Uncertainty Over New Capital For Banks

The Ghana Association of Bankers (GAB) has stated that any push for further increase in the minimum capital requirement for existing commercial banks can spell the doom of local banks in the country, as they are likely to be taken over by the foreign banks. The President of the association, Mr Asare Akuffo, however wants the Bank of Ghana to raise the bar for new entrants into the banking industry, by increasing the reacaptalisation requirement three-fold. This comes on the heels of recent media reports that the Bank of Ghana plans to increase the recaptalisation of new banks from the current GH¢60 million to a GH¢100 million before passing it on to existing commercial banks. A highly placed source at the Bank of Ghana has already denied that the increase will subsequently be applied to existing commercial banks in the country. The proposal from the Bank of Ghana has been influenced by the inadequacy of the current GH¢60 million for banks who seek to participate in emerging sectors of the economy. The move has also been influenced by the fact that the central bank often has to give waivers to banks to finance large transactions such as financing the oil industry which goes beyond their required limit. Most of the local banks cannot participate in the annual syndication of cocoa purchases by Cocoa Board neither are they major players in the country’s oil find. Again, current banking laws restrict banks from extending capital to individuals or a single transactions not more than 25 per cent of their net worth, a provision known as the single obligor limit. Some local banks are, therefore, worried that the move will gradually push them out of business or into foreign hands; some are also unhappy that this is leading to the artificial growth of banks due to mandatory capital requirements. In 2008 when the BoG raised the mininum requirement from GH¢7 million to GH¢60 million majority of the foreign banks were able to meet this requirement by the close of 2009 through various processes including injection of fresh capital from the parent banks, rights issues, private placements and mergers and acquistions. However, the recapitalisation exercise failed to consolidate the Ghanaian banking sector as expected as some of the local banks are still struggling to raise the required funds with less than two months to the December 2012 deadline. But the President of the Ghana Association of Bankers, Mr Asare Akuffo, said it would be wrong for the Bank of Ghana to force commercial banks to up their capital requirements. Quoting section 23 of the 2004 Banking Act, Mr Akuffo insisted that the act made provisions to ensure that commercial banks were adequately capitalised. “The consequence is that commercial banks will be forced to unnecessarily sell to foreigners and that will kill the indigenisation drive”, he argued. It must be noted that the recent recapitalisation was not intended to close down the local banks but aimed at boosting their capacity to enable them compete with international banks in financing long-term projects as the country prepares to join the league of oil producing countries. With the recapitalisation, the country’s banking industry has grew from GH¢446 million in 2008 to GH¢1,576 million as at teh end of December 2011. The new proposals is therefore aimed at raising the bar and to ensure that the country is operating on a very sound financial platform. Mr Akuffo, who is also the Managing Director of HFC Bank, said existing commercial banks were already matching their 10 per cent of risk assets as capital and argued that when the bar is raised for new entrants into the banking sector, it may attract bigger and specialised banks such as HSBC and CITI bank into Ghana because of the bourgeoning oil industry. That, he expects, would trigger mergers, acquisitions and partnerships in the banking sector and engender the deployment of superior technology and attractive products. The GAB President, whose bank holds a GH¢560 million in total assets anticipates a partnership with bigger banks. “My bank [HFC] is open to partnership with reputable international financial institutions with some Ghanaian investors,” he hinted. Mr Akuffo’s concern is shared by his colleague Mr Frank Brako Adu Jnr, the Managing Director of CAL Bank, who told the GRAPHIC BUSINESS in a separate interview that the signals were mixed. Mr Adu, who has just led his bank to shore up its capital to GH¢100 million, appears not bothered by any future directive from the Bank of Ghana for banks to increase their recaptalisation beyond the GH¢60 million mark. That was made possible through the successful injection of GH¢75 million into the bank through a private placement initiated by the bank in September last year. The transaction saw the African Development Partners I (ADP I), Proparco acquiring 28.97 and 6.86 per cent respectively of the bank with the country’s pensions’ fund managers, the Social Security and National Insurance Trust (SSNIT), retaining its 33.18 per cent stake in CAL. For Mr Adu, the Bank of Ghana must be very clear on what it intended to do and the signals it wants to send out. “For me, I think the signals are too mixed and unpredictable”, the Cal Bank boss said in the interview. “If the Bank of Ghana will for every two years direct the commercial banks to increase their stated capital, they might end up mortgaging the financial sector to foreign investors,” he added. Expressing similar sentiments, Mr Akuffo insisted that the Bank of Ghana advised the government to consolidate all state-owned banks into a single big financial institution, if consolidation was what the central bank is seeking to achieve. At the moment, the state controls more than five banks in the country which include the National Investment Bank (NIB), Ghana Commercial Bank (GCB), Agricultural Development Bank (ADB) and Merchant Bank, which the HFC boss wants consolidated into one entity. Chief Executive Officer of uniBank, Mr Felix Nyarko-Pong, whose bank is yet to meet the GH¢60 million in stated capital target by December this year, was however cautious. He said should the regulator finally take the decision to up the minimum capital after broad consultations, “we will work towards meeting the requirement, however difficult it may be.” “By itself, higher capital is good. It allows the bank to undertake more activities and transactions, granting more loans and letters of credit. But a business must always have a matching capital to cover the risks it underwrites and the liabilities it has on its books,” he explained. Although Mr Nyarko-Pong explained that minimum capital could differ from institution depending on the risks and liabilities it underwrites, he said expansions in the Ghanaian economy, particularly with the discovery of oil, would require higher capital should Ghanaian banks participate in such capital intensive financing. A similar exercise in Nigeria reduced the number of banks from 89 to 25 in 2006, while in Ghana the number of banks has risen from 25 to 26 with less than two months to the December 31 deadline.