Developing banks with scale for big ticket transactions
Ghana’s banking sector in the last 10 years has proven to be one of the fastest evolving communities in the business environment in the country.
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Following redirection through regulatory interventions which resulted in the introduction of the new Banking Act, to the elimination of secondary reserves, and adjustment of minimum requirement upwards, the banking landscape has become a platform for continued evolution.
A key feature with respect to the developments in the sector has been the deliberate focus on creating an environment for growing banks with the necessary scale to participate in big ticket transactions and become global game changers.
Minimum capital of banks
This explains the thinking behind the revision of the minimum capital of banks to GH¢100m; a situation which many watchers intimated would trigger mergers, acquisitions and takeovers and result in the creation of bigger players in the sector, something that Ghana and indeed Africa desperately needs for development. Growing stiff competition from diverse sources has also necessitated what I term ‘niche market creation’ by banks in an attempt to survive and reposition.
Well, Ghanaian banks generally have been known to be small ticket players in big transactions in a syndicated manner and considered catalyst to accelerated economic transformation. There has been criticisms of local banks over their inability to take actions that contribute to the speedy realisation of this transformation.
The truth is that local banks have small balance sheets and those sheets cannot finance big ticket transactions. Currently, Ghana for instance has a huge infrastructural gap because banks have small balance sheets and are unable to meaningfully participate in huge infrastructural projects.
I dare say that big is beautiful just as big ticket transactions are beautiful and they happen for the best of reasons. Here I draw a lot of inspiration from a quote I recently read on citifmonline attributed to a renowned Ghanaian banker — Albert Essien, Group CEO, Ecobank Group. Summed up, his point is that this notion of niche banking is cool but in reality, though it does work for Ghana, it does not meet the financing needs of our country. So consolidation is the way forward.
Bottom line for the revision of the minimum capital is that it was intended to ensure local banks up their scale in business. And it surely did open up opportunities for takeovers, consolidation, mergers and acquisitions.
Big balance sheets
Consolidation means creating big balance sheets; banks which can participate meaningfully in big ticket transactions and deliver the higher dividends to shareholders. It means that banks, when they are big enough, can stand the shocks that confront the industry and also look to offering more services to various clientele.
In the light of this, I cannot but be amazed at some recent happenings in our banking sector. I have been following keenly media developments unfolding around the mandatory takeover of the HFC Bank by Republic Bank of Trinidad and Tobago and the suggestion that a national asset is being sold off for a pittance.
Let us look at this issue dispassionately and in the light of what Ghana needs in its banking sector some of which have been discussed above. What is the value in the acquisition of a bank for instance, HFC Bank through a mandatory takeover, by a big bank like Republic Bank, for the various segments of stakeholders?
(i) For the government, the opportunity and indeed value in takeovers is that key infrastructural projects would receive the needed financial injection. Obviously, the huge infrastructural gaps that would be addressed will increase the competitiveness of the economic environment to attract big ticket investments.
The current ongoing energy dilemma clearly attests to the need for big scale banks to partner the government to address critical challenges in the economy. Big banks also come along with cutting-edge financial engineering skills and competences due to experiences in various segments of economic activity. Added value is the potential of multinational organisations and investors redirecting investment attention to Ghana and, therefore, making long-term investment commitments here that result in partnerships that create more value for all.
(ii) The value to customers could be seen in many ways: capital intensive sectors such as real estate, oil and gas, agriculture and construction can access huge financial support to expand the way they want. Expansion on the back of improved access to increased financial support means recapitalisation, more jobs, increased output, opening up of the economy and the ripple effect continues. Ghana currently faces a housing deficit of one million housing units. The mortgage market is only accessible to the upper middle to upper class due to high risk factors because of the small-scale nature of many Ghanaian banks. Currently, Ghana has one of the highest rates for the cost of capital which is a result of multiple risk factors, key among them being the level of scale of banks. Customers, therefore, are unable to enjoy innovation in various products and services and are saddled with very limited portfolio of product and services.
(iii) For the banking community, the value of mergers and acquisitions is the leverage for companies to up the scale of their operations, broaden their product portfolio, and enter to new markets. This would mean there must be a deliberate focus to ensure skills development through training human capital, improved technology to facilitate efficiency and effectiveness and more robust transparent governance systems to deliver increased value to shareholders. Good news is that big scale banks stand to benefit from tax gains, increased revenue and a reduction in the cost of capital for consumers to do business.
(iv) Staff stand to benefit from a conscious focus of the organisation continually investing in empowering them to deliver through skills development programmes, career growth opportunities and sense of belonging and fulfilment to be part of building a legacy that preserves a brand for good.
Examples abound in South Africa where because of the scale of banks in that economy, they are able to underwrite big ticket transactions in property, infrastructure, services, and extractives, among others. This is happening because of scale – that is the plain reality. No wonder, Nigeria saw the writing early enough and the resultant effect of the massive restructuring of the banking sector in that economy is there for all to see.
Clearly, because of the then relatively lower minimum requirements, some affected banks relocated to Ghana.
I think we need the stature and muscle of the likes of Republic Bank Limited with its over 176 years of experience in banking to rub on us. The future, indeed, looks bright with all the big prospects and any serious economy desirous of staying competitive and ahead of the pack, will surely look to the game changers in big banks.
