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The rest of 2018 will be a make-or-break time for many of Ghana’s banks. The central bank is raising capital requirements in the hope of strengthening the banks, boosting their lending and promoting mergers. Bigger and stronger banks would not only assist the financing of major projects but increase their lending to smaller businesses. Such a banking transition will create winners and losers, and small local banks say they worry that higher requirements will strengthen foreign-owned banks to their detriment.
As a sign of the potential pain to come for small banks, the Bank of Ghana (BoG) withdrew the operating licences from five local institutions – Beige Bank, Construction Bank, Royal Bank, Sovereign Bank and uniBank Ghana – in August. The government created Consolidated Bank Ghana out of the operations of these banks, backed by a hefty ¢5.76bn ($1.2bn) bond, to improve the sector’s governance and clean up the banks’ bad loans.
The non-performing loan (NPL) ratio for the sector was more than 22% as of June 2018. As NPLs have risen, banks have been dialling back on their issuance of loans to the private sector (see graph, page 44), raising concerns that this will lower growth in the medium term.
A limited crisis
The BoG and the ratings agencies do not portray the banking sector’s current troubles as a full-blown crisis. They maintain that, overall, Ghana’s banking sector remains solvent, with an average capital adequacy ratio clearly exceeding current requirements. The BoG downplays the impact on public finances of its banking-sector interventions, which critics estimate at more than 3% of GDP, including more than ¢2bn related to two errant banks in 2017 (see below).
The BoG acknowleges corporate governance failures at a number of banks. They include obtaining bank licences through ‘false pretences’, improper lending and diversion by bank leadership and shareholders of banks’ funds to related businesses for their own benefit, and unacceptably poor risk management. The BoG may launch civil lawsuits and has announced the creation of its own ‘ethics and internal investigations’ office. It also claims that Ghana’s Economic and Organised Crime Office is on the case.
Not yet halfway into his presidential term, Nana Akufo-Addo presides over a strengthening economy and maintains support from the international financial institutions. The International Monetary Fund (IMF) has extended its financial arrangement backing Ghana’s economic recovery until April 2019. It commends – with caveats – Ghana’s growth outlook, ‘macroeconomic stabilisation’, reduced inflation and economic reforms.
Economists predict real gross domestic product growth exceeding 6% this year. Optimists laud Eni’s recent commencement of commercial gas production in July from the Offshore Cape Three Points Sankofa field, even as critics say Ghana’s future share of Sankofa revenues is greatly hampered by unfavourable financial terms. Sankofa is due to produce 180m cubic feet of gas per day, most of which will be used to produce electricity.
Ghana’s banks need to operate efficiently in order to take advantage of this growth. BoG governor Ernest Addison, who was appointed in April 2017, champions new regulations and is tackling the legacy of his predecessors. He announced the new minimum capital requirements in September 2017. Both foreign-owned and local banks will need a capital base of at least ¢400m ($83.7m) by December 2018 – more than treble the previous ¢120m capital requirement in local currency terms.
¢400m: The new minimum capital requirement for banks in Ghana, up from only ¢120m. Banks have until December 2018 to meet the target
Bank executives are also dealing with another capital directive of July 2018, with a deadline of 1 January 2019. Among other things, it demands more stringent capital adequacy ratio calculations to match international risk-based Basel standards. Addison has also rolled out directives on corporate governance, management appointments and mergers.
The BoG says that the ¢400m capital requirement is necessary for many reasons: to bolster bank solvency; to adjust for currency depreciation and inflation; to allow banks to expand credit; and to enable future compliance with Basel II and III. While some of the larger banks claim already to meet the requirement and the BoG said in July that around 15 banks were on schedule to do so by December, doubt persists over the ability of the local banks to meet the deadline.
The five consolidated banks include some of the nine banks designated as undercapitalised and with ‘toxic balance sheets’ under the 2016 Asset Quality Review conducted by Addison’s predecessor, Abdul-Nashiru Issahaku. In August 2017, the BoG revoked the bank licences of ‘deeply insolvent’ Capital Bank and UT Bank, and transferred deposits and selected assets of both banks to the comparatively robust GCB. After that, the BoG placed uniBank under administration in March 2018 and Sovereign Bank under supervision in April 2018. It was a sign of action to come.
Prior to the creation of Consolidated Bank, insiders suggested that banks at risk of BoG action could include National Investment Bank and Agricultural Development Bank (ADB). The latter had touted plans to raise more than ¢300m, should it receive shareholder approval, but those plans were put into doubt in July when the BoG took back control of the ADB. It objected to the ADB having sold a majority stake to a consortium of investors led by US-based company Belstar Capital, saying the sale deal, which was part of the ADB’s 2016 initial public offering, was conducted inappropriately. Trading of ADB shares on the stock market was suspended.
The ADB’s initial fundraising optimism is generally mirrored by the leadership of other banks lacking sufficient, readily convertible income surpluses, and thus required to convince investors of their business case to raise new capital. But whether the new capital requirement will and should drive future mergers is a controversial matter, with views differing among regulators, politicians, economists, investors and civil-society experts. Whereas Issahaku took the view that the number of banks would certainly not be “capped” under his watch, Addison said in May that several banks had received licences within just “two years”.
Uphill task for small banks
A reduction in the number of banks was on the BoG’s agenda even prior to the creation of Consolidated. Addison favoured a “market-driven” approach, whether smaller operators merge or major players seek to acquire struggling minnows. In September 2017, Addison claimed the BoG had received more than one proposal for such a move. At July’s BoG press briefing, he said BSIC Ghana and local GN Bank and Premium Bank planned to merge. That deal fell apart.
George Bodo, Ecobank Capital’s head of banking research, says that smaller banks face an “uphill task” in meeting the new capital requirement in such a “short compliance period”. He predicts that the banks, particularly those in the lowest tier, will need to have raised as much as ¢5bn based on their fourth quarter 2017 balance sheets and claims that the local bourse does not have sufficient liquidity to fulfil the banks’ plans. Bodo notes that in 2013 banks were given more time to reach the ¢120m threshold but most had not done so by December 2016.
Laureen Kouassi-Olsson, head of financial institutions and West Africa at private-equity investor Amethis Finance, – a significant shareholder in Fidelity Bank – argues that a capital increase was “inevitable”, particularly given the erosion of the ¢120m capital requirement by both cedi depreciation and inflation. She adds that the capital increase is needed to match the growth in Ghana’s economy.
Kouassi-Olsson nevertheless remains sceptical on the quality of many of the assets within the banking sector, and whether investors and banks would undertake to acquire banks with assets that could incur significant costs and damage profitability. She says that a lack of merger activity is likely in the absence of BoG measures to incentivise acquisitions, such as the creation of a special-purpose entity like the Asset Management Corporation of Nigeria, which assisted in the last restructuring of Nigeria’s banking sector.
Major efforts will be needed for banks to comply with Basel II and Basel III standards, which could require them to raise yet more capital. Bright Simons, of the IMANI Center for Policy & Education, argues that the BoG’s approach to implementing and planning for Basel and other international standards, like IFRS 9, has been “incoherent”. He suggests that bank owners and leaders have their own “interests”, which could mitigate against mergers in the short term.
Local versus foreign
Simons also suggests that the new minimal capital requirement is ill-conceived. He says that perhaps the BoG chose it because it should be easier to enforce than a complex system that would be more reflective of risks and the differentiation of Ghana’s banking industry. Like Kouassi-Olsson and other critics, Simons questions whether banks will be able to deploy their additional capital profitably in the real economy, rather than buying treasury bills.
The political backdrop adds further unpredictability, with persistent pressure on the central bank to support Ghana’s local banks against foreign competition. President Nana Akufo-Addo appears receptive to demands from key ministers to investigate the impact of the BoG’s measures, even creating an advisory committee for this purpose earlier this year. Local bankers are calling for an extension to the December 2018 deadline.
Others, including finance minister Ken Ofori-Atta and the IMF, would like to see fewer, stronger banks even at the cost of bank failures. However, post-Consolidated, the finance minister, like Addison, has given reassurances that properly-managed, solvent local banks unable – due to “market conditions” – to raise sufficient capital could yet receive government assistance to meet the deadline. A recent IMF report, notably, commended the BoG for appointing uniBank’s administrator as a sign of its ‘commitment to tackling lingering weaknesses heads on’.
Certainly, Ghana’s 30 or so banks remains a large number for a modestly sized economy. This is before accounting for the host of non-banking institutions, including microfinance groups, that have also attracted BoG and IMF concern.
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