Ghana’s new banking industry

Ernest Addison, Governor, Bank of Ghana (BoG)

After nearly one and a half years of far-reaching reforms, the Bank of Ghana has unveiled the restructured universal banking industry. While it already comprises fewer, but significantly better capitalized banks, operating under a much more effective regulatory framework, the implementation of the initiatives behind all this has not been completed. TOMA IMIRHE examines the newly restructured banking industry, what is left to be done and the implications for Ghana’s banking public.

The Ghanaian banking industry which is starting 2019 is very different in structure from how it was before the turn of the year. Reforms and restructuring, introduced over the past one and a half years have culminated in dramatic change, and the restructured industry, unveiled by the Bank of Ghana last week, comprises fewer banks than hitherto, but bigger and better capitalized than they were previously.

Most importantly, this has been done without any depositors losing any monies although this has been achieved at an initial cost to the state of over GHc13 billion. But expectedly, part of this will be recovered over time from shareholders of failed banks identified by the central bank and confirmed by the courts as having illegally fleeced their respective banks.

Despite intense pressure from various stakeholders and segments of the general public, the BoG stuck to its guns with regards to compliance with its 233 percent increase in minimum capital to GHc400 million by December 31, 2018. No bank that failed to comply or which at least is in the process of complying through mergers approved by the BoG still has a license; the last-ditch financial support for some indigenous banks has come through equity finance provided by the private pensions industry and facilitated by the Government of Ghana.

Effectively, Ghana now has 23 universal banks, according to the BoG, down from 34 as at mid-2017 when the restructuring began. Actually though, this is not precisely the situation yet – three banks out of this number will only come into existence when ongoing mergers are completed, which would effectively reduce six banks to three.

Indeed, the industry is still in a state of flux and has not quite arrived at the new structure announced by the central bank last week. Apart from the impending completion of three mergers, GN Bank is still in transition from universal bank to savings and loans company and Consolidated Bank Ghana is only now beginning to grapple with the challenge of absorbing two more additions to its corporate pot following the Purchase and Assumption agreement which has seen it take over the liabilities and selected assets of two defunct banks – Premium Bank and Heritage Bank – which have had their operating licenses revoked.

To be sure some outstanding aspects of the restructuring will be simple to execute. One is the transition of GN Bank from universal bank to savings and loans company, a process which the BoG expects will be completed in six months. On the upside, the bank evolved out of one of the most successful savings and loans firms in the first place, then operating under the name First National, and so it is returning to very familiar territory. On the downside though, the transition will deprive it of the ability to be part of the clearing house for cheques and to engage in foreign exchange transactions, both of which will send a substantial portion of its erstwhile customer base scurrying for the exits.

The other relatively simple transformation results from the voluntary winding up of Bank of Baroda. The Indian state owned bank opted to exit the Ghanaian market back in April last year rather than recapitalize, this being in line with the Indian government’s current strategy of downsizing the geographical spread of state owned banks overseas. The bank’s customers in Ghana are being transferred to Stanbic Bank and this is a good fit; Stanbic excels both in international trade finance and domestic commerce finance, the two primary areas of activity for Bank of Baroda in Ghana on behalf of its customers.

Beyond these aspects of the transformation though, there are still lots of complexity outstanding, despite the BoG’s public declaration that all has already been resolved.

First, the mergers. Of the three announced by the BoG as having taken place, only one – that between Omni Bank and Sahel Sahara Bank – is anywhere near completion, with talks having begun some six months ago. The other two, involving a merger between First Atlantic Bank and Energy Commercial Bank and another between First National Bank and GHL Bank are still at their relatively early stages although in both cases, the former is easily the bigger partner, seeking in effect to acquire the latter, a situation which should smoothen the negotiations.

Importantly, a new initiative being facilitated by government – the Ghana Amalgamated Trust – which comprises a consortium of private pension funds  is putting up some GHc2 billion in new equity for five indigenous banks (including the one resulting from the merger between Omni Bank and Sahel Sahara Bank) to enable them meet the new minimum capital requirement. The other banks are the state owned Agricultural Development Bank and National Investment Bank, and the privately owned Universal Merchant Bank and Prudential Bank. What they all have in common however, according to the BoG is that they are all well managed and solvent, and therefore deserving of support to keep them flying the flag of indigenous banking.

This however is already proving controversial. NIB has failed to publish its financials for 2017 and instructively, it is the only one among the five for which the central bank has seen the need to appoint an advisor, even as government has seen the need to assure the regulator that it will be restructured for better performance. Consequently, many analysts doubt its solvency and the quality of its management, and this leads to suspicions that government is simply using GAT to recapitalize its banks without having to deploy public funds. If this is indeed the case then the prudence with which private pension funds are being put to use is questionable.

Another issue arising from this initiative concerns whether the laws governing the structure of the investment portfolios of private pension funds allows for such significant equity investments in unlisted companies  as is required for this new initiative to be implemented.

Related to this is the timing of the investment. So far it is an intention rather than fact, which means that as at today, all the beneficiary banks are still operating with less capital than the new minimum. Under the tenets of the Banking Act currently in force this means all of the banks should be subject to certain restraints with regards to matters such as taking of new deposits, opening of new branches and booking of new loans, until the new equity capital is actually received.

Finally there is the issue of the two banks that have had their licenses revoked – Premium Bank and Heritage Bank – and which have had their liabilities and selected assets passed on to Consolidated Bank under a Purchase and Assumption agreement. Only the most biased observers can argue with the BoG’s reasons for revoking their licenses – both banks obtained their licenses by presenting fictitious start up share capital and consequently had become completely insolvent – but because of the political undercurrents there are plenty of them. Heritage Bank was promoted by a leading member of the National Democratic Congress and its license has been revoked by a BoG management appointed by the New Patriotic Party, thus leading to accusations that the latest action was motivated by politics rather than finance. Even more sensible, unbiased critics worry that the resolution of their problems has added another GHc1.403 billion to the taxpayers tab, this being the value of the bonds issued by government to Consolidated Bank to cover their cumulative capital deficits. Just as importantly, they worry that their absorption by CBG will add to the problems that bank, which is still grappling with its streamlining the processes, staffing and balance sheets of five different erstwhile separate banks, all of which were severely troubled at the time they were consolidated into one.

Indeed, despite CBG’s undeniably bright prospects for the future, as Ghana’s third largest bank, with nationwide reach – and crucially, indigenous state ownership – the bank is still mired in the challenges of synthesizing the disparate balance sheets, income flows, corporate cultures and processes and procedures of several different banks, all of them coming into the melting pot with one financial trouble or the other. Just when it was coming to terms with resolving the differences of five hitherto separate banks, another two have been added on. It is indeed instructive that the bank is not engaging in new business such as booking new loans and is not even advertising itself, because those issues have to be resolved first.

Despite all this however there is a refreshing sense of optimism now flowing around Ghana’s banking industry boardrooms, since huge problems, for long simply swept under the carpet, have now been decisively resolved.

Importantly, the new corporate governance directives introduced by the BoG in 2018, if diligently implemented will ensure that the practices that caused those problems will not be allowed to happen again.

The BoG is understandably in a hurry to put its restructuring of the universal banking industry – and the accompanying controversies – behind it so it can turn its attention to resolving the similar problems still afflicting the other genres of financial intermediaries in Ghana – the savings and loans, rural and community banking and the micro-finance industries which between them account for barely 12% of total deposits but cater for the bulk of Ghana’s retail sized banking public . To be sure, those industries are in even deeper distress than the pre-reformed banking sector, with some GHc800 million in customers deposits at immediate risk.

Deadlines for recapitalization of these sectors have already passed, with poor outcomes with regards to compliance and the BoG has found neither the time nor the logistical capacity to properly begin implementing its new corporate governance directives, which apply to them in the same way as they apply to the universal banks themselves.

There is still a lot of work to be done therefore, but the performance of the BoG in resolving the huge challenges that had faced the universal banking industry, should be cause enough for confidence that it will resolve those challenges facing the other genres as well.

Public confidence will be crucial going forward. The banking public now has to decide where to keep their deposits, who to consummate their transactions through and who to ask for financing. For customers of the 16 banks that smoothly met the new capital requirement and had no solvency or financial reporting problems with their regulator, it will be business as usual, albeit with stronger and therefore more helpful banks. But for customers of the other six emergent banks, resulting from mergers, voluntary or forced, hard decisions are pending as their banks will be forced, over the next few months, to concentrate on back office issues rather than their customers lining up in their front offices. Some customers will be patient and will enjoy the rewards sooner than later. But some other customers will be less so, which means there will be lots of customer mobility in Ghana’s banking industry over the coming few months.