Consolidation to strengthen Ghana’s banking industry

Ghana is pushing ahead with efforts to strengthen its domestic banking sector, encouraging the consolidation of local institutions.

In early August the Bank of Ghana (BoG) announced that it had dissolved five local banks – Beige Bank, uniBank, Sovereign Bank, Construction Bank and Royal Bank – and merged their operations into the newly established Consolidated Bank Ghana (CBG), following concerns over the liquidity of the individual lenders.

The CBG was granted a universal banking licence, and will take over the assets and liabilities of the five institutions.

The 191 offices of the five banks became branches of the CBG at the time of the takeover; however, in early September the newly consolidated bank announced it would reduce this number to 93 as part of efforts to rationalise costs and avoid the duplication of services. As a result, some 1700 jobs will be made redundant.

The consolidation followed the central bank’s decision in August last year to withdraw the licences of two other lenders – UT Bank and Capital Bank – and place them under the control of the GCB Bank, formally known as Ghana Commercial Bank, after they were judged not to have met operational requirements relating to capitalisation increases and liquidity.

Government to push ahead with consolidation

The takeover of seven banks in the past year exemplifies ongoing government efforts to strengthen local players to better compete with foreign lenders and expand internationally.

Speaking during a visit to Nigeria in early September, President Nana Akufo-Addo said he wanted Ghana to follow the example set by Nigeria in its recent consolidation of the banking sector, where the number of local lenders was reduced from more than 80 to 14.

“We want to undertake that same exercise in Ghana so that at the end of the process we can have few and strong banks. Even if they are few, then we know they can compete with the stronger foreign ones,” he said.

“We cannot have a situation where the dominant banks in the country are all foreign banks. It is very dangerous for our future,” he added.

Reforms could further reduce number of banks

Following the latest round of consolidation, Ghana has 31 banks operating in the market; however, the ongoing reform process could result in further mergers or acquisitions in the near future.

The push to consolidate comes ahead of a December 31 deadline set by the BoG for domestic lenders to improve their capital levels to the required minimum of GHS400m ($84m).

Despite concerns over some lenders, the outlook remains positive, according to a sector report released by the BoG on August 30.

At the end of June the sector’s capital adequacy ratio (CAR) – at 19.3% of risk-weighted assets – was well above the regulatory requirement of 10%, and considerably higher than the 14.8% recorded one year earlier.

Meanwhile, industry assets stood at GHS100.3bn ($20.7bn), a 15.6% year-on-year increase, with profits of GHS1.2bn ($249.6m) in the first half of the year coming in 21.7% higher.

Reforms to lead to medium-term benefits, short-term challenges

While the reforms are expected to provide a boost to the broader economy by bolstering the financial sector, there are concerns there could be some short-term costs involved.

In its most recent review of Ghana’s economy, completed at the end of June, the IMF highlighted the strengthening of the financial sector as a key factor that would improve medium-term prospects for economic growth.

Though this consolidation should strengthen the sector in the medium term, the government’s recent injection of funds into the newly established CBG – consisting of GHS450m ($93.5m) in capital and a GHS5.8bn ($1.2bn) bond to cover the liabilities it has taken on – represents 2.6% of GDP, according to estimates by ratings agency Moody’s, and comes as national debt is expected to reach 72.4% of GDP by the end of the year.

With cost-cutting efforts and the recapitalisation under way, the government has said it intends to divest itself of its shares in CBG within two years, opening up potential investment opportunities if the rehabilitation process is successful.

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