Ghanaian banks scramble to beat looming minimum capital requirement deadline.
After the failure of a couple of banks recently, the public is on edge. That is, even as the Bank of Ghana (BoG), the central bank, has provided assurances that depositors’ funds are safe. Not that a banking crisis is at hand. Far from it; although some might argue otherwise. But there is definitely a lot more that the BoG could and must do to restore confidence.
For instance, culprits behind the failure of Unibank, hitherto Ghana’s sixth largest bank, where directors were found to have helped themselves to depositors’ funds to the tune of $1.1bn – about 75% of the bank’s assets – should in addition to being relieved of their positions, also be prosecuted to the full extent of the law. Loan defaults have also become rampant, with non-performing loans (NPLs) accounting for 21.3% of all loans in August 2018; albeit largely unchanged from the same period last year when they were 21.9% loans. Naturally, banks are reluctant to lend, preferring to buy government treasuries and bonds instead.
Consequently, the government accounts for a great deal of banks’ exposure. And although private sector credit extension (PSCE) has been growing in real terms, at 5.4% in August 2018 from -5.0% in the same month last year, it is not the case when compared to GDP in nominal terms – based on Bank of Ghana data. In August 2018, nominal private credit extension was 14.7% of GDP, from 15.2% in the same month last year.
A great deal of regulatory drive would be required for a turnaround. Thus, the central bank’s directive in September 2017 for banks to beef up their capital base to a minimum of C400m ($84m) from C120m should be pursued with the utmost determination. Also, there should not be a shifting of the end-December 2018 deadline. Better capital adequacy reporting via Basel II at the direction of the central bank in July is also laudable.
More consolidation & liquidation
To date, the BoG has taken the following actions to clean up the banking system and restore confidence. It liquidated and gave control of UT Bank and Capital Bank to Ghana Commercial Bank in August 2017 “due to severe impairment of their capital”. A year later, it revoked the licences of Unibank, Royal Bank, Beige Capital, Construction Bank, and Sovereign Bank and put them together under Consolidated Bank Ghana Ltd, a special purpose vehicle, which it capitalised to the tune of C450m.
The authorities also issued a C5.8bn ($1.2bn) bond to cover their liabilities. When put together, the five banks have pending obligations that require funding of about C5.8bn so the measures put in place by the central bank should suffice for now. Much more funds would probably be needed in due course, however, as more information is discovered and perhaps other banks are found to be in less than ideal positions.
Not only were the failed banks found to be struggling, but some had obtained their licences fraudulently; Sovereign Bank, Beige Capital and Construction Bank for instance. With the benefit of hindsight, the BoG was not quick to act. Unibank and Royal Bank were known to be significantly undercapitalised as far back as 2016. Almost 80% of Royal Bank’s loans were non-performing, it was discovered. It is certainly curious that it was only in 2018 that Unibank was declared to be “beyond rehabilitation”. Surely there was no need to wait that long.
The reason might not be too hard to determine. Unibank had some influential board members, including former Ghanaian Finance Minister and Central Bank Governor Kwabena Duffuor, the founder. In early September, KPMG, an audit firm and receiver for the now defunct Unibank, asked a High Court to declare unlawful loans made to Duffuor, other named shareholders and their so-called related interests. KPMG is also asking Duffuor et al. to pay back C5.7bn, about 75% of the defunct bank’s assets, of allegedly misappropriated funds of Unibank.
According to Bloomberg, the news wire service, Nii Amanor Dodoo, a partner at KPMG in Accra, Duffuor and others have committed to the repayment; albeit Daniyal Abdul-Karim, Duffuor’s attorney, raises doubt about that when he remarks in the same report that “[KPMG’s] claims are extremely weak…[and]…are defeated both on facts and the law.” And in a report by Reuters in mid-August, Duffuor disputes the figures: “We believe the figures the central bank is putting out are not right.”
Other banks would definitely not want to become part of Consolidated Bank. Thus, there is almost certainly going to be more consolidation in the industry, as smaller banks or those not able to raise enough capital in time to meet the BoG end-December deadline, merge with bigger ones or come together to become bigger and stronger.
Others are looking to raise capital on the stock market. But considering the supposedly lucrative IPO of MTN Ghana, a telecoms firm, in late August, raised C1.14bn, well below its target, there are doubts about how successful the banks looking to take this route would be. That is not deterring them, it seems. In September, just weeks after the MTN listing, Energy Commercial Bank secured approval from the Securities and Exchange Commission (SEC) to raise C340m via an initial public offering to enable it to meet the new minimum capital requirement. There will probably be a few more before the December deadline.
Additionally, a couple of merger talks are continuing; some not so well, though. In late July, for instance, there were reports that Premium Bank and BSIC Ghana were abandoning merger plans with GN Bank. A merger proposition between Sahel Sahara Bank, GN Bank and Premium Bank also fell through. Instead, Sahel Sahara Bank chose to go with Omni Bank in mid-August, making it the first potential merger since the scramble to meet the new capital requirements, having since received a no-objection nod from the central bank.
Firm up oversight
The recent bank failures are evidence of poor banking supervision by the central bank. There is no easy way to restore confidence with any due speed other than to bring the prominent people responsible for the banking sector mess to book. As part of this, they should be required to pay back the depositors’ funds they misappropriated. Their collaborators at the central bank should also be punished severely.
It is heartening to know that the authorities’ rhetoric reflects this sentiment. In mid-August, the BoG told Reuters that it planned to prosecute the errant executives of the failed banks. More specifically, BoG Deputy Governor Elsie Awadzi said the central bank was “working very hard on submitting a dossier on each of these banks to the law enforcement agencies…to further investigate criminal behaviour or what could potentially be criminal behaviour and to prosecute,” adding further that the regulator was “going to ensure that integrity is returned to the financial sector by ensuring that persons whose conduct contributed to the banks’ failure will not be shielded.”
According to Moody’s the new state-owned ‘bad bank’ would raise the already worryingly high indebtedness of Ghana to 70% of GDP from 64% in May. The authorities’ words must be backed by action to matter.