Ghana’s “Big is Beautiful” Gamble with its Banks

Nothing gets my pulse racing and my juices flowing like the suspicion that the professional class has retreated into silence in the face of clear “policy incoherence” – I.e. an “Emperor’s New Clothes” situation.
The Bank of Ghana may have very prudent and sensible reasons for raising the minimum paid up capital for universal banks in Ghana to nearly $100 million. But I haven’t heard them. And, trust me, I’ve been scouring the financial press trying to hear some cogent arguments. So far, none.
The country’s financial analysts and specialists have made some comments, but all I get is a confusion of “minimum equity” with “capital adequacy”. I have been a keen follower of public policy in this country for nearly a decade and half; I can smell incoherence when I see it.
Setting the minimum “own funds” requirement at such a high level, rather than focusing on the relative ratio between core capital (in simple terms: what the owners of the bank have invested, together with past profits from operations), on the one hand, and risk-weighted assets (crudely: loans advanced to borrowers, mostly with deposits made by the public, and other liabilities), on the other hand, is simply a promotion of big banks over medium banks regardless of the business strategy of individual banks.
There are banks focused on segments of the market with less risk. There are banks better at managing risks. There are banks focused on small projects. There are banks targeting medium sized businesses. In short, there are banks with less risky assets. And fewer assets in total, who perform critical roles in the country by providing credit at lower cost to niche customers they know extremely well. Such banks don’t need to be massive to be profitable and catalytic.
A hundred million dollars in minimum capital if translated into Basel III terms might suggest that the Bank of Ghana sees the minimal viable asset footprint of a bank in Ghana as roughly a billion dollars. In a tiny economy of $42 billion, this is merely the triumph of size over substance.
Such consolidation may well reduce competition and simply act to shield already unresponsive market leaders. Not when in the most sophisticated markets regulators are doing everything possible to spur competition and reduce the influence of the banking majors. In the UK we have seen nearly 20 new banking licenses in the last half a decade, with 20 more under consideration. In fact both the PRA and FCA are now open to discussing capital requirements on a case by case basis.
The notion that only giant universal banks can play essential roles in the top end of the economy isn’t very persuasive. India, with an economy several dozen times our size has had a minimum equity/capital requirement of $77.5 million for a good while now without banks imploding under the weight of the economic obligations placed on them. Australia, one of the world’s strictest banking jurisdictions, maintains a minimum own funds limit of $50 million. In Canada, the minimum paid up capital is a remarkable $5 million.
The minimum subscribed capital in Luxembourg is less than $8 million. In Switzerland, it is a little more than $10.2 million. Don’t the Swiss need banks with giant muscles to pursue “big ticket transactions”? As we are usually told is the reason why banks in Ghana need to consolidate? Even though there is no real logical basis for assuming that syndication and risk pooling by multiple independent banks are not more than adequate for large-scale transaction financing activities. And in some cases actually more prudent. Even the Nigerians, from whom the Ghanaian regulators believe they have been borrowing these “macho” banking regulations, have a minimum capital requirement of $70 million for national banks (our equivalent of “universal banks”).
But here is what is interesting: Nigeria is now proposing to CAP or LIMIT total capital to $280 million. Why? Because they have been going too far in promoting consolidation to the point where “size-related systemic risks” have been rising, and innovation is suffering. Nigeria has one of the world’s lowest mobile money penetration rates: 1%! Compared to 60% in Kenya, where in 2016 lawmakers rejected an attempt to force minimum capital requirements up from $10 million to $50 million.
When I started this dawn to search for a sophisticated banking jurisdiction with a minimum paid-in capital requirement of $100 million plus, I was hopeful of finding a few within minutes. I haven’t seen any so far.
As I said in the beginning it is important that we don’t confuse “capital adequacy” and liquidity ratios with absolute equity amounts. Both Basel III and the intimidating EU CRR emphasise capital adequacy rather than minimum paid up capital for the simple reason that capital adequacy is the more effective instrument for matching a bank’s safety buffers with its risk appetite. And Ghana’s 10% requirement, if well policed, seems fine enough (though one could actually get away with 8% under the Basel Accords. Minimum capital thresholds are somewhat more blunt. A large capital base does not translate in any significant sense to prudent banking practices.
Of course it is harder to do risk weighting and monitor governance and personnel competence than it is to measure the absolute levels of capital, but that is not the soundest excuse for preferring the latter.
At any rate, technology is beginning to erode the differences among the different tiers of banking anyway.
A wag may say that it will soon be shrewder to bag 250 rural banking licenses (“one district one bank”) for 250 million Ghana Cedis than one universal banking licence for 400 million Ghana Cedis, if the goal is to aggregate privileges.
But the more serious point is that technology is on the verge of transforming risk management in ways never before possible hence the aggressive push in more sophisticated markets to remove arbitrary barriers and promote smarter, more sensitive, regulations that encourage competition and innovation whilst detecting fraud and cheating well before their effects escalate or cascade.
I would of course be happy to change my attitude to the policy in the face of superior argument, analysis, and logic. What a pity then that so little insight has so far been forthcoming from the lofty quarters where these decisions are taken.

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