A few months ago, following broad consultation with the banking industry on proposals embodied in Bank of Ghana’s (BoG) Consultation Paper of Minimum Capital Requirements, the former top financial policeman, Governor Dr. Paul Acquah announced a move to raise the minimum capital required for obtaining a banking licence and operating in the country from GH¢7 million to Gh¢60 million. Existing local banks are therefore required to attain this minimum capitalization by New Years Eve 2010, whereas foreign-owned banks had till 2012 to meet this requirement.
The increase formed part of the Central Bank’s reforms and strategy to deepen the financial sector and the increasing importance of bolstering capital, the buffer, that banks depend on to absorb losses which has become especially crucial in this era of economic downturn and recession. The move was also prompted by the need to support Ghana’s drive for accelerated growth to achieve middle-income status and to further secure customers’ savings. Banking pundits also believe that the move was aimed at halting more banks from entering the Ghanaian banking sector following comments made by Ghana’s Vice President John Dramani Mahama that the government had put a seal on the number of banks that were preparing to enter the Ghanaian market.
It must be noted that liberalizing entry and encouraging foreign banks and investors in the financial services industry has increased competition in the banking industry as well as the introduction of strong business practices, technology, products, and risk management systems. The entry of foreign banks of international standing surely mitigates the anti-competitive disadvantages inherent in concentration and enhanced market power of domestic banks, giving impetus to dynamic efficiency. However, the country also risks some injury in the form of capital flight as these foreign-owned banks often repatriate their profits to their country of origin.
This move by the central bank has been met with mixed feelings and many banks have resorted to a myriad of measures to meet this target. Some players in the banking industry have begun welcoming the move by the Bank of Ghana (BoG) although a growing number of concerns have arisen in the wake of this move. Already, the phenomenon has caused some smaller banks to consider either going out of business or merging with the bigger banks to survive in the industry. The prospects of acquisitions have also heightened among the 24 banks as well as the many financial institutions. Merchant Bank has already closed deal and has successfully merged with The Trust Bank; Intercontinental has also acquired assets of City and Loans Financial Limited and Stanbic Bank is still in talks with the Agricultural Development Bank (ADB) over a possible merger. In the past few weeks a number of major banks including the Assurance Bank Gh.Ltd; HFC bank Ghana, Intercontinental bank, Ecobank, UBA and Standard Chartered Bank Ghana have also embarked on a rights issue to increase their stated capital assets and meet the current minimum requirement of the BoG
The core problem, nonetheless, is not the issue of regulating banks to try to make them safer and the attempt to limit the implicit guarantee but how to improve the perception of banks. The government, for instance, risks being labeled a ‘hypocrite’. How? For one thing, ordinary citizens are constantly being indoctrinated to stop saving ‘under pillows’ and adopt saving in the banks where they will generate interests. These banks are however, most often than not, the same institutions who as a result of increased capital requirement, increase interest rates on loans and demand huge collateral from consumers, thus reducing consumer confidence in the banks. Financial institutions have also joined forces and introduced a ‘Financial Literacy Week’ which aims at making the average Ghanaian more adept and interested in the finance and banking world. But, all this, to what end?
The question then remains, are our banks are really ‘safe’? Why then do they have to be ‘insured’, ‘guaranteed’ and ‘regulated’? In the United States, The Federal Deposit Insurance Corporation (FDIC) is charged with the responsibility of preserving and promoting public confidence in the US Financial System by insuring deposits in banks and thrift institutions for at least $250,000. However, no such system exists in the Ghanaian Banking sector, as such; one of the ways whereby deposits and savings can be ‘insured’ is through raising the minimum capital requirement. But then again, capital is still a fairly blunt tool and thus apart from helping to keep banks afloat, improving liquidity and reducing risk we could still be bargaining for too much.
There are, however, other options. Banks can be coerced into planning for their own collapse using ‘living wills’, which should make it easier to protectors. Banks must also be encouraged to finance themselves with monies that are not ‘state-guaranteed’. Its costs, and thus banks profits, may at least for a while be sensitive to the risks being taken. No one should pretend or begin to believe that banking is an industry that is absolutely and perfectly safe. This is a viewpoint that is utopian and often misguided. But as ‘guarantees’, both explicit and implicit are withdrawn, the hope is that self-discipline will be imposed and banks will begin to live within their means and not off the Ghanaian taxpayers’ largesse.