The Bank of Ghana has almost completed its herculean effort towards cleaning up Ghana’s tottering financial intermediation industry. However, there is still one industry segment still awaiting its attention – the rural and community banks.
The BoG has already announced that it will be taking a different tack with these than it did with the other genres of non-bank financial intermediaries where it executed mass forced liquidations followed by an ongoing refund of depositors’ monies by government from borrowed funds. Rather it intends to collaborate with the ARB Apex Bank to, wherever possible, nurse the RCB industry back to good health
This will necessarily require both recapitalization and the bridging of capital deficits among many of the over 140 RCBs currently in existence. Fortunately, both requisite regulatory actions are somewhat related in that both ultimately amount to fresh capital injections.
The BoG ‘s seemingly more accommodative approach to the impending RCB clean up is most prudent. RCB s are not only crucial to economic activity in rural Ghana; in many locations where they operate there are no formal alternatives, more so since GN, which had the most rural branches, has been liquidated. Outright closures would therefore deprive many communities of formal financial intermediation of any kind.
Too be sure, the RCB industry is in relatively better shape than the other genres of non-bank deposit taker, a fact illustrated by their significantly bigger contribution to the membership of the Ghana Club 100 which is derived from strictly quantitative quality assessments. However, challenges remain and these are what both the financial media and public commentators are now focusing on following the mass liquidations enforced by the BoG on the other financial intermediation industry segments.
Therefore, it is imperative that the BoG assures the banking public as to the financial health of the RCB industry, preferably accompanied by some concrete regulatory actions aimed at strengthening them.
In this regard we have some suggestions which may be worth considering.
One concerns direly needed recapitalization where so far, the industry has fallen short.
We therefore suggest that where recapitalization is necessary it is sourced from capital raised by government either directly or through supporting banks for financing projects under the one district one factory initiative.
Financially healthy RCBs would represent a prime source of working capital for factories established under the IDIF and consumer loans for their employees. They would also be needed to finance their suppliers and support service providers too. Therefore, it makes sense for entrepreneurs to use other facilities available for procurement of capital good – such as the US$2.5 billion equipment credit facility from China – and their own equity capital, to build and equipment the factories and have RCBs available to provide such short-term financing for their operations.
Importantly this would enable the financiers of such recapitalization to enforce good corporate governance and risk management practices, to ensure that the RCBs subsequently remain healthy.
Resolution bonds could them be issued to bridge their respective capital gaps rather than to pay off the depositors of liquidated entities, with the confidence that this would not amount to throwing good money after bad money.
A healthy RCB industry is crucial to Ghana’s economy and every effort should therefore be exerted to make it work well.
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