2022 Pre-Budget: The urge to grow Ghana’s economy through the Banking system, lessons from post recapitalization

It has been extensively studied that a country’s economy grows steadily when there are more inputs made into its system from the banking industry.

Just like most developing economies, the Ghanaian economy thrives largely with inputs (loans and advances) from the banking system to support the private sector.

This in turn creates the required bank asset level that ultimately generates revenues and profits for a bank’s survival.

This process, if properly supervised by the regulator, would create the desired multiplier effect in the Ghanaian economy.

Lessons from the Recapitalisation exercise

In an attempt to get the banks to drive the private sector, the Bank of Ghana in September 2017, issued a directive for banks to recapitalize from an existing bank capital threshold of GH¢120 million to GH¢ 400 million. For the first time, both Foreign controlled banks (FCBs) and Domestic controlled banks (DCBs) were required to capitalize by 31st December 2018.

The motive primarily was to enable banks to undertake big-ticket transactions (i.e. do more loans and advances), absorb more risk & losses and ultimately improve the overall performance of banks in Ghana.

Confidence in the banking industry

Research findings show that customer confidence in the banking industry shot up after the recapitalization exercise and same led to corresponding increases in bank deposits as well as bank total assets.

The Question

Generally, a higher bank capital would trigger an improved capital adequacy ratio (CAR) which ultimately improves a bank’s ability to undertake big-ticket transactions.

Study shows that an increase in a bank’s loan portfolio is an indication that the said bank has had adequate cushion through its CAR position, thereby enabling same to absorb the risk and losses that come with the management and administration of loans. The question therefore is, did the recapitalization exercise achieve its core motives in particular the objective of aiding banks to undertake big-ticket transactions (loans and advances) to support the growth agenda of the Ghanaian economy?

Corresponding increases in bank deposits and total asset levels
study shows that there was a positive relationship (+0.63) between bank recapitalization (increase in bank capital) and bank deposit levels immediately after the recapitalization exercise.

A bank’s total asset is made up of bank loans and other assets such as investments held in Government of Ghana securities. The study shows that there was a positive relationship between recapitalization and bank total assets.

Further study reveals that a chunk of the total asset increase came from an investment made by banks in Ghana of Ghana securities and that was not actual loans and advances made to support the private sector.

Loan to Asset ratio

To further interrogate the findings, the loan to asset ratio of banks was reviewed. The loan to asset ratio measures the component of loans that exist in a bank’s total asset structure. Results show that loans and total assets increased in absolute terms prior to the recapitalization exercise.

However, the average loan to total asset positions dropped after the recapitalization exercise. The results show that banks did not channel excess liquidity, the product of bank recapitalization, into loans to drive the growth agenda of the country.

Clearly, banks found other investment portfolios in the total asset structure more attractive and preferred the same to loans thereby defeating one of the key purposes of undertaking the recapitalization exercise.

Government securities and other cash equivalents held with banks rather increased significantly as against bank loans and advances. This inverse relationship between increases in bank capital and loan to total assets ratio shows that bank recapitalization exercises do not necessarily lead to increases in bank loans and advances. This can be attributed to the conservative nature of banks in Ghana and it further shows the risk-averse posture of banks in managing deposits available to them.

The drop in the loan to total asset ratio also explains the High Non-performing loans (NPL) ratio recorded by banks within the banking industry. The drop in the loan to total asset ratio also explains the crowding-out effect in Ghana as Government continues to compete with the private sector for depositors’ funds and thereby reducing the chances of the private sector getting access to the same funding to grow their businesses.

Conclusion

One cannot entirely blame Ghanaian banks for not supporting the private sector at a level commensurate to the growth levels recorded in both capital and bank deposits, taking into consideration the high NPLs and the huge appetite by Government in borrowing from the domestic market at a relatively high-interest rate.

In a free-market economy space, Government intervention is largely restrained and therefore banks cannot be coerced into investing in portfolios they find not interesting. Be that as it may, Government through the Bank of Ghana should use monetary policy tools under the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) to urge banks through moral suasion to structure more secured loans to support the private sector and also as a conscious effort to grow the economy.