macroafricaintel | Ghana: Assessing the banking industry cleanup exercise (2)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Spread net wider
Incidentally, it is the non-bank but quasi- financial institutions that could now be even more problematic. Menzgold, a gold trading firm, is owing its customers huge sums of money that it likely would not be able to pay back. The firm’s chief executive Nana Appiah Mensah is now to face prosecution for myriad financial offences. But how would Menzgold customers get their money back?

Anxious customers would like the Bank of Ghana to intervene like it did for banks. It declined, adding how it warned citizens severally about the risks involved in patronising the firm which is now widely believed to have been operating a ponzi-type scheme. The relevance is whether the anger of Menzgold’s customers could create another crisis of confidence that could potentially rub off on the banking sector. In any case, the Bank of Ghana is increasingly getting the blame for not doing more.

Just like the banks that were found to be problematic had the patronage and endorsement of top politicians, Menzgold did as well. With almost 2 million Ghanaians invested in Menzgold to the tune of $400 million, it is highly unlikely the central bank would be able to escape responsibility both for the crisis and indeed for fixing it.

The Menzgold example further highlights poor regulatory vigilance on the part of the central bank. Clearly, even as Menzgold was not directly under its jurisdiction, the Bank of Ghana could not have been ignorant of the potential disruption the firm’s activities could cause to the financial system should things go south. In other words, just as the banking crisis was as a result of lax supervision, the Menzgold crisis is likewise. And until the regulator is better positioned and sufficiently willed to monitor and guard the financial system, another crisis may not be too far away.

GAT could be problematic
Already, there is talk about the propriety of GAT. Could more local banks have been rescued? Some wonder why GN Bank was not similarly rescued, for instance, leading to accusations of foul play. In remarks to the media on the issue, BoG governor Ernest Addison says the central bank did not choose the banks to be rescued: “We have not played a direct role but we supported the initiative”.

Members of parliament from the National Democratic Congress (NDC) party take a different view, saying in a statement released in January that “there has always been the suspicion that the NPP [New Patriotic Party] government led by Nana Akufo-Addo is hard on businesses owned by people perceived to be sympathisers of the former NDC administration.”

It is also wondered why in the first place hard-earned pension funds would be used to rescue banks that could not secure funds otherwise. Labour unions have raised concerns. In response, the finance ministry issued a statement in January to clarify the purpose of GAT. “The GAT arrangement is to support solvent and strong indigenous banks to meet the new minimum capital requirement and is not a bailout programme…”.

There is also the issue of the pensions law which stipulates that fund managers should not invest more than 5 percent of pension funds in collective investment schemes, which most industry stakeholders believe GAT is. They would be breaching this regulatory limit if they collectively invest up to 2 billion cedis in the SPV.

This should not be a problem, however, as the National Pensions Regulatory Authority (NPRA) is expected to grant special approvals to interested pension fund managers, some of which have already started entering into agreements with GAT. There could still be legal troubles ahead for GAT and the pension funds that subscribe to its instruments regardless.

Prosecute erring officials
It is abundantly clear the banking crisis occurred with the connivance of banking supervision staff at the Bank of Ghana. And unless those found wanting are punished, there is likely to be a recurrence. Osei Gyasi, head of banking supervision at the BoG told Joy News, a reputable television station, in early January that “the work of the ethics department [investigating the matter]…is almost completed and very soon the final report will be issued to management”.

And the Economic and Organised Crime Office (EOCO) has reportedly questioned persons of interest already. These are all encouraging steps. Still, scepticism remains about whether the authorities would follow through and prosecute the big and small fish involved. The culprits must be punished for full confidence to be restored.

An edited version was published in the first quarter 2019 issue of African Banker magazine

macroafricaintel | Ghana: Assessing the banking industry cleanup exercise (1)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

In early January, the Bank of Ghana (BoG) announced there are now twenty-three banks – from thirty previously – licensed to operate as universal banks in Ghana. This followed their successful recapitalisation to at least 400 million cedis on or before 31 December 2018. The central bank gave the ‘minimum capital directive’ more than a year earlier. Out of the twenty-three, sixteen met the minimum capital requirement on their own. Three were mergers: First National Bank and GHL Bank, Energy Bank and First Atlantic Bank, and Sahel-Sahara Bank and Omni Bank.

Five indigenous banks, which could not secure the minimum capital before the deadline but deemed solvent and well-governed, were rescued by private pension funds through the “Ghana Amalgamated Trust Limited (GAT)”, a 2 billion cedis special purpose vehicle they formed for the purpose. They are state-owned Agricultural Development Bank and National Investment Bank, Omni/Sahel Bank, Universal Merchant Bank, and Prudential Bank.

Bank of Baroda, an Indian bank, chose to exit the Ghanaian market all together for strategic reasons. Assuringly, its operations have been taken over by Stanbic Bank. GN Bank, one of the erstwhile universal banks which could not meet the minimum capital requirement by the deadline, successfully applied for a savings and loans company licence. It has until June to complete the transition.

Some confidence restored
Seven banks, which were considered insolvent, had their licenses revoked, however. Unibank, The Royal Bank, Beige Bank, Sovereign Bank, and Construction Bank lost theirs over the previous one and a half years. Premium Bank and Heritage Bank are the two which were shut down in the new year. Like the earlier five, some of their assets and liabilities have also been transferred to Consolidated Bank Ghana, the ‘bad bank’ the authorities set up for the purpose.

The infractions by the closed banks were virtually the same. There were perenially illiquid and insolvent. Huge loans were granted to related parties and investments were fictitiously booked. And in the case of the defunct Heritage Bank, the sources of its capital were considered to be suspicious by the central bank and its majority shareholder adjudged not to have met the “fit and proper person” test.

In the most recent comprehensive update on the banking sector published by the central bank in November 2018, the main financial soundness indicators “recorded broad improvement…” relative to the year before. As at October 2018, there were thirty banks with total assets of 106 billion cedis. Thirteen of these were indigenous banks and seventeen were foreign-owned. Deposits were put at about 67 billion cedis, a quarter of which were in foreign currency. Shareholders’ funds were put at about 14 billion cedis.

By and large, the central bank has done a decent job of bringing some sanity to the erstwhile beleaguered banking industry. But are these steps enough? What about the reported poor governance systems at many banks? Not a tad few point to mismanagement and corruption for the genesis of the crisis. Have these been addressed? Would the central bank officials found culpable be dealt with to the full extent of the law?

What about the top politicians found to be responsible for embezzlement, insider deals, and stagnant loans at these banks? Would they be dealt with? And what informed the rescue of the five indigenous banks and not others?

More importantly, has confidence now been restored to the banking system? Probably. There certainly are now no panic withdrawals. And all those who go to their banks are able to do their transactions with little or no hassle.

An edited version was published in the first quarter 2019 issue of African Banker magazine

macroafricaintel | Ghana – Assessing the ‘one district, one factory’ policy

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Nana Akufo-Addo, the president of Ghana, is a great speaker. English audiences listen in awe to his speeches, marvelling at his mastery of their mother tongue. His fellow citizens did not stand a chance against his charm. He defeated an incumbent to the coveted position he now occupies with relative ease. His oratory was not all that won the votes of the majority of his compatriots. He sold a dream of an industrialised Ghana that would look beyond aid to development. At the time, during the campaigns and almost momentarily after he was sworn into office, analysts wondered about the realism of pursuing such adjudged follies as his “One district, One factory”, “One village, One dam” proposals. Still, as highfalutin as they sounded, the citizenry drank the Kool-Aid with relish. And to his credit, he was not just selling a dream. He meant to realise it. Bear in mind, this is not the first time such an experiment would be attempted in Ghana. And even for planned economies in the East like China, which underpinned the failed first trial, the authorities there have since learnt the wisdom of allowing market forces to determine certain things. Clearly aware of the scepticism, Yofi Grant, chief executive of the Ghana Investment Promotion Centre, told the Financial Times, a British newspaper, in September 2017, that “this time around it’s going to be private-sector driven, with government only playing a facilitatory role.”

Slow progress
Has this been the case more than a year afterwards? There has not been as much progress as envisaged by the authorities. Speaking to the Financial Times in October 2018, Joyce Awuku-Darko Osei, head of the transformation unit at the finance ministry, which prepared the current government’s “Ghana Beyond Aid” development framework, avers poor co-ordination is one reason why progress has been slow. “Only 600 of more than 1,000 factory proposals have been evaluated,” she tells the Financial Times. And she refutes the populist garb put on her prinicipal’s intentions. “The idea…is that private businesses can request government assistance (feeder roads, power supply, access to credit, etc) to make factories viable”, she adds. Still, how likely is it that there would be an industrial venture worthy of investors’ capital in every district? What do analysts think? Malte Liewerscheidt, Vice-president for West Africa at Teneo Intelligence in London tells New African that “at about half-time of Akufo-Addo’s first term, the ‘1 district 1 factory’ policy has still to get off the ground. As of October 2018, a mere 18 factories of varying size have been built in the 216 districts. The sluggish progress on one of the government’s flagship policies makes it rather unlikely that the stated target will be achieved by 2020. Teneo’s Liewerscheidt actually questions “whether [this] ‘shotgun approach’ to industrialization will yield sustainable results”. In the view of Verner Ayukegba, principal analyst for sub-saharan Africa at IHS Markit in London, the desirability of industrialisation to tackle such social challenges like high youth unemployment is not the subject of contestation but rather the somewhat impracticable approach. For instance, “factories need support infrastructure and other support services which is impossible to have in all districts”, says IHS Markit’s Ayukegba, reckoning “the concentration in Accra, Tema, [and] Takoradi is likely to continue.

There is also the issue of affordability. With public debt at more than 60 percent of gross domestic product (GDP), can Ghana afford more indebtedness in pursuit of these ambitions? Mr Ayukegba is unequivocal: “No! They’ve had to display immense creativity to get the Chinese to finance key projects with strong IMF [International Monetary Fund] opposition.” China has agreed to fund various infrastructure projects to the tune of $19 billion, in a deal signed during a state visit by President Akufo-Addo in early September, ahead of the Forum for China-Africa Cooperation (FOCAC) meeting in Beijing. More significant for the Chinese, though, is the estimated 960 million metric tonnes of bauxite reserves worth about half a trillion dollars when processed into aluminium that they hope to exploit in the 26,000 hectare Atiwa forest in southeastern Ghana. In a first phase, Sinohydro Corp Ltd paid the authorities $2 billion in November as part of a barter deal to fund road projects in exchange for refined bauxite. The authorities also plan to tap the eurobond markets for as much as $5 billion to $10 billion before end-2018; being the first tranche of its proposed century bonds of $50 billion, an amount almost equal to the current size of the economy. The government is probably banking on crude oil revenues to meet its debt obligations. But at an expected production level of 250,000 barrels per day by 2020, that is even as twice as much could be added soon after, it is unrealistic for the administration to bank its hopes on oil in this regard. That said, there are early indications of interests by foreign manufacturing capital allocators. In early September, the government signed a memorandum of understanding with Sinotruck International, a Chinese maker of heavy-duty vehicles, to build an assembly plant, which would initially produce about 1,500 trucks annually, with room for further expansion. The deal was struck not too long after Volkswagen, the German automaker, announced it was in talks with the government to build an assembly plant in the country as well.

Refine policy, set realistic targets
Without a doubt, there is a strong imperative to grow the manufacturing base. That is, even as crude oil production is expected to boost growth for a while, with the IMF projecting an average growth rate of about 6 percent in 2018-22; after an average acceleration of about 7 percent over the past decade. And even after the review of the base year of the country’s gross domestic product (GDP) data to 2013 from 2006 in September, which increased the size of the economy by about 25 percent in 2017, industry is still about a third of output; despite growing the highest at about 16 percent. Services, which is not as labour-intensive, takes the lion share at about 40 percent. As industry creates more jobs, the issue is not so much about the need for boosting the sector as it is about the approach. But what is the alternative, especially as the country’s increasing oil wealth may weigh on progress before too long if momentum towards an industrialised Ghana is not built right now. “There is no alternative than for government to keep that narrative at least from an aspirational standpoint”, IHS Markit’s Ayukegba opines. But the authorities could also “focus more on regionally-focused clusters to create economies of scale, which countries such as China have pursued with sometimes remarkable success,” avers Teneo’s Liewerscheidt. In any case, “automation in agriculture and industry [would erode] the benefits of such policies for employment [over time]”, adds Ayukegba. What can the government do then to make the policy better so that it achieves the objectives of industrialisation? “Power and other infrastructure investment to make the cost of production and doing business cheap”, is one way, according to Ayukegba, and a boost of the services sector is another. The authorities’ 5-pillar “Ghana Beyond Aid” development framework of wealth creation, inclusivity, sustainability, empowered Ghana, and resilient Ghana (WISER) already incorporates these considerations. So the issue is not so much about policy objectives as it is about a practicable, optimal and sustainable approach.

An edited version was published by New African magazine in January 2019

macroafricaintel Weekly | 10 Dec [Update]

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

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Date Data / Event Period Forecast Previous
10 Dec Nigeria GDP, % yy Q3 2018 0.8 [act. 1.8] 1.5
11 Dec South Africa Mining Production, % yy Oct 2018 -1.7 -1.8
11 Dec South Africa Manufacturing Production, % yy Oct 2018 -0.1 0.1
12 Dec South Africa CPI, % yy (mm) Nov 2018 5.3 (0.3) 5.1 (0.5)
12 Dec South Africa Retail Sales, % yy Oct 2018 2.8 0.7
13 Dec South Africa PPI, % yy (mm) Nov 2018 6.8 (0.4) 6.9 (1.4)
31 Dec South Africa PSCE, % yy Nov 2018 5.2 5.8
31 Dec South Africa M3. % yy Nov 2018 5.7 6.0
Seychelles CPI, % yy (mm) Nov 2018 4.1 (0.2) 3.4 (0.2)
Tanzania CPI, % yy (mm) Nov 2018 2.9 (0.2) 3.2 (-0.3)
Botswana CPI, % yy (mm) Nov 2018 3.8 (0.4) 3.6 (0.7)
Namibia CPI, % yy (mm) Nov 2018 5.3 (0.4) 5.1 (0.4)
Nigeria CPI, % yy (mm) Nov 2018 11.4 (0.9) 11.3 (0.7)
Ghana CPI, % yy (mm) Nov 2018 9.2 (0.6) 9.5 (0.7)
Ethiopia CPI, % yy (mm) Nov 2018 11.1 (0.3) 11.5 (-0.3)
Mauritius CPI, % yy (mm) Nov 2018 2.7 (0.3) 2.8 (0.4)

macroafricaintel Weekly | 3 Dec

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

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Date Data / Event Period Forecast Previous
4 Dec South Africa GDP, % qq saa Q3 2018 0.4 -0.7
4 Dec Botswana Policy Rate, % 5.0 5.0
5 Dec Namibia Policy Rate, % 6.75 6.75
6 Dec South Africa Current Account Balance, % GDP Q3 2018 -3.4 -3.3
Seychelles CPI, % yy (mm) Nov 2018 4.1 (0.2) 3.4 (0.2)
Tanzania CPI, % yy (mm) Nov 2018 2.9 (0.2) 3.2 (-0.3)
Botswana CPI, % yy (mm) Nov 2018 3.8 (0.4) 3.6 (0.7)
Namibia CPI, % yy (mm) Nov 2018 5.3 (0.4) 5.1 (0.4)
Nigeria CPI, % yy (mm) Nov 2018 11.4 (0.9) 11.3 (0.7)
Ghana CPI, % yy (mm) Nov 2018 9.2 (0.6) 9.5 (0.7)
South Africa CPI, % yy (mm) Nov 2018 5.3 (0.3) 5.1 (0.5)
Ethiopia CPI, % yy (mm) Nov 2018 11.1 (0.3) 11.5 (-0.3)
Mauritius CPI, % yy (mm) Nov 2018 2.7 (0.3) 2.8 (0.4)

macroafricaintel Weekly | 26 Nov

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

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Date Data / Event Period Forecast Previous
26 Nov Ghana Policy Rate, % 17.0 17.0
27 Nov Kenya Policy Rate, % 9.0 9.0
29 Nov South Africa PPI, % yy (mm) Oct 2018 6.0 (0.5) 6.2 (0.5)
29 Nov South Africa PSCE, % yy (mm) Oct 2018 6.2 6.3
30 Nov Kenya CPI, % yy (mm) Nov 2018 6.1 (0.3) 5.5 (-0.8)
30 Nov Uganda CPI, % yy (mm) Nov 2018 3.2 (0.1) 3.0 (-0.4)
30 Nov Zambia CPI, % yy (mm) Nov 2018 7.3 (0.5) 8.3 (0.7)

macroafricaintel Weekly | 19 Nov

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

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Date Data / Event Period Forecast Previous
21 Nov South Africa CPI, % yy (mm) Oct 2018 5.0 (0.4) 4.9 (0.5)
22 Nov Nigeria CPI, % yy (mm) Oct 2018 11.5 (1.0) 11.3 (0.8)
22 Nov Nigeria Policy Rate, % 14.0 14.0
23 Nov South Africa Policy Rate, % 6.5 6.5
23/26 Nov Ghana Policy Rate, % 17.0 17.0

macroafricaintel | Banks in West Africa: Struggling amid tighter regulatory grip

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Banks in West Africa have been in the news for the wrong reasons lately. In Nigeria, four banks, of which three have foreign affiliations, namely Standard Chartered, Citibank and Stanbic IBTC Bank and Diamond Bank, were in total fined 5.65 billion naira by the Central Bank of Nigeria (CBN) for illegally facilitating the transfer abroad of $8.134 billion for MTN, a South African telecoms firm. The Nigerian central bank has also increased its scrutiny of some of the practices of banks that are clearly exploitative. In September, for instance, it instituted a fine for erring banks that fail to reverse failed electronic transfer transactions within 24 hours. In neighbouring Ghana, five banks, namely Unibank, Sovereign Bank, Construction Bank, Beige Bank, and Royal Bank, failed and had their licenses revoked by the Bank of Ghana, the central bank, in early August. The failures were largely due to weak corporate governance systems, with widespread fraud and insider dealings alleged. In Unibank, for instance, hitherto Ghana’s sixth largest bank, directors and their associates availed themselves of depositors’ funds to the tune of $1.1 billion, according to the BoG. Consolidation Bank Ghana, a resolution vehicle set up by the Bank of Ghana, to assume the assets and liabilities of the failed banks, is believed to be adequate to prevent a crisis, however. Stringent punitive measures against the directors of the failed banks are also expected. Nonetheless, poor banking supervision by the BoG is also a reason why the banks failed. That said, remedial measures by the central bank have proved to be effective. S&P Global Ratings, a rating agency, seems to think so, at least. In September, it raised Ghana’s sovereign rating to B from B- in part because it assessed the country’s banking sector to be largely stable. Regardless, there is a general lack of confidence by Ghanaians in the banking sector at the moment. It is also important to note the continued divide in the banking sectors of anglophone and francophone countries. “In West Africa generally, there continues to remain a deep divide between the banking systems in English and French West Africa,” says Andrew Nevin, chief economist at PwC, a consultancy, in Lagos. “Apart from Ecobank – a truly pan-Sub-Saharan African bank, the players are different in the 2 regions, and certainly, English-speaking banks have not had great success when they entered Francophone markets,” he adds.

De-risking, increased mobile banking, and tighter regulations
So what are the notable banking industry trends in the region over the past year, especially in Nigeria, Ghana, and Ivory Coast? “We have noted three trends,” says George Bodo, head of banking research at Ecobank, a pan-African bank, in London. First, we have generally seen a balance sheet de-risking trend in West Africa, where banks, in Ghana, Nigeria and UEMOA, increased the pace at which they purchased Central Government debt compared to lending to the real economy. In 2017, the share of Central Government debt to total banking sector assets rose sharply by 400bps y-o-y to 21%. In the same period, the share of customer loans rose by 200bps y-o-y. This is largely a risk-off trend informed by the elevation in credit risks (as gross NPL ratio rose to 16% in 2017, from 11% in 2015).”

“Second, there is an increasing adoption of mobile phone as a distribution channel-especially in Ghana and UEMOA. In Ghana, the value of mobile money transactions (primarily deposits and withdrawals) hit USD35bn in 2017, from USD18bn in 2016. In UEMOA, the value of mobile money transactions hit USD21bn in 2016, a sharp growth from the USD2.9bn transacted in 2013.”

“Finally, regulations seem to be tightening. In Ghana, commercial banks have until end of 2018 to increase their minimum fully paid-up share capital to a new regime of GH¢400mn (from GH¢120mn). In UEMOA, the regional central bank, BCEAO, has, effective January 1, 2018, rolled out a mix of Basel II and III inspired regulatory reforms. Some of the key reforms include: (i) introduction of operational and market risks in the calculation of risk-weighted assets; (ii) a capital conservation buffer surcharge – mainly 2.5% surcharge of core capital; (iii) a reduction in the single large exposure limit to 25% of core capital; and (iv) regulation and supervision of financial holding companies on a consolidated basis by the BCEAO and the Banking Commission.”

PwC’s Nevin provides additonal views on the Ghanaian banking sector: “With respect to Ghana, the number of banks was very high in a small market and it is not surprising there is a consolidation. The costs of banking technology – particularly with the Fintech challenge – and the increasing demands of regulatory compliance mean that small banks are going to be more and more uncompetitive. In the Ghana market, you have Ghana Commercial Bank as a huge player, and a number of very successful African Banks (GT, Ecobank, UBA, Absa for example). So it is not a surprise that small, poorly capitalized players cannot survive. The Bank of Ghana is doing an excellent job of resolving these banks and making sure the banking system in Ghana is robust.”

QE to the rescue?
And how does Ecobank’s Bodo see the banking industry in the region evolving over the next year or so; especially in the key countries Nigeria, Ghana, and Ivory Coast? “In Ghana and UEMOA, we are anticipating increased partnerships between traditional banks and mobile network operators (MNOs) especially in regards to liability mobilization. In Nigeria, we still anticipate increased risk-off liquidity deployment strategies.” How so? “In 2017, banks bought FGN-issued debt securities worth NGN245bn, while only lending NGN183.6bn to the real economy. This kind of asset allocation was bound to concern the CBN. However, we broadly believe that for balance sheets to grow, banks have to move up the risk curve. But this risk spectrum, which holds the right price incentives, still lacks the right ingredients that banks are looking for.” To push them along, the CBN announced a number of stimulus measures in August. It offered to release some of the funds kept by banks with it as reserves for lending to agricultural and manufacturing firms at the single-digit rate of 9 percent. Additionally, it offered to buy long-tenored bonds of corporates that demonstrate their activities would create jobs. But would these be enough to nudge the banks towards more lending to the real sector? Ecobank’s Bodo is sceptical: “CBN’s direct intervention in deposit intermediation will still not avail the ingredients.”

Innovate, innovate, innovate
“In the [Nigerian] banking sector, the environment remains very challenging. The uplift in oil prices has taken some pressure off non-performing loans in the oil & gas sector (but not the power sector). [And] there continues to be a widening gap between the major banks and the middle-tier banks in terms of return on equity and cost-to-income ratios. [Therefore,] middle-tier banks will need to find distinctive strategies to create value because if they do what other banks do, they will not earn adequate returns,” says PwC’s Nevin. Besides, banks all over the world and indeed Africa, are facing disruptions from new technologies at the behest of industry outsiders. At their current pace, financial technology companies could easily displace banks in the very near future. For the Nigerian experience, PwC’s Nevin provides some perspective: “all [Nigerian] banks (even the top tier banks) are challenged by FinTechs and they need to create new, innovative products if they want to appeal to a very young, connected population in Nigeria. FinTechs are very strong in the payment space – Interswitch, Paga, [and] Flutterwave, [for example] – and are increasingly strong in the consumer credit market. There are also new players trying to create savings vehicles for retail clients. The banks carry significant legacy costs and the FinTechs will find ways to take revenue at a much lower cost.” Clearly, short of innovation, banks in Nigeria and broader West African region, might find the times even more challenging yet.

An edited version was published in the Q4-2018 issue of African Banker magazine

macroafricaintel Weekly | 13 Nov

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Click here for PDF version

Date Data / Event Period Forecast Previous
14 Nov South Africa Retail Sales, % yy Sep 2018 2.5 2.5
Nigeria CPI, % yy (mm) Oct 2018 11.5 (1.0) 11.3 (0.8)
Botswana CPI, % yy (mm) Oct 2018 3.0 (0.1) 2.9 (0.0)
Namibia CPI, % yy (mm) Oct 2018 5.2 (0.5) 4.8 (0.8)
Ghana CPI, % yy (mm) Oct 2018 9.0 (0.2) 9.8 (0.0)
South Africa CPI, % yy (mm) Oct 2018 5.0 (0.4) 4.9 (0.5)

macroafricaintel | Ghana: Need for stronger banking supervision

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

After the failure of a couple of banks recently, the public is on edge. That is, even as the Bank of Ghana, the central bank, has provided assurances that depositors’ funds are safe. Not that a banking crisis is at hand. Far from it; although some might argue otherwise. But there is definitely a lot more that the BoG could and must do to restore confidence. For instance, culprits behind the failure of Unibank, hitherto Ghana’s sixth largest bank, where directors were found to have helped themselves to depositors’ funds to the tune of $1.1 billion, about 75 percent of the bank’s assets, should in addition to being relieved of their positions, also be prosecuted to the full extent of the law. Loan defaults have also become rampant, with non-performing loans (NPLs) accounting for 21.3 percent of all loans in August 2018; albeit largely unchanged from the same period last year when they were 21.9 percent of loans. Naturally, banks are reluctant to lend, preferring to buy government treasuries and bonds instead. Consequently, the government accounts for a great deal of banks’ exposure. And although private sector credit extension (PSCE) has been growing in real terms, at 5.4% in August 2018 from -5.0% in same month last year, it is not the case when compared to GDP in nominal terms; based on Bank of Ghana data. In August 2018, nominal private credit extension was 14.7% of GDP from 15.2% in the same month last year. A great deal of regulatory drive would be required for a turnaround. Thus, the central bank’s directive in September 2017 for banks to beef up their capital base to a minimium of 400 million cedis from 120 million cedis hitherto should be pursued with the utmost determination. And there should not be a shifting of the end-December 2018 deadline. Better capital adequacy reporting via Basel II at the direction of the central bank in July is also laudable.

More consolidation & liquidation
To date, the BoG has taken the following actions to clean up the banking system and restore confidence. It liquidated and gave control of UT Bank and Capital Bank to Ghana Commercial Bank in August 2017 “due to severe impairment of their capital.” A year later, it revoked the licenses of Unibank, Royal Bank, Beige Capital, Construction Bank, and Sovereign Bank and put them together under Consolidated Bank Ghana Ltd, a special purpose vehicle, which it capitalised to the tune of 450 million cedis. The authorities also issued a 5.8 billion cedi ($1.2 billion) bond to cover their liabilities. Considering when put together, the five banks have pending obligations that require funding of about 5.8 billion cedis, the measures put in place by the central bank should suffice for now. Much more funds would probably be needed in due course, however, as more information is discovered and perhaps other banks are found to be in less than ideal positions.

Not only were the failed banks found to be struggling but some obtained their licenses fraudulently; Sovereign Bank, Beige Capital and Construction Bank for instance. With the benefit of hindsight, the BoG was not quick to act. Unibank and Royal Bank were known to be significantly undercapitalized as far back as 2016. Almost 80 percent of Royal Bank’s loans were non-performing, it was discovered. It is certainly curious that it was only until 2018 that Unibank was declared to be “beyond rehabilitation.” Surely, there was no need to wait that long. The reason might not to too hard to determine. Unibank had some influential board members, including former Ghanaian finance minister and central bank governor Kwabena Duffuor, the founder. In early September, KPMG, an audit firm and receiver for the now defunct Unibank, asked a High Court to declare unlawful, loans made to Mr Duffuor, other named shareholders and their so-called related interests. KPMG is also asking Mr Duffuor et al. to pay back 5.7 billion cedis ($1.1 billion), about 75 percent of the defunct bank’s assets, of allegedly misappropriated funds of Unibank. According to Bloomberg, a news wire service, Nii Amanor Dodoo, a partner at KPMG in Accra, says Mr Duffuor and co. have committed to the repayment; albeit Daniyal Abdul-Karim, Mr Duffuor’s attorney, raises doubt about that when he remarks in the same report that “[KPMG’s] claims are extremely weak…[and]…are defeated both on facts and the law.” And in a report by Reuters in mid-August, Mr Duffuor disputes the figures: “We believe the figures the central bank is putting out are not right.

Other banks would definitely not want to become part of “Consolidated Bank.” Thus, there is almost certainly going to be more consolidation in the industry, as smaller banks or those not able to raise enough capital in time to meet the BoG end-December deadline, merge with bigger ones or come together to become bigger and stronger. Others are looking to raise capital on the stock market. But considering the supposedly lucractive 1.14 billion cedis ($238.5 million) initial public offering (IPO) of MTN Ghana, a telecoms firm, in late August underwhelmed below its 3.47 billion cedis target, there are doubts about how successful the banks looking to take this route would be. That is not deterring them, it seems. In September, just weeks after the MTN listing, Energy Commercial Bank secured approval from the Securities and Exchange Commission (SEC) to raise 340 million cedis via an initial public offering to enable it meet the new minimum capital requirement. There should probably be a few more before the December deadline. Additionally, a couple of merger talks are ongoing; some not so well, though. In late July, for instance, there were reports Premium Bank and BSIC Ghana were abandoning merger plans with GN Bank. A merger proposition between Sahel Sahara Bank, GN Bank and Premium Bank also fell through. Instead, Sahel Sahara Bank chose to go with Omni Bank in mid-August, making it the first potential merger since the scramble to meet the new capital requirements, having since received a no objection nod from the central bank.

Firm up oversight
The recent bank failures are evidence of poor banking supervision by the central bank. If confidence is to be restored, the prominent people found to be responsible for the mess in the banking sector should not only be required to pay back the depositors’ funds they misappropriated but also face the full wrath of the law. Their collaborators at the central bank should also be punished severely. It is heartening to know that the authorities’ rhetoric reflect this sentiment. In mid-August, the BoG told Reuters, a news agency, that it planned to prosecute the errant executives of the failed banks. More specifically, BoG deputy governor Elsie Awadzi said the central bank was “working very hard on submitting a dossier on each of these banks to the law enforcement agencies…to further investigate criminal behaviour or what could potentially be criminal behaviour and to prosecute,” adding further that the regulator was “going to ensure that integrity is returned to the financial sector by ensuring that persons whose conduct contributed to the banks’ failure will not be shielded.” According to Moody’s, a rating agency, the new state-owned bad bank would raise the already worryingly high indebtedness of Ghana to 70 percent of GDP from 64 percent in May. The authorities’ words must be backed by action to matter.

An edited version was published in the Q4-2018 issue of African Banker magazine

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. https://www.businessdayonline.com/columnist/rafiq-raji/article/ghana-need-for-stronger-banking-supervision/