The Real Weights on Ghana’s Banking Shoulders

Take a look at the non-performing loans trendline below (Source: Bank of Ghana).
Since 1989 when the Ghanaian banking authorities introduced the use of “minimum paid up capital” as a major instrument of quality control in the banking system, the only direction has been “up”. From $740,000 in 1989, and $7 million in 2008, we have now arrived at $90 million plus in 2018.
Whilst we are not arguing an absolute correlation, the fact remains that over the last decade and half, more important quality indicators of bank performance, such as capital adequacy ratio and non-performing loans, have actually deteriorated. Just look at the Bank of Ghana’s own graphs annexed below this short note. This deterioration has happened even as the Bank continues on this obsessive drive to promote super-high minimum paid-up capital, a variable considered relatively insignificant in most sophisticated banking jurisdictions around the world.
Since 2012, successive Bank of Ghana (BoG) governors have made the same argument when raising the capital floor: we want strong banks that can finance “big ticket” transactions. What happened to “syndication”? To “risk pooling”? Every year we go to Europe for $1 billion plus of loans and facilities to finance cocoa purchases. Each time, several European and other international banks pool capital to lend to us, even though each of the major banks that participate can probably finance our entire national budget on their own.
We don’t need every single bank in Ghana to be able to finance a $50 million road on their own. Right now, that is not what happens anyway. Big deals are syndicated. We want more of that. And we want more attention paid also to the $250k to $2.5 million deals that non-bank finance institutions aren’t always able to handle, and which medium-sized and specialised banks are best placed to handle.
Arbitrary capital floors are certainly easy to impose. But they do little to cure the deep rot festering within the banking system. When last we pushed the minimum capital requirement from a little over $25 million to more than $50 million, it did little to enhance the health of the financial system. So, few years later, what do we see? As much as 40% of loans extended by banks to the agro sector risk default. A quarter of all loans to the manufacturing sector cannot be paid back. In these critical sectors, Ghana has one of the riskiest credit environments in the world.
The truth of the matter is that the aggressive use of the minimum capital requirement as a key instrument in regulating banking quality in this country has not proven effective over the last two decades. The reason is simple: this blunt tool is not the right surgical instrument for dealing with the delicate problems facing the sector.
The minimum capital tool’s use in South-East Asia following the Asian Financial Crisis, which influenced some countries in the region to jack minimum requirements to a billion dollars and more, was in the context of very special circumstances. Circumstances whereby international speculators and purveyors of hot money were threatening to bring entire regional financial systems down.
A medicine for managing acute crises cannot be prescribed to deal with chronic problems, like the deteriorating capital adequacy and NPL situations we face. Nor is it likely to fix the fundamental challenge of the high cost of credit, which is the bane, not just of the financial system, but of the economy itself. In fact, by raising the cost of doing business for the smaller banks, this blunt capital jackup measure is likely to exacerbate that problem. And what about the 800-pound gorilla that is asset risk-weighting?
It is fast becoming obvious, following the Unibank debacle, that a more urgent task confronting the BoG is to completely overhaul the entire framework for assigning risk weights to the off – balance sheet exposures of banks in this country, and to do so in a way that can provide some sort of early warning signal of potential distress.
Most of the Basel (BIS) and IMF prescriptions in this regard require considerable adjustment to work in our context, where “sovereign” doesn’t mean what it does elsewhere (our governments often have worse borrowing habits than some addicts) and “public sector entities” don’t have the cachet they are granted by convention. The weak credit referencing system also makes corporate debt rating a virtual crapshoot. It has always been a source of fascination for observers how preferential risk weights and maturity treatments affect capital adequacy measurements in Ghana considering the thinness of regulatory reporting in this country.
If capital hungry Dubai and fabulously rich Abu Dhabi, the crown jewels of the UAE, can both make do with a $14 million minimum paid-up capital requirement for their banks, without fear of eroding capacity to finance, then I am pretty sure that Ghana can manage too.
Not too long ago, we were all over Mauritius, trying to cosy up to their leaders in the hope of benefiting from the experience of their financial services success story. We even wanted them to come and set up an “International Financial Services Center” here. Yet, this Indian Ocean country maintains a $6 million capital floor.
It must be obvious to the Great and Good who run this country that managing a healthy financial system and insisting on a $90 million plus capital floor can be mutually exclusive propositions.

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