The 'bad and ugly' side of BoG's new ¢400m minimum capital levels

The 'bad and ugly' side of BoG's new ¢400m minimum capital levels
Source: Ghana| Myjoyonline | JoyBusiness
Date: 12-09-2017 Time: 08:09:16:am

The decision to increase the minimum capital requirement may have been greeted with some excitements from some quarters. This is because proponents of this capital review have argued that it would bring some fresh capital into the economy and help banks take on big transactions. But some analysis and engagement with some industry players point to the 'bad and ugly' side of the recapitalization.

For those banks that are against this capital increase, their concerns have been influenced by the fact that the economy is not growing at the rate they expected, therefore, upping the capital to this level would be more injurious to them, rather than helping the situation. This is because the capital increase must be supported by a pickup in economic activities, so they can make some prudent returns.

The development if not well managed according to some industry watchers could also lead to a reduction in shareholders’ funds. Some are also of the view that it could affect continuous investments in these banks. Also, pumping some ¢280 million into a bank obviously means that the investor would be looking forward, getting back their some returns quickly.

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In all, about ¢9 billion could be pumped into the economy, now if this injection is not “met” with economic activities that could lead to inflation or call it, too much money chasing few goods on the market.

Some industry watchers have also worried that it could also result in Ghana getting back to that era of High Non-Performing Loans (NPLs). For some analysts, in situations where more of the banks would have merged, in the medium term, it could lead to some to some job losses. So even though the capital increase might be good for the economy, some say there is also the “bad and ugly” side of this policy.

Central Bank's justification

But the Bank of Ghana in a statement has justified the substantial jump in capital. The regulator said the move is to strengthen and modernize the financial sector to support the government’s economic vision and transformational agenda. The regulator, for instance, cites the revocation of the licenses of two insolvent banks to ring-fence a potential spillover threat to the rest of the financial sector.  

It also said it is to prepare the grounds for other reforms as part of the first steps to deal with the industry challenge. At the same time, the Central Bank has agreed with identified banks, a roadmap for recapitalization in accordance with the capital restoration plans stipulated by the Bank and Specialised Deposit Institutions Act, 2016 (Act 930).

Looking ahead, banks would require a more sophisticated and robust capital framework, adequate to transform the banking sector and consistent with the growing risks, levels of sophistication and exposure banks are currently facing. 

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