The damaging uncertainties over bank recapitalization

The rumours – albeit untrue – that have been making the rounds since the beginning of this week, that the Bank of Ghana is asking universal banks that cannot meet the December 31 deadline for recapitalization to apply to convert to savings and loans companies, have generated a new bout of uncertainty, in some cases bordering on outright panic, among the country’s banking public. This is ruffling the feathers of an already nervous banking public which has been fretting about the safety of their deposits ever since the central bank began liquidating some banks – seven so far, all indigenously owned – in August last year.

Since then the BoG has largely succeeded in calming nerves, by assuring that none of the banks left are in immediate danger of having their operating licenses resolved for reasons of insolvency or misrepresentation of the facts in their reporting, the causes of the recent license revocations.

However, the impending revocation of licenses for reason of failure to meet the new GHc400 million minimum capital requirement represents a new cause of worry for bank customers, especially business enterprises that are using relatively small banks who’s potential to meet the new requirement in time remains questionable.

This is because even if they are allowed to convert to savings and loans companies rather than be liquidated outright, it still means they can no longer buy sell foreign exchange to or buy same from their customers directly.

Furthermore it means the institutions they obtain their financial services from would no longer be part of the cheque clearing house and so would have to process their customers cheques through a third party commercial bank at extra cost and time to the customer.

The refusal of financial industry regulators to reveal the identities of banks that are still capital deficient is understandable; until December 31, they still have the chance to meet the new minimum requirement and so it would be unfair to declare them guilty of a shortcoming which has not yet occurred.

However, we suggest that the BoG at least clarifies to the public the processes and procedures that will be applied to banks that fail to meet the deadline, and the implications for their customers.

This would enable customers of banks who suspect they might be affected by this at the end of the year, to make informed decisions about how to best address the situation and to implement those decisions in an orderly fashion.

With customers properly understanding the potential scenarios facing them – specifically, the options of their banks being voluntarily liquidated, compulsorily liquidated, or converted into a savings and loans company or some other form of financial intermediary – they would be able to engage their respective bankers directly, out of the public glare, to obtain the specific information that would guide their decision making in this regard.

Banking as an activity runs primarily on the confidence reposed in the respective banks by their customers, actual and potential.

Uncertainties such as those that have ravaged Ghana’s banking industry since August last year, initially over the safety of customer deposits and now over the fate of some banks in the face of the looming deadline for recapitalization, inhibit the efficiency with which the industry carries out its primary role of financial intermediation.

Ghana’s banking industry has enough problems already, about corporate governance and risk management shortcomings. Uncertainty and resultant panic decisions by the industry’s customers as to the impending fate of their respective banks can only make the situation worse.