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Ghana: Banks prepare for the oil boom

By Ben Avor and Martin Yeboah ?in Accra
Posted on Wednesday, 17 November 2010 17:33

The start of commercial oil and gas production this year will transform Ghana’s economy, and regulators want to ensure that banks can meet the demand

Standing grandly above the melee of street hawkers in the old High Street are the foundations of the country’s financial system – the central bank and the three biggest banks: Ghana Commercial Bank, Barclays and Standard Chartered. The industry is changing rapidly as nimbler and more innovative competitors rush into one of Africa’s fastest-growing markets. The grand old banks are beginning to emulate the drive and energy of the street vendors to defend their share of the market.

The regulators at the Bank of Ghana (BoG) have also responded to new market conditions by raising minimum capital requirements. It is more as a safeguard against the threat of future problems than a reaction to immediate events. Ghana’s banking sector, unlike Nigeria’s, managed pressures from the financial crisis without major restructuring.

After a difficult transition from the years of illiquidity, insolvency, interest-rate controls and credit rationing to a more market-based system, Ghana’s banks have been strengthened by better regulation. Most of them are now more efficient, competitive and profitable than they were a decade ago.

After pushing through several banking acts and toughening reporting standards, the BoG says the reforms will continue as pressure grows on the banks to do more to offer credit to the leading sectors of the economy and prepare for their biggest challenge: their participation in the country’s new oil and gas industries.

Big and small tasks?

Banks also have to concentrate on lower-profile tasks such as developing new ways to lend to small and medium-sized businesses and to reach the millions of Ghanaians who do not have bank accounts. At the same time, Ghana’s banks have watched their Nigerian counterparts and are trying to avoid overexposure and inadequate risk management.

The recapitalisation of Ghana’s banks was largely based on a similar Nigerian operation, but the results were very different. First announced in late 2007 by the BoG, the recapitalisation was seen as important to underpin future growth and strengthen Ghana’s banks. The BoG governor at the time, Paul Acquah, said that greater capital and size would make it easier for Ghana’s banks to develop technology and skills, absorb economic shocks, introduce new services, increase profitability, broaden their shareholder base and improve corporate governance.

Recapitalisation was meant to facilitate the takeover of weaker banks through mergers and acquisitions. In Nigeria, the number of banks was reduced from 89 to just over 20.

Nigeria’s operation was much more of a financial shock. Some banks had to quadruple their capital in less than a year and many were pushed into mergers. The BoG required Ghanaian-owned banks to increase their capital to ¢25m ($17.1m) or more by 2010 and to ¢60m by 2012. Foreign banks had to increase their capital to at least ¢60m by December 2009.

Regional reflections?

Despite Ghana’s lower thresholds, some industry analysts criticised it as a brash copy of Nigeria’s strategy. Ghana’s Association of Indigenous Banks warned the deadlines were too tight and argued for their extension over seven years.

There has been little consolidation, despite plenty of discussion about acquisitions. Talks between Merchant Bank Ghana and The Trust Bank have stalled. The sale of state-owned Agricultural Development Bank to a foreign-owned suitor has not gone through, partly due to government reservations and “inappropriate pricing”, according to senior banking sources.

A survey by PricewaterhouseCoopers suggests that few banks are actively seeking mergers. Foreign banks planned to get the additional capital from their parent entities if they were unable to obtain equity capital. Ghanaian banks resorted to private placements and rights issues to raise fresh capital. In fact, many more banks met the new capitalisation requirements than the regulator had expected.

The top league of Ghana’s banks still includes Ghana Commercial Bank and foreign-owned Barclays, Standard Chartered, Ecobank and Stanbic. However, the market share of the biggest five banks has fallen over the last five years, from over 60% to under 50%.

Build better banks?

BoG figures show that capital adequacy ratios have increased significantly and that liquidity remains good. Although there has been an increase in non-performing loans and reduced loan quality, reflecting tougher economic times, there have been no significant defaults.

A Capital Idea

Two very different banks – CAL Bank, an investment bank with a growing retail base, and Ecobank Ghana, part of a leading pan-African network of commercial banks – are thriving in the wake of the Bank of Ghana’s recapitalisation exercise. The chief executive officer of CAL Bank, Phillip Owiredu, says that his bank has bounced back strongly after the generalised pressures in the international financial system in 2009: “In this first quarter [of 2010], we recorded a substantial 72.6% increase in operating income. Falling interest rates have allowed us to grow our balance sheet while keeping interest expenses constant.” CAL Bank will this year celebrate its 20th year as one of Ghana’s most consistently-successful financial institutions. Owiredu says that over the past year CAL Bank has recorded a 43% increase in customer deposits, primarily from wholesale customers. It is seeking to increase its retail base too.

Ecobank Ghana is now one of the best-capitalised banks in the country after shareholders approved the directors’ recapitalisation plans to boost the bank’s stated capital from ¢16.4m ($11.2m) to ¢100m last year. Ecobank’s management did this by transferring ¢4.1m from the income surplus account to stated capital, thereby settling a bonus share issue to existing shareholders. It raised the rest from a rights issue. Ecobank predicts a better profit performance for the 2009/2010 financial year. That means an improvement on the already impressive 51% increase in earnings for the previous year. In July, West Africa director Evelyne Tall said that customer deposits for Ecobank Ghana had grown 25% year-on-year.

High interest rates and tough requirements for borrowers continue to constrain credit. Banks are now under pressure to reduce excessive interest-rate spreads. Bank executives say that will become easier as risk assessment and credit information improve.

The big prize will be the oil and gas sectors. The managing director of one of the biggest banks is worried that because banks in Ghana under-capitalised, most banks will struggle to invest in project finance. They would also have to learn oil expertise from foreign banks. The biggest Ghana-based bank involved in the Jubilee field, Standard Chartered, is also foreign-owned. Most banks will focus on the downstream sector for a share of the action.

Even there, they will need to hone their risk-management skills, given the tougher environment. In June, BoG Governor Kwesi Amissah-Arthur spoke of the need to reinforce risk management and meet international standards, such as the Basel II requirements. Managers are introducing new risk-management functions to ensure that cross-border, regulatory, currency and market risks are better monitored and controlled.

Amissah-Arthur’s new regime is more demanding. Many banks will have to recruit new specialists in risk management, and some industry analysts question the BoG’s ability to enforce its targets. But nobody questions the need to strengthen Ghana’s banks ahead of a ?period of unprecedented ?economic expansion.

This article was first published in the August-September 2010 edition of The Africa Report.

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