How strong are Ghanaian banks?

There is no doubt that the banking industry plays a very formidable role in any economy and for it to thrive, it must have a robust system that is well supervised and regulated.

Ghana’s banking system has gone through various transformations since the late 1980s and that includes the adoption and implementation of the financial sector adjustment programme.

The privatisation of some of the state owned banks and the liberalisation of the financial sector have led to the entry of a number of domestic and foreign banks into the industry. Currently, there are over 30 banks operating in the country with a couple more on the waiting list to acquire their universal licences to begin operations.

Though the liberalisation of the financial sector has brought in some level of competition; it has equally brought in its own challenges as the sector has not responded to the level of efficiency that is required.

Some of the critical challenges facing the banking industry in Ghana include the failure of some banks to capitalise adequately, high exposure to government and quasi government institutions such as the oil sector debts, aggressive growth and weak controls.

Nevertheless, the banking industry in Ghana remains relatively  solid and robust.  As at the end of June 2017, the banking sector comprised of thirty-six (36) banks. Out of this number, nineteen (19) are domestically-controlled and the remaining seventeen (17) foreign-controlled. 

Total assets and deposits of the sector stood at GH¢86.72 billion and GH¢54.48 billion respectively as at the end of June 2017.

The soundness and resilience of the banking sector is rooted in the strength of its capital and liquidity position. Let’s look at the capital and liquidity positions of the seven leading banks that control 50 per cent of banking business in Ghana today.

The Capital Adequacy Ratio (CAR) is a key indicator of the solvency of a bank and measures a bank’s capital in relation to its risk-weighted assets. Capital acts as a cushion to absorb unanticipated losses or declines in asset values that could otherwise cause a bank to fail. It also provides protection to uninsured depositors’ money in the event of liquidation.  Adequate capital serves to protect depositors and promote the stability and soundness of the financial system.

As at the end of June 2017, the Capital Adequacy Ratios (CAR) of the top seven banks in Ghana (in terms of balance sheet size) were as follows:

Bank	Ratio
Fidelity Bank	30%
GCB Bank	26%
Barclays Bank	24%
Stanchart Bank	24%
Stanbic Bank	19%
Ecobank	11%
Unibank	10%

The bigger the CAR, the better the capital adequacy of the bank and the stronger the bank is.

Another index used in measuring the strength of a bank is its liquidity position. Liquidity here refers to the ability of a bank or any other institution to meet its obligations as they fall due for payment. Liquidity risk for a bank is the risk of being unable to honour deposit withdrawals or to make repayments of other liabilities at maturity or upon demand. According to the Bank of Ghana in its banking sector report as at June 2017, the banking industry remained adequately liquid.

The loan-to-deposit (L/D) ratio is an important and widely used measure of the overall liquidity of a bank. Below is the position of the top banks as at June 2017:

Bank	Ratio
GCB Bank	30%
Fidelity Bank	41%
Stanchart Bank	42%
Stanbic Bank	53%
Ecobank	60%
Barclays Bank	73%

The smaller the L/D ratio, the better the liquidity position of the bank and the stronger the bank is.

From the analysis above it will be over simplistic for anyone to say that Ghanaian Banks are weak and foreign banks are strong. It is interesting to note that two Ghanaian Banks from the data above are the first and second strongest banks in Ghana today and are matching the foreign banks boot for boot. In addition, Ghanaian banks like Calbank and ADB may not be members of the top seven club of banks but they have acceptable levels of CAR and L/D ratios and are also considered strong and competitive. 

According to the latest banking sector report as at June 2017 released by the Bank of Ghana, the performance of the banking sector for the first half of 2017 was mixed with some key performance indicators pointing to better performance for the same period last year. Most indicators remained within the regulatory thresholds even though a few had deteriorated. The industry recorded strong asset growth by June 2017 on the back of growth in investments and other domestic assets. Gross advances also picked up by June 2017 when compared to the same period last year.

The key risk to the banking sector is the high level of impaired loans to total loans as measured by the non-performing loans (NPLs) ratio. This situation is explained to a large extent by the energy related exposures a lot of banks have on their books. This situation is expected to improve as banks put in place measures to strengthen credit risk management processes and improve loan recovery efforts.

In addition, the repayment of the energy sector debts through the Energy Sector Loans Accounts (ESLA) receivables, backed by Energy Bond proceeds of GH¢10 billion will definitely help clean up the loan books of the banks  and will bring  the NPLs down considerably.

The outlook for the banking industry remains positive as the resolution of the energy sector debts situation will have a positive impact on the solvency of the banking industry.

The introduction of the Internal Capital Adequacy Assessment Process (ICAAP) under the Basel II Framework which would require banks to recapitalise to meet their economic capital requirements together with the enhancement of the  minimum capital to GH¢400 million would ensure that the banking industry is well capitalised to effectively play its financial intermediation role in the economy.

Some industry observers have expressed some concerns about the ability of banks to re-capitalise to meet the minimum capital requirement. Currently, only a few banks have enough capital to meet the new minimum capital requirement of GH¢400 million but that should not be a worry for any customer of a bank at this point in time.

The Bank of Ghana has given all banks up to December 31, 2018 to re-capitalise.  It is widely expected that a good number of banks will be able to re-capitalise by that deadline. If by the third quarter  of 2018 your bank has not met the new minimum capital and is not also showing any convincing signs of that happening, then customers have grounds to worry about the ability of their banks to make it. That notwithstanding, even such banks have up to the end of 2018 to make it.

All in all, the recent developments in the financial sector can be seen as positive and will make the industry a lot stronger. Banks will be in a position to better absorb shocks with a marked reduction in the likelihood of a financial distress. A strong banking sector will boost economic growth, increase business confidence and promote a sound financial system.  

By Lloyd Evans