ARE SMALL BANKS in danger following increment in minimum capital requirement?

The banking industry is set to witness interesting times pretty soon with the announcement by the Central Bank that it is proposing an increment in the minimum capital requirement from the current $ 7 million dollars to between $55 to $60 million dollars.
Currently there are about 23 Universal banks in the country with majority being foreign-oriented.
The minimum requirement in the industry has been described as very small, especially as the country is striving to become a financial hub in West Africa.
Ghana achieved an unprecedented feat in the history of the West African banking when it received the nod to operate as an offshore banking destination in the sub-region.
With this development, Barclays Bank Ghana Limited had the honor of being decorated with a general license from the Bank of Ghana to spearhead the offshore banking process.
With heightened competition in the industry currently due to the dominance of foreign-oriented banks and the financial services center status of the country, analysts say the time is now for the country to accelerate growth and enhance its financial outlook to become a financial hub in the sub-region.
While everything appears to be boding well for the country, one setback that the Central Bank believes could hinder the process is the fact that the minimum capital requirement of the banking industry is woefully inadequate if this feat is to be achieved.
In this light, it recently, in a bold move, issued a statement to the effect that it is proposing an increment of the capital requirement from $7 million dollars to between $55 and $60 million dollars.
The mechanism, set to take place by the middle of next year, requires Banks and deposit taking non bank financial institutions to submit capitalization plans by the end of June 2008.
Governor of the Central Bank, Dr. Paul Acquah says the banking sector requires huge financial muscle if Ghana is to compete on the international stage.

‘‘The industry requires sufficient muscles if we are to compete on the international stage’.
‘We had the liberty to force consolidation by insisting that everybody meets the requirement but we have created a lower tier for banks who cannot meet it’, he maintained.

Submission of capitalization plans would guarantee continued access to the settlement and primary dealership systems.
To ensure an orderly consolidation, BOG says the banking system would allow for lower tier banks after December 2008 so that banks that do not meet the capital requirements will belong to the lower tier.
Banks granted licenses or provisional licenses within the last six months to date will be required to meet the new capital requirements within two years from the date of operations.

Whilst the move appears the right way to go for now, others have expressed worry for small banks in the industry.
The situation, they believe, could cause most small banks in the country to either fade out or merge with relatively bigger banks if they want to stay in business.
Though a lower tier is being created for smaller banks according to the Central Bank, it is believed that they will not benefit from the advantages that come with being a settlement bank.
Currently banks such as Barclays, StanChart, Ecobank, GCB, ADB, Stanbic as well as the Nigerian banks, are likely to meet the requirement.
Most officials of small banks this magazine have interacted with so far have expressed disappointment with the decision, insisting that the Central Bank appears to be following the Nigerian example ‘blindly’.
They maintain that the situation could reduce the current 10% banking population as the lower sectors of the economy will be cut off from the prestige banking that the new regulation will bring.
An Economist Dr. Nii Moi Thompson, upon hearing the news, called for restraint in the implementation of the regulation.
He was of the view that it could cause capital flights since most of the banks in the country are foreign-oriented.

‘Ghana’s case is different from Nigeria. If the decision is to strengthen the sector then it means profits being taken outside.
‘There is also the fear that competition could go down should more consolidation occur in the sector.
‘Government should, therefore, take steps to strengthen the rural banking sector if it wants to increase the requirement otherwise the sector will face problems’, he said.

There appears more divided opinion on the issue and I bet it will generate huge debate in the coming months.
Managing Director of Zenith Bank Ghana Limited, Andy Ojei shares a different opinion altogether.
He says that the new move will not create uncomfortable moments for the banking industry.
‘I am confident that about 20 banks will still be in operation when the new regulation comes to effect.
‘Most banks have what it takes to recapitalize and the increment is to add impetus to the industry.
‘The lower tier for the banks unable to meet the requirement is to create fairness in the industry’, he added.
Already, Chief Executive of CLAYDOD consult, Prof. Cletus Dordonu has called on government to invite the rather big banks into the country to shape the banking sector. He says the country does not really require the numerous Deposit Monetary Banks operating in the country.
He says about seven big banks with branches such as those of the Ghana Commercial Bank are all that is needed. This, according to him, may introduce a much more aggressive competition that will be capable of enhancing economies of scale and increase financial intermediation.
He says it will also help in reducing the spread between lending and borrowing rates.
As it stands now more voices are expected to be heard soon on the new regulation and the issue of whether there might be some resistance next year when the regulation begins to take effect is yet to be experienced.
Our fingers are crossed for now waiting with bated breath for the events to unfold.