Ghana’s banking sector experienced a tumultuous period starting in 2015, and culminating with two commercial banks – UT Bank and Capital Bank – collapsing in August 2017 due to a “severe impairment” to their capital.
The collapse of the two banks sent shockwaves throughout the country’s financial services sector, with some commentators warning that the entire banking industry was at risk of contagion. UT Bank and Capital Bank became insolvent because they carried significant exposure to non-performing loans (NPLs), specifically those held by energy sector firms.
The state-owned energy companies – including Electricity Company of Ghana, Volta River Authority, Ghana Grid Company, Ghana Gas and Tema Oil Refinery – had racked up debts in excess of C10.8bn ($2.4bn), which in turn were sitting on banks’ books. The Bank of Ghana (BoG), wound up UT Bank and Capital Bank, and the customers’ deposits and some assets of the two defunct banks were eventually taken over by one of the largest banking institutions in the country, Ghana Commercial Bank (GCB).
Realising the gravity of the situation, the BoG also moved quickly to assess the liquidity levels of the remaining 34 commercial banks, discovering that seven failed to meet the minimum capital requirement of C120m. The vulnerable banks were eventually able to prove that they could recapitalise to the minimum level needed and avoid the same fate as the two liquidated banks.
Following the scare, the BoG mandated that all commercial banks in the country would need to set aside by the end of December 2018 a minimum of C400m in capital or have their licences revoked. Banks in Ghana were last recapitalised in 2012, when the BoG asked them to raise their stated capital from C60m at the time to C120m.
Ghanaian banks are in the process of establishing whether they can raise the required sums by the deadline and a clearer picture should emerge by August 2018.
Bank lending to tighten
However, analysts have warned that the new capital requirements will see banks tighten lending, which would have a knock-on effect on economic growth. However, this viewpoint is not a true representation of the current situation across the industry, according to D.K. Mensah, executive secretary at the Ghana Association of Bankers (GAB).
“I don’t think that the minimum capital requirements have affected how banks lend to customers,” Mensah said. “What the whole process is about is a fresh injection of capital and if you look at the balance sheets of most banks, they carry a very huge income surplus.”
“If the banks can’t make enough to meet the minimum C400m threshold then shareholders will have to inject fresh cash, which they could achieve by reducing dividends paid out to shareholders, for example,” he added. Those banks that fail to meet the new requirements will simply have to apply for a licence in a lower tier of banking, becoming a Class II bank or a savings and loans company, where the capital requirements are currently C60m for the former and C7m for the latter.
While the banking sector adjusts to the new regulatory regime, NPLs continue to weigh heavily on the books of banks, despite action by the government to reduce the debts.
Reducing the NPLs’ debt burden
To raise funds and help clear the state-owned utilities’ debts, the Ghanaian government issued a series of non-sovereign bonds, dubbed the ‘energy bond’, backed by the Energy Sector Levy Act (ESLA). The first tranche, worth C2.4bn, was issued in October 2017, with a seven-year yield pegged at 19% interest, while the second tranche was issued a month later for C3.6bn, with a 10-year yield at 19.5%.
The bonds have had mixed success, with the first tranche attracting investors in their droves, while the second failed to meet its target, forcing the government to reopen the 10-year bond in January but for the more modest sum of C137m, with a yield of 19%. The most recent tranche, however, was oversubscribed, raising C616m, which indicates that demand remains strong.
Further tranches have yet to be announced, but the money already raised has gone some way to alleviating some of the NPLs which have blighted banks, according to Mensah.
“A large share of the public-sector debts, especially the energy debts, have been paid off using bonds, meanwhile, the indebted private sector firms, whose debts can be traced back to bulk oil distribution companies, have also issued bonds as well to help pay their debts,” he said. “This has had an obvious positive effect on the capital reserves of the banks, which in turn has helped stabilise the sector.”
The BoG has also initiated a policy directive which mandates that the banks exposed to NPLs need to present plans on a loan-by-loan basis, indicating how each loan can be restructured into a performing one. There is no doubt that the energy bond has on the whole successfully managed to reduce the burden on the banking sector, but it is important that the burden does not get transferred to the taxpayer, according to Said Boakye, a Senior Research Fellow at the Institute for Fiscal Studies (IFS), an independent think-tank.
“Celebrations over the success of the bond should be tempered because although the government has stressed that the repayments of the debts will fall to the state-owned energy companies, at the end of the day [Ghanaians] are the ultimate custodians of those companies and their liabilities,” he said.
Nevertheless, the banking sector remains upbeat that the energy bond will help reduce the burden of the NPLs, leaving scope for most institutions to diversify the products they can offer. One area that could prove lucrative as the economy flourishes is the personal business banking sphere, which remains underdeveloped.
The new capital requirements, meanwhile, will strengthen the banking sector by making it more resilient and leaner, but achieving the threshold should not come at the cost of economic growth, Boakye said.
“We all want a strong banking sector but if it means banks are reluctant to lend then that would affect business,” he said. “We are also concerned that the requirements could push domestic banks out because tripling your capital in such a short space of time would be difficult for those institutions but not for the foreign ones.”