaller, why don’t you limit their operations and limit their capital,” he asked.

He observed that the BoG’s refrain that “if you cannot survive, go join the others” was not entirely right.

“I have heard a BoG official say that if you cannot operate as a bank, then you have to become a savings and loans (SLC) company but SLCs are not banks.”

“Strictly speaking, a bank is a company that takes deposits and lends and because of the reserve requirements that the BoG apply to them, they (the banks) can create secondary money and all that.”

“So, a bank is distinct from a SLC. When they say that if you cannot operate as a bank, then drop to a SLC, then I think it is right,” he said.

Smaller banks

Broadly, Ghana’s financial sector is categorised into; the banks and non-bank financial institutions (NBFIs).

The NBFIs comprise rural and community banks (RCBs), microfinance companies, money lenders (now rebranded to micro credit) and savings and loans companies.

While the RCBs are expected to operate from the hinterlands, the other institutions under the NBFIs are spread across the country, lending mostly to small and medium enterprises.

On whether or not the NBFIs were not serving the purpose that smaller banks with less stated capital are expected to serve, Dr Kwakye said the two were not the same.

Using the United States of America (USA) as an example, IFS’s Head of Research said just like Ghana, SLCs also existed that yet state banks are dotted across the country.

“Generally, people do not want to change things because new things are cumbersome and things like that and also central bank sometimes tend to be conservative; the way they do things, the want to keep it that way but I think that we need to probably change things,” he said.

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