Increasing Minimum Capital Requirement is not the Panacea to Addressing Ghana’s Banking Sector Woes

Prof John Gatsi, University of Cape Coast

Accra, Ghana, May 15, 2018//-With just six months to the deadline of the GHC400 million ($88.5million)  minimum capital requirement (MCR) by the Bank of Ghana (BoG), economists, bankers, banking analysts and political commentators are yet to come terms with the rationale behind the increase.

They argue that increasing the minimum capital requirement is not the panacea to addressing the country’s banking sector woes.

The critical question is “do we need all banks to undertake large transactions”? The answer is no. Even currently some banks don’t do such large transactions, according to a renowned Economist and Professor of  the University of Cape Coast (UCC), Prof John Gatsi.

He added: “The reality is that banks do different businesses either base on size or transaction type. Increasing the minimum capital from  GHC 120million to GHC400million which more than  200% is maybe genuinely too high and  could be unhealthy attempt to create vulture like mergers, acquisitions and takeovers”.

“Increase in minimum capital of banks with short time period to comply may seem harsh and not a replacement of good corporate governance that strengthens internal controls, quality management to reduce operational risk, standard  credit and risk management policy as well as proper liquidity and transparent treasury management of banks”.

It is a misleading impression that the banking sector will be robust through a forced inorganic takeovers and acquisitions, Prof Gatsi replied to proponents of the MCR increment.

Perhaps differential capital base aligned to the segment of the market may be feasible though this may not be in line with universal banking, he told African Eye Report.

“We have seen minimum capital increased before but the activities that led to less effective banking including  weak management, poor corporate governance , high interest rates delivered by economic management and unclear supervisory oversight still persist”.

Surprisingly, the Bank of Ghana is yet to ensure commercial banks comply with the main requirements of Basel II “this should tell all of us the regulatory shortfalls in an era when the provisions made by banks to cover default loans including those linked to government  such as energy sector loans and huge record of default from the SME sector are real challenges that will not be solved by only increase in minimum capital”, Prof Gatsi added.

Those commercial banks ready to take advantage of the situation may even say the GHC400million is small but the reality of banking in Ghana must be looked at.

“The danger we face is the slow response to poor governance and in some cases unattractive investment in rural banking sector which finances  mainly rural and small businesses.

The BoG must be encouraged and supported to enhance the outlook of banking but in a balanced manner”.

In the recent IMF review, the government and BoG are encouraged to step up the cleaning process in the banking sector. The question seeking answer is that “does a bank fall so deep below the regulatory redline without some contribution from the turnout from economic management, regulatory weakness and compromises?

“While we lament, and sometimes play the victim drum for BoG to dance, our collective acceptance of Act930 should energize BoG to ensure deeper and balanced reforms”, the renowned economist stressed.

Prof Gatsi stated that a critical look at the requirements of corporate governance in the banking sector would reveal that corporate governance failure maybe a reflection of regulatory weakness.

“If we continue to treat corporate governance failure as one sided issue then, there is a problem.  High interest rate remains potential source of loan default. Enforcement of corporate governance rules in banking should be complemented with corporate governance culture among businesses and zero tolerance to intentional default among political borrowers”.

Indigenous banks call for more time

In September 2017, the BoG announced that all 34 banks in the country have up to December 31, 2018 to increase their MCR.

This means all banks, foreign, local-foreign partnership and wholly-Ghanaian-owned (indigenous) at that time have only one year, three months to raise an additional GHC280 million each to meet the MCR.

Some of the big foreign banks have announced that they are ready to pay way ahead of the deadline, but the smaller banks, mostly the indigenous ones are asking for more time otherwise they face either eventual collapse, buy outs by foreign banks or mergers that will reduce local stake in the financial industry.

To this end, ten indigenous universal banks in Ghana are asking President Nana Addo Dankwa Akufo-Addo to impress upon the BoG and the Economic Management Team (EMT) of the government to give them five years to pay up the MCR.

The ten indigenous universal banks are Prudential Bank, Royal Bank, Unibank, Beige Bank, OmniBank, GN Bank, Sovereign Bank, Heritage Bank, Premium Bank, and Construction Bank.

In their 11-page petition to the president, the indigenous banks stated that they are willing to pay the GHC400 million but it beats their minds why the BoG would give them same deadline as the bigger banks.

Indeed, on previous occasions when MCR was raised, indigenous banks were given an average of four years to pay, so this new policy is out of the norm and it is unsettling for them because of their size and comparative muscle.

In 2003 for instance, when BoG raised MCR, banks were given almost four years to pay up, and in 2008 they were given almost five years to settle. At other times, the payment period was even flexible for existing banks, while new entrants were required to comply immediately.

In their 11-page petition to the president, the indigenous banks stated that they are willing to pay the GHC400 million but it beats their minds why the BoG would give them same deadline as the bigger banks.

Indeed, on previous occasions when MCR was raised, indigenous banks were given an average of four years to pay, so this new policy is out of the norm and it is unsettling for them because of their size and comparative muscle.

In 2003 for instance, when BoG raised MCR, banks were given almost four years to pay up, and in 2008 they were given almost five years to settle. At other times, the payment period was even flexible for existing banks, while new entrants were required to comply immediately.

Proposed payment schedule

The indigenous banks have therefore proposed a payment schedule of annual installments over a period of five years ending 2022 when they would each have finished paying the GHC400 million.

In that schedule, they propose that by December 2018, the will raise MCR to GHC170 million each; December 2019, GHC220 million; December 2020, GHC280 million; December 2021, GHC340 million the final install to make up the GHC400 million will be done by December 2022

No way
While the petition of the indigenous is still before the president and a committee has been set to take a look at their plea, the Governor of the Central Bank and his lieutenants are out saying their decision is final.

They cited poor corporate governance practices at several of the indigenous banks, leading to the collapse of two, takeover of two by assigns of the Central Bank, and indeed speculation of even others facing grave liquidation problems.
The BoG is therefore suggesting the smaller banks should either go into mergers or roll back into lower tier financial service companies to bring some sanity into the banking sector.

Jeopardy to local content

Whereas the regulator has a point in raising concerns about the poor corporate governance practices in the indigenous banks, a policy that collapses them is also not consistent with government’s own touted support for local businesses, Spokesperson for the Association of Indigenous Universal Banks, Issah Monney  said.

“Government is pursuing a laudable One District One Factory policy, which promises to create and grow local industries and provide jobs; meanwhile, the regulator of the financial sector is pursuing a policy that threatens to collapse local industries and create unemployment,” he said.

He noted that if the indigenous banks merge, it will reduce the overall Ghanaian stake in the mainstream financial sector and or push Ghanaians to the fringes while foreigners run the sector and dictate the health of the economy.

Compare Ghana MCR to others

Some analysts have raised several concerns about the entire policy, one of which is the quantum of the MCR itself, in an economy like Ghana where GDP is just a little over $46 billion.

They noted that in neighbouring Nigeria, where GDP for 2017 was more than $400billion, MCR for universal banks is $70million; In Kenya MCR is $50 million, meanwhile, GDP is over $75 billion.

Moving outside of Africa, in India MCR is $77.5 million; in Australia MCR is $50 million; in Switzerland it is $10.2 million, in Luxembourg it is only $8 million; in Canada is as low as $5 million, and in the fabulously rich countries of Dubai and Abu Dhabi, MCR is just $14 million each.

All those economies are much bigger than Ghana so analysts have been questioning what informed the pegging of MCR at $88.5 million in Ghana beyond the accusations of poor corporate governance, and if not calculated to collapse indigenous banks to please Breton Wood institutions as being speculated.

By Masahudu Ankiilu Kunateh, African Eye Report

 

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