The banking sector underwent a major round of recapitalisation between 2008 and 2012, when institutions were required by the regulator to increase their minimum capital from GHS7m ($1.9m) to GHS60m ($16.7m), and this lifted the relevant ratios, which were already high, to levels that suggest safety and soundness by a comfortable margin.
Above & Beyond
The Banking Act 2004 sets the minimum ratio at 10%, while the cash reserve requirement is fixed by the central bank, the Bank of Ghana (BoG). In an attempted to mop up excess liquidity, the cash reserve requirement was lifted, from 9% to 11%, in April 2014, and then taken back down to 10% in November 2014. As of December 2014, the capital adequacy ratio of the sector was 17.9%, down from 18.5% a year earlier and from 19.1% in 2010, but it remains substantially higher than the 13.8% recorded in December 2008. In terms of Tier-1 capital, the banks are also quite strong, according to BoG statistics. At the end of 2014, the ratio was a healthy 15.3%, up from 14.7% in 2013 and 12.8% in 2008. Overall capital is up significantly from where it was in 2003 (9.3%, with Tier 1 at 6.1%), according to IMF research.
Individual banks are particularly well capitalised. Standard Chartered Bank’s ratio was 15.67% at the end of 2014, down from 23% a year earlier, according to the bank’s annual report for 2014. Ecobank was at 17.22% in 2014, up from 13.69% a year earlier. While its ratio was lower than some of its competitors, Ecobank is Ghana’s best-capitalised bank on a gross basis, with stated capital at GHS227m ($63m) in 2014. CAL Bank’s ratio in 2014 was 22.5%, up from 19.4% a year earlier, while Société Générale Ghana’s ratio at the end of 2014 was 13.48%, down from 15.91%.
In general, liquidity has been good. The liquid-assets-to-total-deposits (core) ratio as of December 2014 was 42.5%, up from 33.7% a year earlier, while the liquid assets-to-total-assets (core) ratio was 26.8% at the end of 2014, up from 21.7% a year earlier. According to a report by Ecobank Research, the sector is highly liquid because of the high percentage of government bonds that are held by the institutions. (https://www.stgeorge-inn.com/) The report also noted that the restructuring of Tema Oil Refinery debt in 2010 helped to improve the ratio overall for the sector. Ecobank Research adds that while the ratio did drop from its peak in 2011, that was mainly due to the fast growth of credit.
Ghana compares well to its regional peers. In terms of its liquidity, the World Bank (which publishes the ratio of bank liquid reserves to bank assets) placed Ghana’s banking sector at 28.3% in 2013. It says that Sierra Leone’s ratio was at 13.4%, while South Africa’s was at 3.5% and Kenya’s was at 9.2%. Nigeria’s banking sector was slightly higher, at 31.1%.
In terms of sector-wide capital adequacy, the World Bank put Ghana at 14.7% in 2013, while Nigeria was at 10.3%, South Africa at 7.7% and Kenya at 11.8%. “The industry also continued to show a strong capital position, with the capital adequacy ratio averaging 17% – well above the minimum 10% requirement,” said Henry Kofi Wampah, governor of the BoG, in November 2014. “The liquidity position of the industry was comfortable, although the upward adjustment of the cash reserve ratio put some stress on a few banks.”
Other banking segments have also been compelled to lift their capital levels. As a result of the Non-Bank Financial Institutions (NBFI) Act 2008, savings and loans companies were required to bring their capital to GHS4m ($1.1m) by end-2011 and GHS7m ($1.9m) by end-2012.
In 2011 the central bank further clarified and expanded the rules on capital for smaller institutions in its circular Licensing Requirements for Microfinance Institutions. It said that rural and community banks, finance houses, and savings and loans companies will be regulated under the terms of the Banking Act and the NBFI Act. “Several banks this year have either executed or considered an acquisition of an NBFI. When you acquire such an institution, you are buying the assets but also the skill of this NBFI in serving a unique set of clients,” Kobby Andah, managing director of the Bank of Africa, told OBG.
Smaller institutions have to meet different requirements. Susu collectors (a form of small-scale deposit-and-loan activity) and financial non-governmental organisations that make loans and take deposits are required to have GHS100,000 ($27,750) of capital if they have one office (and more if they have has more offices) and must have capital equal to 10% of their assets. Money lenders and financial NGOs that do not take deposits will need GHS60,000 ($16,650) of capital and their assets cannot be more than eight times their capital. Susu collectors and individual money lenders do not need to have capital.
In 2013 the central bank decided to further increase the minimum and published the circular Revision of the Minimum Paid-Up Capital and Liquidity Requirement. In the document, it called for all deposit-taking microfinance institutions to have at least GHS500,000 ($138,750) of capital, while non-deposit taking institutions would need GHS300,000 ($83,250). Each branch requires an additional GHS100,000 ($27,750), or GHS200,000 ($55,500) for each branch above a total of five. The BoG also published new liquidity rules. Each institution needs to keep 10% of assets in an account at a class-1 bank and 20% in government bonds. The increase was scheduled in stages: GHS250,000 ($69,375) by June 30, 2015 and the total a year later. Despite these rules, and in light of recent failures in the sector, the central bank is considering an increase to GHS1m ($277,500) for microfinance.
While the GHS120m ($33.3m) capital level is being advertised by the central bank as basically optional for existing banks, the BoG is pushing for it. All new banks must reach this level and all others are being pressured to hit the target. Indeed, some observers have argued that even meeting this level will not be sufficient. For example, Ecobank Research stated in a research note in 2013 that GHS120m ($33.3m) is not enough and that the minimum should be GHS200m ($55.5m). It added that an increase would require another GHS1bn ($277.5m) of capital to be raised by the banking sector.
With the dramatic fall in 2015 in the value of the cedi, there have also been occasional calls to set minimum capital levels in dollars rather than in cedis. GHS60m ($16.7m) of capital may appear less adequate over time, should the currency continue to slide. Although there is only limited support for the idea, Johnson Akwetey, a former banker with Morgan Stanley, told local press in 2012 that denominating in dollars would help stabilise the cedi.
Another major factor to consider is asset quality. While non-performing loans are low, and provisions are high, they are starting to rise (up a full percentage point in 2014) and bring into question the stability of the system. In its 2014 Article IV Consultation, the IMF raised a number of concerns regarding asset quality. It noted that the sizeable holdings of government securities bring as much worry as they do comfort, as they expose the banks to interest rate risk and sovereign credit risk. The IMF also raised questions about the foreign currency borrowings of the local banks and said they may be exposed to the falling cedi. “Asset quality is likely to decline if macroeconomic imbalances persist and the economy slows down,” indicated the IMF report.
Basel On The Way
Moreover, the BoG has been working to implement the Basel II regulations. While the process has been slow, with technical assistance ongoing as of early 2015, once in place the banks in Ghana will have to fine-tune their capital to meet the specific risks of their balance sheets.
This will likely bring more stability than can be achieved with the more simplistic benchmarks of gross capital minimums and ratios of capital to total assets. “We are going to Basel II,” said Philip Cobbinah, assistant director of the banking supervision division at the BoG. “When we get there, capital will be assessed. Capital needs will be dictated by risk.”