Regulators are aiming to use higher capital requirements as a means of encouraging consolidation in the Ghanaian banking sector, in a bid to repeat the success of neighbouring Nigeria. In 2004 the Central Bank of Nigeria’s then newly appointed governor, Charles Soludo, faced a weak and thinly spread financial sector that failed to meet the needs of private businesses and retail customers. At the time, most of Nigeria’s 89 registered banks were smaller enterprises linked to powerful families that focused their businesses on currency trading and Treasury bills, rather than accepting deposits or issuing loans. “Confidence in the system was very low,” Soludo told local press in 2012. “All the banks put together were smaller than the fourth-largest bank in South Africa, and none of them were in the top-1000 banks in the world. If any private sector entity needed a loan of $500m, it had to syndicate it from all the banks put together – or go abroad.” To remedy this, Soludo raised the minimum capital requirements for banks 12-fold, sparking a wave of mergers and acquisitions (M&A) that left 25 banks in operation.
Room For Consolidation
Something like this exists in Ghana. As of November 2017 it had 36 banks, of which 19 were locally controlled. In 2016 their total assets were GHS86.7bn ($20.8bn). Total deposits stood at GHS54.5bn ($13bn), representing 84% of GDP, while net loans amounted to GHS31.5bn ($7.5bn), equivalent to 19% of GDP. The Bank of Ghana (BoG) already raised the minimum capital requirement twice in the past decade: from GHS7m ($1.7m) to GHS60m ($14.4m) in 2008, and again to GHS120m ($28.7m) in 2013. The aim is to make banks more resistant to unforeseen shocks and losses. While depreciation of the cedi – from GHS0.9:$1 in 2008 to GHS4.50:$1 by 2017 – has eroded the value of reserves, a BoG analysis in August 2017 found that seven banks still failed to meet these requirements.
Revoke & Regulate
The analysis was prompted by the collapse of two local banks that required the central bank to intervene. On August 14, 2017 the BoG approved Ghana Commercial Bank (GCB) to take over the assets and deposits of UT Bank and Capital Bank, saying it had no choice but to revoke their licences, as both were deeply insolvent and unable to develop an acceptable plan to rectify accounts.
One month later the BoG mandated that all commercial banks would have to more than triple their minimum capital reserves to GHS400m ($95.8m) by end-2018. Though it had signalled that a hike was on the cards, the BoG’s new regulations set out a rise that was sharper than anticipated and imposed a limited timeframe. The central bank said it was introducing “a new minimum capital requirement as part of a holistic financial sector reform plan to further develop, strengthen and modernise the financial sector to support the government’s economic vision and transformational agenda”.
Path Ahead
At the time, only four banks – GCB, Zenith Bank, Barclays Bank and Standard Chartered Bank – met the new requirement. To achieve sector-wide compliance, Ghanaian banks will have to raise a combined GHS8.6bn ($2.1bn), according to PwC. One likely source of funds for this will be the domestic capital markets. Following the 2016 initial public offerings of Agricultural Development Bank and Access Bank Ghana, 13 banks are listed on the Ghana Stock Exchange (GSE), and the current government has made clear its intentions to strengthen the capital markets through increased listings and trading. However, since 2012 the combined capital raised on the GSE is only GHS1.4bn ($335.2m), one-sixth of the amount needed to recapitalise the nation’s banks.
M&A
The BoG has remained confident that the new requirements will push the sector towards greater M&A activity, and that having fewer banks in the sector would put less strain on the ability to raise funds via the GSE. “We have different feedback, with many investors interested in investing in the sector, both domestic and external,” Ernest Addison, governor of the BoG, told local media. “If we get consolidation in the industry you will find that there is enough depth in the Ghana capital market.”
Outcomes
However, previous attempts to encourage consolidation in the industry have produced mixed results. In December 2011, pan-African lender Ecobank acquired Ghana’s Trust Bank for $135m, but aside from this the country’s financial institutions have shown a determination to resist takeover bids. In the months following the 2017 policy move, a number of banks – including Fidelity Bank, First Bank of Nigeria and Access Bank – made public their intention to meet the new requirements either by working through their own operations or through the injection of external capital.
The size of the increase may prove too much for the country’s smaller banks, however. Addison said he expected that 10-15 banks with market shares of under 5% of deposits and assets would be merged or acquired. In September 2017 Anthony Jordan, managing director of HFC Bank, told local press that his firm was in possible acquisition talks with two smaller banks. “We remain very much aggressive in the market and we have the expertise when it comes to acquisitions as we are ready to grow the bank through such means, should the need arise from the increase in the minimum capital requirement,” Jordan said. “This is because we suspect some of the banks will not be able to meet the GHS400m ($95.8m) set [by the new regulation].”
Market Value
Government and industry players are in agreement that the consolidation process should provide synergies for each party in any potential M&A activity. “The process should be driven by market-based valuations, with net positive benefits for each party, and provide lower-cost capital to the private sector,” Sampson Akligoh, director of the Financial Sector Division at the Ministry of Finance, told OBG.
If successful consolidation takes place, it could result in sounder banks with stronger balance sheets, with clear positive effects on private sector growth. PwC’s 2017 survey of the Ghanaian banking sector, which was published before details of the new policy were released, noted that larger banks would have increased capacity to invest in the real economy, and that “with good underwriting practices, banks will be better placed to underwrite bigger credits to other sectors of the economy”. Under current regulations, banks cannot lend more than 25% of their equity to a single client, though the BoG has been known to issue waivers for certain transactions beyond this limit.
Caution
The pressure applied to trigger M&A activity has not been without its critics. In its 2017 report PwC noted that a sharp increase in the minimum requirement, combined with the anticipated introduction of risk-based capital management regulations, could make banks overly cautious, resulting in suppressed credit growth. “There should be some banks that are allowed to remain small, because each operates in its own market space and client base,” Robert Quansah, head of strategy at Bank of Africa, told OBG.
Looking Ahead
The sheer size of the required increase in capital, combined with the short timeframe set for implementation, makes it highly unlikely that all of the country’s smaller banks will make it to 2019 with their independence intact. “There was uproar, and the opposition by vested interests was gargantuan,” Soludo said of the Nigerian reaction to his own reforms. However, its success brought about the start of a new era for the banking system, and in the following years many Nigerian banks became major regional players, with several operating in Ghana. A similar transformation may lie ahead for Ghana’s strongest financial players.
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