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New minimum capital requirement sensible – Economic Historian
An economic historian at Cambridge University, Professor Gareth Austin, has lauded as timely the Bank of Ghana’s announcement of a new minimum capital requirement for banks to operate.
The central bank early this month raised the minimum capital requirement to GH¢400 million, equivalent to about US$100 million. Commercial banks in the country have up to December 2018 to raise the amount, which represents a 333.3 per cent increase from the current minimum capital of GH¢120 million.
Banks were last recapitalized in 2012, when the BoG asked them to raise their stated capital from GH¢60 million at the time to the current GH¢120 million.
That round of recapitalization led to the consolidation of three banks, The Trust Bank (into Ecobank), Intercontinental Bank (into Access Bank) and Amalgamated Bank (into Bank of Africa).
According to financial analysts, none performing loans (NPLs) will be the biggest beneficiaries of the rise of the minimum capital requirement. The development has been the bane of the Ghanaian financial sector for a decade.
One of such analysts, Jerry Afolarbi told Starr Business in a recent interview that businesses can attract long term loans to inject into their operations.
The total stock of loans that banks fear may go bad have reached close to GH¢8 billion as at June this year, the latest Bank of Ghana Banking sector report said.
The report which tracked the performances of banks from June 2016 to June 2017 showed the latest numbers translate into a NPL ratio of 21.2 percent in June 2017, compared with 18.8 percent in June 2016.
“This is going to give a lot of space to the banks to be able to give long term and medium term loans to most of the companies in the country,” said Afolarbi.
Speaking Tuesday on Morning Starr Professor Austin said while commenting on the new requirement that, “The great extension of credit that has taken place in recent years is positive. But I think regulations and increasing the capital requirement is extremely sensible move. Otherwise, you will have the current problems that a lot of western countries have had with the financial sectors when people are overoptimistic and borrow too much and things turn bad. And Ghana doesn’t need that kind of problem on top of other problems.”
According to the Governor of the Bank of Ghana, Dr. Ernest Addison following the announcement of the new capital requirement, the central bank has received mergers and acquisition proposals in order to make the cut.
“I can tell you that if you look at the structure of the banks in terms of their shares, deposits and assets, you will find out that we have a cluster of small banks with less than 5percent shares in deposits,” he told journalists Monday after the Monitory Policy meeting.
He added, “We expect that there will be consolidation in that sense and how that consolidation takes places we want it to be market driven.”
Moving forward, he downplayed calls by some financial players for different capital requirement for commercial banks.
Former uniBank Managing Director, Felix Nyarko-Pong for instance, is advocating for financial institutions to be allowed to play in economic sectors they are comfortable with and have the financial muscle to operate in.
Others like the managing director for Royal Bank Osei Asafo-Adjei agree with him. But Dr. Addison says considering the financial landscape such banks should revise their banking license and become Savings and loans.
“Apart from the banks we also have the savings and loans. We also have the micro finance. We have all types of financial institutions that cater for the inclusion agenda. But we want banks that would have the capacity to be able to help transform the economy.
“And having financial sectors or a bank that can mobilise adequate resources and finance big ticket transaction it is crucial in being able to deliver that transformation and this is why we are emphasizing the strength of the capital of the banks.
“So yes, if you think that you are operating in a niche that does not require that you should have GH400million level of capitalization you can choose to go for savings and loans license,” he replied.