A Buoyant Banking Industry For A Healthy Economy

The Writer

Industry Dynamics
Ghana has Gross Domestic Product (GDP) of $ 38.65 billion, GDP growth of 4.2% and population of about 26.97 million (World Bank, 2014). Ghana has about 29 universal banks and a myriad of rural banks and microfinance institutions. Banks play an important role in propelling the entire economy of any nation, of which there is need to properly regulate them efficiently through reform processes geared towards forestalling bank distress.

The Bank of Ghana (BoG) has increased the capital requirement of commercial banks in the country from GHC 60 million (USD 15,752,165.9) to GHC 120 million (USD 31,504,331.8) to strengthen them against risks.

By this, commercial banks in the country would be expected to raise their capital assets to a minimum amount of GHC 120 million (USD 31,504,331.8) as an insurance in times of challenges.

According to sources at the Central Bank, the move has largely been welcomed by some major banks whose capital requirement already exceed the minimum level set by the BoG.

This will ensure that lenders maintain sizable financial cushions that can absorb losses as a bank is failing , without threatening a crisis in the broader banking system. Capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to hold as required by its financial regulator .

This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm's balance sheet.

On the other hand, the reserve requirement is a central bank regulation employed by most, but not all, of the world's central banks, that sets the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves (rather than lend out). These required reserves are normally in the form of deposits made with a central bank, or cash stored physically in the bank vault. .

Ghana as a sovereign state manages her own monetary and fiscal policy geared toward prudent economic management. Interest-rate targets are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment.

Monetary authority is an institution that manages a state's currency, money supply, and interest rates and in Ghana's case, the monetary policy committee chaired by Central Bank governor set monetary policies to control money supply, inflation, exchange rate among others. MPC also uses reserve requirement to control money supply in an economy.

REGULATORY ROLE
The regulator of the banking industry is the Bank of Ghana. The Bank of Ghana shall have overall supervisory and regulatory authority in all matters relating to banking and non-banking financial business with the purpose to achieve a sound, efficient banking system in the interest of depositors and other customers of these institutions and the economy as a whole.

The regulatory and legal framework within which banks, non-bank financial institutions as well as forex bureaux operate in Ghana are the following:

• Bank of Ghana Act 2002, Act 612
• Banking Act, 2004 (Act 673)
• Non-Bank Financial Institutions Act, 2008 (Act 774)
• Companies Code Act 179, 1963
• Bank of Ghana Notices /Directives / Circulars / Regulations

The functions and responsibilities of the Central Bank as a regulator are defined in Act 612 and Act 673 as follows:

• To regulate, supervise and direct the banking system and credit system to ensure the smooth operation of a safe and sound banking system
• To appoint an officer designated as the head of Banking Supervision Department, who shall be appointed by the Board
• To consider and propose reforms of the laws relating to banking business

The increase in the capital requirement is a step in the right direction. It will solidify banks’ capital base to be able to finance huge investments.

SAME PRODUCTS AND SERVICES
In Ghana, almost all the banks are offering the same products and services. From retail banking to corporate banking to electronic product services to SME banking etc. They are virtually offering same products and services. In fact, specialization and innovation is low in the industry. It is not surprising that, most banks are recording huge profits in an ailing economy. The lack of investment into the real sector of the economy has led to what I call “lazy banking”.

This is where banks and other financial institutions invest heavily in government treasury bills and bonds at the expense of the real sector of the economy. There is more room for improvement. Few years ago, the Bank of Ghana increased capital requirement which brought about mergers and acquisitions in Intercontinental Bank and Access Bank, The Trust Bank and Ecobank, HFC etc. Did that reform fully achieve its objectives?

NIGERIAN EXPERIENCE
The Nigerian experience where the Central Bank (CBN) increased the minimum requirement of banks from two billion Naira (US$14.5 million) to 25 billion Naira (about $ 181million), reflecting an increment of 115.0% in 2004 .The move caused ripples in the industry with several mergers and acquisitions occurring thereby reducing the number of banks from over 70 to about 24.

OWNERSHIP
There are critical questions we need to ask ourselves; how many of the 29 universal banks are owned wholly by Ghanaians? How many of the universal banks are party owned by Ghanaians? How many banks are owned by foreign nationals? How many of the Ghanaian banks can comfortably raise the GHC 120 million (USD 31,504,331.8)? I am not calling for nationalization but a call on policy makers (Finance Ministry and Bank of Ghana) to develop policies to aid indigenous banks grow in the interest of fair competition.

I expect government to take a bold step to roll out policies that will nurture indigenous Ghanaian companies not only in banking industry but also in insurance industry, telecommunication industry, manufacturing industry, transportation industry, pharmaceutical industry, oil and gas industry among others.

In conclusion, the increase in capital requirement of banks will encourage mergers and acquisitions. Mergers and acquisitions in banking industry results in overall benefits such as improved revenue efficiency related benefits, Return on Asset (ROA) which is decomposed into Total Asset Turnover (efficiency) and profit margin (effectiveness), Return on Investment (ROI), cash flows, reserves, liquidity, etc.

Again, the increase in capital requirement should lead to specialization of banks in all sectors of the economy. From manufacturing to agriculture to oil and gas, real estate etc. Banks should be able to finance big projects to steer economic growth.

AMOAH-DARKWAH EMMANUEL
ECONOMIST
[email protected]
0245-683297