In support of plurality of banks
Recently, the news has been trending comments about the growing number of banks in Ghana. The main argument being that there are too many banks for the size of the nation and the size of the economy, and that banks should merge into a few relatively bigger banks so they could do big ticket deals. It is suggested in certain quarters that the maximum number of banks for this nation should not exceed 20. However, we have 35 and counting.
Advertisement
There is some expectation that a drive for increased capitalisation of banks would force some banks to merge so as to reduce the number of banks in Ghana to what is deemed an acceptable number. This ‘shrill’ call for the capital of banks to be increased believes that when that is done, banks will have the ability to do ‘big ticket deals’.
Quite disturbing is a certain suggestion that too many Ghanaian business people are venturing into universal banking services and that it should be stopped.
Capital of Ghanaian banks
Certainly, a strong capital base for banks protects depositors and assures that financial problems at a bank would not cause it to default on its obligations. The regulator would want the capital of banks increased to match risks that banks take. Inflationary pressures have whittled down the real value of the present minimum capital requirement for banks. But how much is enough, and do we really need banks with the much-touted big capital? Who says we can only do big deals with big ‘monied’ banks. How much capital do investment banks have? And what size of deals do they handle?
Bluntly put, any excessive increase in minimum capital requirement would in a subtle way ‘kill’ indigenous Ghanaian banks. We need more indigenous Ghanaian banks in the system, not to kill them.
Indigenous Ghanaian banks have shown over the past 10 years that they can match and even outpace the competition, despite their relatively smaller capitalisation. Any project that reduces their numbers would definitely shortchange the banking community of their enviable service delivery record and their deep understanding of the Ghanaian business culture.
Number of banks
The number of banks in Ghana vrs Nigeria has been trending for a couple of years.
Some have made spirited comparisons between the Ghanaian banking industry and its Nigerian counterpart, almost querying the audacity for Ghana to have as many as 33 or 35 banks when Nigeria has far less. Interestingly, no one has made any indication as to whether the Ghanaian banking industry would want to be like its Nigerian brother. At worst, I believe we would like to be 20 times better than them, and yet people think we should play second fiddle to our brothers in Nigeria.
Meanwhile, a google search showed 6,799 Federal Deposit Insurance Corporation (FDIC)-insured commercial banks in the United States (US) as of February 2014.
These are banks whose deposits have been insured by the FDIC against failure.
For a country with a population of about 320 million as of December 2014, this works out to one bank per 47,065 people.
Ghana has 25 million people and 33 banks, yielding one bank per 757,575 people. This is a clear sign of the dearth of financial intermediation in this country and the reason for the strong appetite that our people have for banking services.
According to the Commercial Banks Guide, the German Banking Sector comprises about 2,400 banks with 45,000 branches nationwide. It notes that 400 of these banks are ‘really small’.
With a population of 80,682,351, there is one bank per 33,618 people in Germany.
We are really far behind the norm, and we need to catch up in our financial services delivery.
Theoretically, we shall need 100 banks to shore up our financial services coverage to one bank per 250,000 Ghanaians.
It would be interesting to hear again from the proponents of too many banks in Ghana.
One would think that the submission from the deputy minister-designate for Finance that there should be no cap on the number of banks would have put this simmering debate to rest. On the contrary, there seems a resurgence of the debate, with some radio stations carrying interviews reacting to his submission.
The deputy minister’s position that the number of banks should not be capped is worth supporting. Let market forces do that and let us spend our efforts in needed areas.
Perhaps one key submission here is that what makes a bank a bank is not how much capital it has per se, but how well that capital is used to support business and society. There are some banks in this country that are well capitalised by Ghanaian standards, but would hardly support any Ghanaian entrepreneur.
Advertisement
Merger of banks
The notion that when banks merge they have bigger capital is a financial placebo. If you have five banks each with a capital of GH¢120 million and they merge, you will have one bank with a capital of GH¢600 million. Yes, the merged would have seemingly bigger capital, it would have the ability to lend more money to a single entity, but the fact still remains that the total capitalisation of banks would not have increased with that sort of merger. Meanwhile, a similar effect of giving much more funding to one entity could be achieved with syndication, whilst having in place five functionally sized banks that would give closer attention to our small and medium enterprises (SMEs).
We need to look at what simple practical solutions most banks can give our buoyant SME business constituency, but we seem to have been caught in a web of speaking fine English and impressive financial jargons.
Banking is financial services business, and besides the primary role of banks as accepting deposits and making advances to customers, banks may be set up for some secondary reasons that the promoters may deem fit so far as it does not breach the requirements of the regulators and the laws of the land.
It is good to have banks that can do big ticket deals; however, it is likely that not all bank promoters would want their banks to play in big league business.
Advertisement
Some banks would want to grow to become market leaders and make big tickets deals, others may want to keep their small size and operate as ‘mickey mouse banks’ to borrow banking consultant, Nana Otuo Acheampong’s description.
Thus any push, whether covert or overt, meant to yoke banks together might disturb the mission of certain financial service businesses.
If banks want to do bigger deals, they could always do syndication, which is not strange to the banking community.
Yes, it is good to have banks with big capital of for example GH¢5bn or GH¢15bn so we can do all the oil deals and build another ‘Dubai’ without fuss, but functionally what matters most to our people is service, proximity, access to finance etc etc.
Advertisement
Rise of Ghanaian-owned banks
Truly, banking is not like just any other business. Since banks handle other people’s money, there is the need for adequate controls and professional expertise in their operation, but that should not stop the ownership of banks by Ghanaians. Financial services is one of the most lucrative businesses in emerging economies, and I strongly suggest that more Ghanaian-owned banks should be opened, but there should be adequate regulatory oversight and the employment of highly qualified experienced professionals as is happening now.
Care should also be taken not to indirectly bar Ghanaians from entering the lucrative financial services market by setting rather high capital requirement for banks. About a month ago, I was in a discussion with an older acquaintance who spends more of his time in the US, and he informed me that it is much easier to ‘open’ a bank in many states in the US than in Ghana, and that the capital requirement was much lower.
What do customers really want from banks?
The Ghanaian business landscape is made up predominantly of SMEs, who as submitted by Anita Pieterson (2012) are seen as ‘the means through which rapid industrialisation and other development goals’ of this country can be realised.
Pieterson (2012) has cited work by Abor and Quartey (2010), confirming that ‘small and medium enterprises provide 85 per cent of manufacturing employment, contribute about 70 per cent to Ghana’s Gross Domestic Product (GDP) and account for about 92 per cent of businesses in Ghana’.
Following from the above, any well-meaning bank that supports our SMEs would be supporting 70 per cent of our GDP, 85 per cent of our manufacturing employment and 92 per cent of businesses.
It is generally accepted that finance is a critical challenge to the growth of SMEs, but we don’t need to break into the World Bank to get money to meet that need, neither do we need banks with the muscle that some people are touting to solve the problems that can impact 70 per cent of our GDP, 92 per cent of businesses and 85 per cent of our manufacturing employment.
What SMEs really need is good customer service, advisory support and working capital support, especially bridging facilities in this era of increased informal credit.
The 2001 to 2004 Customer Experience research by the Ghana Banking Awards shows the top three needs of bank customers as: Efficiency / Reputation, Proximity, Access to credit. The top three have not changed much over the years.
The 2014 Nigerian Banking Industry customer satisfaction survey shows the following as the top three motivating factors for SMEs in choosing their banks: Financial stability,Excellent customer service,Image and reputation.
However, when it comes to reasons for switching banks, the top three are: Service quality - 53 per cent,Proximity - 11 per cent, Turnaround time - 08 per cent.
Clearly, 92 per cent of businesses in Ghana care more about the efficiency/reputation of the bank they are dealing with, the closeness of the bank to them, and how easily they can get credit when they need it.
If we can extrapolate the research findings in neighbouring Nigeria, we may conclude, with a slightly higher margin of error, that 53 per cent of bank customers would change their bankers if the service quality deteriorates, and 11 per cent would do same if the bank is not near enough to them.
The size of a bank’s capital does not come any where in this equation, so why are we making so much noise about capital of banks when 92 per cent of the companies using banking services don’t care a hoot about the size of capital?
Perhaps what could be of more importance is the quality of service that the banks give customers. Our economy is thriving on the back of SMEs and small-scale farmers, most of whom shy away from the universal banks and patronise the over 500 registered microfinance companies and a ‘plantation’ of susu enterprises. If a bank is highly capitalised but has not got what it takes to serve the segment that produces about 70 per cent of our GDP, then high bank capitalisation has fallen short of the glory we want to place on it. Service is key in this environment, and servicing the critical mass of Ghanaian micro companies to grow to the next step is critical. As the customers of the banks grow, the banks also grow with them till we get Ghanaian multinational enterprises and Ghanaian multinational banks.
A number of the foreign banks in Ghana have been in the banking business for centuries and have huge financial resources at their disposal. A capital requirement of the equivalent of USD 50 million is small change, but they started as small entities with small capital just like the many Ghanaian banks which have now entered the market. Ghanaian banks need time and protection to grow, just like the centenarian banks that can now easily afford the requirement for bigger capital for the much-touted big ticket deals.
Conclusion
We need to encourage the setting up of more indigenous banks, because they are the key to growing the Ghanaian SME sector that carries the future of this country.
Excessively high minimum capital requirements can strangulate the growth of indigenous banks.
Banks need adequate minimum capital to contain the risks they take, but merger of banks should be left to market forces and not regulator driven.
It is assumed that banks are free to have capital more than the minimum, thus banks that want to do ‘big ticket deals’ should be free to ramp up their capital to do such, whilst banks, especially indigenous banks, that want to remain small should be allowed to remain so.
What 92 per cent of bank customers need is good service, proximity and access to credit, whilst eight per cent need big capital for big ticket deals. It would be good to satisfy the eight per cent, but not to the detriment of the needs of the majority 92 per cent.
If about 500 microfinance companies have ever been registered in this country, then it shows the thirst for financial services provision in this country. It is time we called for ‘One District, One Bank’.
The writer is a business advisor, Res Consuasor Afrika
Member, Banking Commission, International Chamber of Commerce (ICC) Ghana.