Tuesday, 12 December 2017

Banks to lose indigenous ownership – study

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Adnan Adams Mohammed

Ghanaian majority owned banks are likely to lose their ownership to foreign investors as banks struggle to meet the new minimum capital requirement by December, 2018.

The new minimum capital requirement have left many banks struggling and majority among them are the indigenous Ghanaian majority owned banks.

Strict application of the Basel II and III standards by the Bank of Ghana will see many banks merging with others, being partially or fully acquired by foreign investors through new inflows and investment from existing shareholders. 

The most likely to be adopted among the options are mergers and acquisitions, and this brings in new shareholders or ownership into the banks.

As Ghanaian owned banks keep turning to foreign investors, a recent research by the GN Group on local ownership of banks as against foreign ownership across Africa showed Cote D’Ivoire, Nigeria and South Africa as the only countries whose banks are owned by majority domestic investors.

Cote D’Ivoire had 100% local ownership, 80% by Nigerians and 76% locals owned assets of banks in South Africa. In Ethiopia state owned banks predominate and in Mozambique, Republic of Congo foreign owned subsidiaries hold the most assets.

Between 1992 and 2006, the local ownership of Banks in Ghana averaged 61% but that figure has fallen to an average of 48% between 2007 and 2016. In 2003 the local ownership was about 60% to 40% foreign ownership.

However, it is fact that, strong indigenous financial institutions are integral to the development of every economy.

It is believed that local banks have their survival tied closely to the growth of the local economy, hence a stronger commitment to help the country grow, unlike the foreign majority or fully owned banks that repatriate their profits to their mother companies which also affect the economy negatively by putting pressure on the local currency.

Additionally, local banks are prone to turn deposits into loans, especially for small scale enterprises, compared to big foreign banks that are likely to prefer to take minimum risk.

Analysis of the Bank of Ghana’s latest statistics on interest rates showed that, the five highest base rates in the banking industry are offered by local banks whilst the first lowest are offered by foreign banks.

This partly reflects the risks associated with their advances. Therefore, the private sector, which is dominated by small-scale industries, will be the worst affected should the local banks fail to meet the new minimum capital requirement, leading to license withdrawals.

The Bank of Ghana, in September this year, introduced the Internal Capital Adequacy Assessment Process (ICAAP) under the Basel II framework. The ICAAP will require banks to more than treble their minimum capital to GHC400 million by December 31, 2018.

This is the fourth time in about 15 years the BoG has increased the minimum capital requirement for banks, with the current increase being the second highest.

Early is 2003, BoG directed all banks to increase the minimum capital to GHC7million by the end of 2006.

In 2008 the bank lifted the minimum capital requirement from GHC7 million to GHC60million giving foreign banks two years and local banks four years to comply with the rule. In 2012 it again raised it to GHC120 million, mostly for the reason of the expansion of the economy.

The latest increase could further reduce the proportion of banks owned locally and their market share. The locally owned banks control less than 21% of the banking industry’s assets.

It is no secret that the financial position of the local banks is poor and needs assistance from both government and the Bank of Ghana, if they are to survive. Therefore, government should have a programme, well-structured and aimed at bailing out the local banks.

This has been done in many countries. Using the UK as an example; in 2008, the government injected about £37billion in three UK banks – Royal Bank of Scotland (RBS), Lloyds TSB and HBOS – to save them from collapse.

In 2016, the Italian government pumped around €6.5 billion into Monte Paschi, the country’s third biggest lender to rescue it. Today, the economies of these countries are benefiting immensely from these banks.

The Bank of Ghana, on its part, should not treat local banks and foreign banks equally in this matter, with the view that they are all operating in the same market. It should recognise that the survival of the local banks depends on its support and regulation while the survival of the foreign ones depends on it and others in other countries.

Therefore, universal treatment for the sector is unfair to the local banks. Like in 2007, the BoG needs to give different timelines to the local banks to afford them more time and opportunity to raise the money needed to meet the requirement.

It should also be firm on the management of these banks to submit their plans towards recapitalisation and ensure that the plans are followed strictly.

As well, the banks need to improve on management efficiency to enhance profitability. Those that are listed on the Ghana Stock Exchange should consider floating more shares, if prudent, to increase their equity capital. They should also consider suspending payment of dividend to shareholders and review their investments to avoid losses.