Following the collapse of UT and Capital Banks, the Bank of Ghana announced a new capital requirement of GH¢400 million for banks in September 2017, to be met by all banks by the end of 2018, which sent chills down the spines among players in the financial industry.
The reason has been attributed to developing a stable financial system and the banks being able to absorb severe shocks. Thus, makes it less likely for the banks to depend on the government to mitigate their losses, which will discourage them from taking imprudent risks.
Higher capital requirements shift more risks to the shareholders. The more capital, the more the risks fall to the shareholders.
Looking at recent developments in the financial sector, with the Bank of Ghana appointing administrators for Unibank, it has become obvious that only a few banks have the capacity to meet the requirement before the set deadline with a few banks petitioning the president to intervene.
These banks have blamed mostly, governments’ indebtedness to them as one of the major reasons for their inability to recapitalize. Contractors, who take facilities from these banks to carry out government projects, have not been paid making it impossible for them to repay the loans taken from these banks.
THE PRUDENCE
There have been lots of opinions on whether the Bank of Ghana took a step in the right direction in strengthening the financial system. Listening to an interview of two members of parliament, one is of the opinion that the deadline set for the new capital requirement to be met is not scientific and that the banks should be given more time to meet the new capital requirement, and government should take steps in repaying what they owe.
While the other is also of the view that it is time to get tough in strengthening the financial system, thus if the banks are unable to meet it, they can move downwards to tier 2 banking. After all, some of these banks have still not been able to meet the GH¢120 million capital requirement set in 2012, so why give them more time? It does not matter if the Ghanaian banking industry is dominated by the foreign banks; what the people want is for their monies to be safe and secure.
Some analysts also believe this may lead to a regulatory overkill; that is in an effort to block the abuse of loopholes in strengthening the financial system, the Bank of Ghana may end up imposing more restrictions than necessary on the banks.
Delving into the merits of this increment, higher capital requirements requires that banks fund themselves more with equity and less with debt. This enables the banks to absorb shocks and make it less likely to fail. A lack of bank capital is one of the major causes of the financial crisis in the banking sector, because under-capitalized banks are unable to absorb their losses and have to be bailed out by the Bank of Ghana in such times.
A little over GH¢5 billion has been given to the banks by the Bank of Ghana to strengthen their liquidity position. A bank’s capital protects the citizens from any crisis the banks may face. Making banks fund themselves with more equity and less debt therefore makes perfect sense from a customers’ point of view because in that case their deposits are more secure. The other important benefit is that the capital helps banks to lend more effectively.
The economic development of any country is dependent on its financial systems (banks, insurance sector, stock markets, and pension funds). Since Ghana is in a developing stage, the lack of a strong financial system will have a direct impact on its national development. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner.
These financial services help to make the overall economy more efficient. Without this source of available capital, businesses would be hard-pressed to continue growing and returning profit to their owners and outside investors. This has a direct impact on the employment situation in any country. Unprofitable businesses are unlikely to employ more to expand.
Panic withdrawals have become common here in Ghana. This can be attributed to the poor corporate governance practices exhibited by some managers, which led to the collapse of UT and Capital banks, and the insolvency of Unibank. In any country, confidence and trust in the banking system are crucial to its economic health and growth.
If banks cannot fulfill their obligations to pay their liabilities and depositors begin to fear a loss of their money; this quickly drains cash from the bank and can eventually cause the institution to fail. When individuals fear risk or lose their trust in the markets, they sell their securities and cause the value of companies to fall. This, in turn, makes it difficult for businesses to raise money, either from banks or capital markets.
A few may argue that, what will be the point, if a bank raises so much capital and have no need for it creating substantial costs so great as to make more capital unfeasible. I think one thing is obvious; the foreign banks may have monies coming in from their parent companies, other banks who have so much money sitting in their reserves could easily transfer some of the money there to shore up their stated capital.
Some local banks are billed to meet it and others may resort to listing on the Ghana Stock Exchange (GSE) to raise the required capital, while the remaining may have to merge or downgrade to tier 2 banking. The costs associated with the increment of the capital requirement may have been exaggerated over the period. I think the benefit far outweighs the demerits. While most industry players have welcomed the move, some argue that more time should be given to the banks that may have challenges to meet the new requirement before the set deadline.
The argument as to why raising more equity capital may be problematic for banks is that the benefit of extra capital may substantially accrue to those with debt claims, making it unattractive to new shareholders. Depending on a bank’s risk exposure, the Bank of Ghana may require a bank to raise additional capital making it even more problematic.
A higher capital requirement is essential in strengthening the financial stability of the Ghanaian banking sector. They ensure that banks are in a better position to absorb the risks associated with it and compel them to improve their risk control, as they bear the costs of those risks themselves.
Perhaps, now that the Bank of Ghana has come out with a new corporate governance directive, it is expected that it will improve the corporate governance practices exhibited by managers and the result being that, banks will reduce their risks, by operating within its core mandate. The banks with a healthy business model will be able to keep up their lending.
What is your take?
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By: Joshua Asare Date