Interview: Charles Cofie, Samuel Adjei, Simon Dornoo, Kweku Bedu-Addo
What can be done to improve the ability of Ghanaian banks to cater to larger scale projects?
KWEKU BEDU-ADDO: The ability of Ghanaian banks to take part in larger transactions is linked to the capital base, which is currently insufficient. Looking at oil and gas, upstream infrastructure alone requires sums ranging between $20bn and $30bn and, even for downstream operations, the banks do not have the balance sheets necessary. At best they could participate in syndications. Some industry consolidation could potentially help to improve financing capabilities.
Similarly, an increase in minimum capital requirements might help – for example Zambia has a minimum requirement of $100m.
In the meantime, we need to focus on what we can support, which are small and medium-sized enterprises (SMEs) and local corporates. If you look at the balance sheets and liabilities of banks, it is mostly on demand. You cannot fund long-term assets with demand deposits. There is a liquidity mismatch. At the same time, where are the benchmarks? The longest-dated instrument is a five-year bond. The government has announced that it will extend the bond to seven years, but we want to see it doing 10, 15 or even 20 years, like is done in Kenya, for example.
This would create a yield curve so that the market can use this as a benchmark and appropriate products can be created in comparison to the risk-free curve. Ghana also needs to create a secondary market, so that these instruments become tradable and liquid. This is something that investors want.
SIMON DORNOO: The entire industry capital was $2.2bn in 2012, which means altogether banks had a single obligor lending restriction of $550m, a low figure given the large funding requirements for infrastructure projects. Banks therefore focus on lighter infrastructure projects if they want to go on their own or go down the syndication route to do larger projects. Local banks that are subsidiaries of international banks are able to undertake such large-scale projects by leveraging group balance sheets. From a regulatory standpoint, the Bank of Ghana is pushing the agenda by not granting dispensation to banks to exceed their single obligor limits, so the syndications market will be forced to take off. As the economy grows we expect banks to increase their capital base to take on larger risk assets. There is also very limited pool of longterm local currency funding to support lengthy projects. Most people invest in short-term instruments, typically 90 days, and you also observe that 90% of investment in three to five-year Treasury bonds is held by foreign investors. Lastly we need to move to a low interest rate environment to improve the chances of success of such large-scale projects. At a current interest rate of 25% per annum such infrastructure projects will not be viable.
SAMUEL ADJEI: On the whole, a bank’s ability to finance largescale projects, and also attract long-term deposits, depends largely on the level of confidence that the general populace and businesses have in the banking sector, based on the stability of the macroeconomic environment as a whole. Banks will also require very strong balance sheets to be able to finance large-scale projects on their own. For the most part they will have to seek some kind of collaboration – generally in the form of syndication – with other banks in order to underwrite these large business transactions.
In Ghana, we are fortunate to have enjoyed relative macroeconomic stability for a number of years now, backed by the recent requirement by the central bank for all 26 banks to recapitalise to the tune of $30m equivalent.
In fact, the Bank of Ghana has just announced that new entrants into the Ghanaian banking market are expected to have a minimum stated capital of GHS120m ($61.7m). This is aimed at ensuring that Ghanaian banks are positioned to meet the financing needs of all businesses, without respect to scale.
At the end of the 2012 financial year, Ghana’s top four banks had a combined total equity in excess of GHS1.4bn ($719.7m). However, the remaining 22 banks had an average of about GHS124m ($63.7m) equity. Given the limits on the amount of funds each bank can lend to any single borrower – with the regulatory single obligor limit of 25% of net worth – this highlights the local sector’s lending constraints. Still, given the kind of macroeconomic environment that Ghana has enjoyed over the past few years, banks can leverage this to attract long-term deposits. Potential depositors like to see clear gains from their savings and investments on the money market.
CHARLES COFIE: Relatively few banks can do the big projects, especially when it comes to serving the needs of the oil and gas sector, so there is a continuous need for syndication. The requirement for banks to have higher capital is a step in the right direction and the current minimum capital amount is appropriate given the size of our market. Ultimately, higher capital is a permanent source of stability and a resource for banks to leverage. Risk absorption and being able to participate in bigger projects serves the interest of the customers. It will make banks more resilient to external market shocks and create a much safer environment for the banking public, as deposits in Ghana are not insured as they are in many other countries. Still, when you look at our levels of inflation and depreciation of the cedi against other countries, Ghana is not as stable as other countries. We need a more stable macroeconomic environment, and we need the players in the sector to be able to craft longterm investment opportunities that will meet the medium-term requirements of the banking public. With the current fluctuating macro conditions, it is difficult to sell longer-dated securities to anyone.
What are the main drivers behind the high interest rates, and what can be done to reduce them?
COFIE: When people look at the high interest regime, they mostly tend to blame a single culprit. I think that the culpability rests in a number of areas. Many banks still have some degree of internal institutional weaknesses, so there are loopholes which create a situation where non-performing loans (NPLs) arise and the effectiveness of loan recovery is not as good as it can be. As a result of these weak internal structures, a lot of banks are not able to pass on falling interest rates to the consumer as quickly as they should.
You also have to consider the government, who is the biggest player in town; the biggest employer, payer and borrower. People often do not look at the country’s national accounts. There is a huge deficit, which is financed by continued borrowing. That is why Treasury bill (T-bill) auctions are heavily patronised. Also, many consumer products that are readily available are imported, so the public has also played a role. We are all partly to blame for high interest rates.
We now talk about growing the economy. Every economy needs two things to grow: productivity and investment. Who is going to invest when the cost of borrowing ranges from 25% to as high as 30% for smaller players? You need a 40% return on your equity to make this viable, which is crowding out investment opportunities. To tackle that issue we really need to pursue a mutual and strategic effort.
ADJEI: Generally, there are many causes of high interest rates in any economy, the key factor being the interaction of demand and supply for the particular type of loan or deposit product. In addition to this, issues such as credit risk, government policies, and the cost of funds to the lending institutions all have effects on interest rates. In our particular situation, loan products are priced using the policy rate of the central bank as a guide, as well as taking into account the type and cost of the initial deposits taken from the market. These deposits have assumed high prices due partly to the proliferation of non-bank financial institutions, mainly micro-finance enterprises, which have cultivated good appetite for highly priced deposits. Perhaps the most important factor worthy of mention is the fact that banks are also usually guided by the prevailing risk-free T-bill rates as a key benchmark for setting interest rates. Additionally, market specific risk profiles are drawn for the various sectors of the banking market to guide banks in their loan pricing.
How would you rate access to reliable credit data for prospective borrowers in Ghana?
DORNOO: For a credit bureau to be effective it needs a quite large database in my view. The existing credit bureaux are relatively new so need time to build their databases on borrowers and their history. They are doing a great job and are already beginning to have a positive impact on credit culture. It is now a requirement of our credit process to check on prospective or existing borrowers from XDS Data. In the long run, I see banks expanding their unsecured lending portfolio because of reliable credit data.
BEDU-ADDO: The establishment of multiple credit bureaux is a welcome development and, while the start was not too smooth, the situation will continue to improve. Certainly, within our bank, there is no lending done without first running data checks on the individual or the entity.
As a result, the establishment of credit bureaux has improved the financial sector. It creates more transparency and, over time, it might help to reduce current non-performing loan levels.
Gradually people will begin to realise that there is a database out there with their credit history and this will begin to influence consumer decisions, particularly as more banks use the credit bureaux. That, together with the collateral registry, will improve the credit process in Ghana, making the system as a whole more robust over the next four to five years.
ADJEI: Traditionally, Ghana has not been able to build very good sources of credit data for which banks and other lending agencies can rely on. Past attempts were largely ineffective, due mainly to the bureaux’ inability to get good and sufficient credit data, as many of the banks were uncooperative. Some banks have been very unwilling and reluctant at providing customer data into the data pool, making access to reliable credit data on some loan applicants difficult.
The recent establishment of new credit bureaux, while not yet successful in creating the needed transparency to facilitate the credit appraisal process of banks, nonetheless goes a long way in guiding banks to differentiating high- and low-risk borrowers.
Banks generally require sound credit appraisal and lending guidelines, backed by excellent credit risk management and loan monitoring policies to be able to reduce the levels of NPLs on their books.
In Ghana today, the industry NPL rate has declined significantly to 12% from about 25% in 2009. This could be further improved, if the referencing bureaux prove to be very effective.
To resolve these difficulties, I will proffer three nonmutually exclusive solutions. The banks should see data pooling and sharing of credit information as reciprocal, and willingly contribute data on their customers to the bureaux.
The referencing bureaux should ensure absolute confidentiality in dealing with the data pool, so as to build customer confidence. Lastly, the Bank of Ghana – through the Banking Supervision Department – should compel banks to contribute data to, and also retrieve credit information from, the bureaux for all loans, particularly consumer and SME loans. These three suggestions would be a good start.
What do you see as the single biggest short- to medium-term risk for Ghana’s banking sector?
DORNOO: Operational risk is still elevated in the banking sector, for example, we now have 26 banks all trying to recruit from the same pool of banking staff. The rate of growth of the population of trained staff has not kept pace with the growth in the number of banks.
International banks have an advantage over local banks when it comes to human capital development because they leverage their group-wide expertise to provide the necessary training.
BEDU-ADDO: With the recent capitalisation, I hope that banks would not become reckless in their credit decisions. By local standards, they would have the balance sheets to take on more risks. The temptation to take on more risk exists before banks are ready to take on those risks. Hopefully the regulator will have identified this risk, and perhaps they can scrutinise the banks more to make sure that capitalisation does not lead to NPLs going up a few years from now.
How likely do you think additional consolidation is over the next one to three years?
ADJEI: If the current minimum capital for banks is maintained, we are not likely to experience much consolidation in the industry. However, a significant increase in the required capital by the regulators could result in industry consolidation. I have already indicated that new entrants are expected to have minimum capital of twice the existing banks. If this new requirement is later extended to cover all players in the Ghanaian banking industry, then the possibility of consolidation could be real, but otherwise it remains an unlikely development.
Presently, 15 out of the existing 26 banks can boast of having over GHS120m ($61.7m) equity, leaving the fate of the remaining 11 open.
DORNOO: The pace of consolidation would have been accelerated if we got into a lower interest rate environment. The minimum capital requirement was increased to GHC60m (US$30.8m) and all existing banks complied. Then minimum capital was increased to GHC100m for new entrants and this has not restricted entry. I think banks will feel the pressure when they have to operate in a low interest rate environment which will force them begin to consider more seriously, scale and efficiency as the next option.
COFIE: In 2013, at least three more banking licences could be given out. Certainly consolidation will not happen during the short term. Many smaller players do not even want to become a big bank, as they are happy operating in their niche market. It may be a disappointment to the regulator.
One of the ideas behind the increase of the minimum capital requirements was to encourage consolidation, but the desired effect has not been achieved due to a multiple of factors. Instead of local banks merging, they went out in some cases and sold equity to foreign partners who have come in as latent investors. This was not the initial intention, as the main aim was to grow our local banks.
Why are so few of Ghana’s banks listed on the Ghana Stock Exchange?
COFIE: The entire procedure is expensive and cumbersome for any company to enlist, which has been a deterrent in the past. Now, the alternative market has been launched which makes things a lot easier, so this may change things.
Regarding disclosure requirements, there is a big advantage in being listed as it strengthens a company’s internal governance processes. The stock exchange is there to raise long-term capital, but many people will say that they do not need to raise any capital and sell 20-30% of their business. The new governor is on record as seeking to encourage banks to list and, from a disclosure and good governance point of view, this will be a healthy development.
BEDU-ADDO: Standard Chartered has been listed for more than 20 years, but it is more a way of getting the local population involved so they can benefit from dividends. The question is if banks are willing to go through the process of enlisting. The depth of the market is not sufficient enough yet, so a truly convincing case for banks to list is still missing. Perhaps when we see the market deepen, when we see debt and capital markets develop, with corporate bonds being issued and a more liquid stock exchange, people will realise the benefits of being able to raise cheaper funding.
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