Graphic Business News

Bank re-capitalisation and the enabling environment

By: Francis Owusu-Achampong, FCIB
Dr Ernest Addison - BoG Governer
Dr Ernest Addison - BoG Governer

 The Bank of Ghana has finally asked all licensed universal banks in Ghana to raise their minimum capital levels to GH¢400 million by the end of December 2018.

This is designed to ensure that banks keep adequate buffers to withstand shocks associated with their respective risk profiles and carry strong balance sheets.

The banks are now at liberty to define their respective risk appetites in line with their capital bases and profit expectations. In the current liberalised dispensation (unlike the pre-1983 era of regulatory-driven apportionment of capital to specific sectors), each bank now decides, without any prompting from the central bank, where it wants to deploy its capital in line with its own risk/return dynamics, and within operative laws.

 The Capital Adequacy Ratio serves as the major constraint on how far each bank can go with depositors’ and investors’ funds. This writer concedes that over time, rising non-performing debts and a weakened local currency have shrunk the capital bases of many of these banks. Raising the minimum capital levels superficially would strengthen the balance sheets of those banks which find themselves in current difficulties. Indeed, improved liquidity has been observed of late, leading to a reduction in the universal banks’ demand for accommodation from the central bank.

It is earnestly hoped that this liquidity would not be followed by the recklessness in the origination of loans and exotic, complex products like what precipitated the American Financial crises of 2006-2008, amidst weakened regulatory oversight.

As an ardent proponent of indigenisation of the banking and financial sector in Ghana, I was elated to read that Unibank Limited had passed the GH¢400 million minimum capital threshold. I was equally excited to be part of the inauguration of Beige Bank, the newest banking bride on the block.

Tackling weak loan repayment
It is important to emphasise that no amount of capital can insulate the banks from distress unless the underlying causes of the poor loan repayment and weak exchange rate regime are fundamentally tackled. For instance, the dollar component of the current GH¢400 million minimum capital can be  easily eroded if the macro-economic fundamentals that affect the exchange rate regime are not simultaneously tackled.

Analysts of the Ghanaian economy can hardly overlook the endemic  twin deficits – on the fiscal/budget front - and the current account portion of the balance of payments. Some elements of this twin deficits can easily be tackled with a little  political discipline. It is generally agreed that government borrowing that does not go into productive ventures merely fuels  inflation and erode the value of the cedi.

Demand for foreign exchange
Unbridled demand for foreign exchange (mainly for consumption-oriented imports) not coupled with adequate supply from a strong export base continually weakens the value of the cedi in relation to foreign currencies.

This ultimately affects  the balance sheets of banks, especially  those with significant  foreign exchange exposures. That much of the re-capitalisation is going to come from external investors sets the scene for the importance of future outward  capital flows and their potential effects on the cedi/forex  imbalances if we do not strengthen our productive capacities.

Balance of payments
On the balance of payments front (the current account), we must courageously re-examine the  outrageously over-liberalised import regime by subtly blocking certain imports, without  incurring the wrath of our trading partners under the WTO arrangements. Nigeria does that so well; and so are other countries beginning to look inward as far as the theoretical globalised trading regime is concerned.

 Isn’t it humiliating that Ghana  spends over  $600 million on rice imports alone in a year when we have all the resources to produce rice locally and even for exports?

The re-branded polytechnics  (now technical universities) must be able to produce simple agricultural and industrial spare parts and  tools to aid the foreign exchange conservation agenda; lest some of us will continue in our belief  that a decorated monkey is still a monkey.

The current efforts (or is it talk) about industrialisation must focus on linkages with local agriculture, the roads, transport and warehousing infrastructure to give meaning to a real indigenous revolution that will not be aligned to import dependence to  further weaken the local currency.

Role of agriculture
An export-led economy can be established with agriculture still playing a dominant role through value addition to the traditional raw materials.

Let us for once read about success stories in the agri-processing sub-sector, instead of the doom and gloom which make banks shy away from the sector in which we have comparative advantage. 

It is indeed time to prop up the productive base of this economy and de-emphasise the concentration on distribution of imported goods, which appears to be  more lucrative  but  merely worsen  both inflation and currency depreciation.