Too Many Banks, Not Enough Funds

Written by Anthony Sedzro

The financial sector in Ghana especially Commercial banking is one of the most competitive industries in the country.

At a banking forum in 2007, the managing director of a Ghanaian bank remarked that times had changed for them. According to him, in the years before the baking sector was opened to foreign entry, Ghanaian banks opened at 9am, the managers will then buy large chunks of government securities (they had a very high interest rate then), give out a few loans, close at 3pm and the bankers will head off to play golf. How times have changed he said. Now some banks open at 8am, send out sales executives to bring in new customers before closing at 4 or 5pm. Almost all banks work on Saturdays these days.

That is the nature of the competition the sector is experiencing. Not that Ghanaian bankers no longer play golf. They do. But even the golf courses have not escaped the competition from the banking halls. There is the Ecobank Chairman Senior’s Golf Championship, the annual CAL Bank Invitational Golf Tournament, UT Bank sponsored golf tournament, the annual Barclays Golf Competition and so on.

There are currently about 28 licensed universal banks with some applications still pending before the Bank of Ghana (BOG). Looking at the size of Ghana’s economy which is around $50billion, many financial watchers think the country has too many banks.

At a World Bank Forum in June 2011, all the speakers, former deputy finance minister and parliamentarian Dr. Anthony Akoto Osei, investment expert Dr. Sam Mensah and economist Professor Cletus Dedornu agreed that Ghana simply had too many banks and the situation had to change. Dr. Akoto Osei said that the country needed few banks that could lend more, be efficient and compete among each other. Dr. Sam Mensah explained that aside competing against the bigger banks with the same services, the smaller banks were not benefitting enough from economies of scale.

The BOG announced in 2008 that it was increasing the capital reserve requirements of all banks in Ghana with a view to consolidating the sector. Foreign owned banks had to meet the new capital reserve requirement last year which they did. Ghanaian-owned banks have up to December this year to raise at least 60 million GHC (equivalent of 40 million dollars).
This new requirement has already led to some acquisitions: the Bank of Africa from Ivory Coast acquired Ghana’s Amalbank last year; Access Bank acquired fellow Nigerian bank Intercontinental Bank and lastly Ecobank Transnational acquired The Trust Bank (TTB). All these have boosted the balance sheets of these banks and increased their market share.

One top banker however has a contrary view. The Managing Director of HFC bank Mr. Asare Akuffo believes that this new capital requirement from the banking regulator is pushing Ghanaian banks into an “artificial growth” against their will. At a programme in July last year Mr Akuffo said “it is not for anybody to determine how big a bank in Ghana should be…let’s face, some banks want to be small, why not? There could be a bank that wants to lay only in Accra, yes it has the right” he stated.
In Nigeria, an economy about six times Ghana’s size, there used to be about eighty-nine (89) banks some years ago. But an increase in the capital reserve requirement by the Central Bank of Nigeria (CBN) led to mergers and acquisitions. At the end of the period, the banks were trimmed down to just twenty-one (21). It was this new requirement in that country which pushed many of their banks into Ghana in a bid to increase their size and profitability.
In February this year in Zimbabwe, finance minister Tendai Biti told a parliamentary committee that the country had too many banks and recapitalization was needed to transform their financial sector. He said he wanted to trim the country’s 26 banks to “10 or 6 strong banks”.

So why is there the need for a few big (or strong) banks?
Bigger banks tend to have larger capital base to fund productive sectors of the economy that Africa badly needs. Bigger banking institutions can fund mega infrastructural projects like roads, railway projects, housing units, power plants, dams, bridges, hospitals and so on. Small, capitalized banks will not have the capacity to fund these projects on their own. This scenario makes some African governments turn to Chinese investment and foreign donors to fund their projects. For example, telecom operator MTN Ghana this year needed to raise $300million to expand its operations and the firm wanted to source the money locally. It took a combined strength of SIXTEEN locally based Ghanaian banks to be able to raise that amount. Four foreign banks had to contribute as well. The sixteen included the top five biggest banks in Ghana and still other 15 bank had to join in. I believe this was so because the capital base of many of the banks operating in the country is not big enough.

Currently in Ghana, two capital intensive projects under construction are the Bui Dam Hydro-Electric project with a total cost of $890 million and a Gas Processing Plant to be situated in the Western Region at a cost of $ 775 million. The Bui Dam project is being funded by loans from the Chinese government and the EXIM Bank of China. The China Development Bank (CDB) provided the funding for the Gas Processing Plant. The funds mentioned for these projects are huge and I doubt if it could have been sourced locally. The scale of these projects are what I believe makes observers to demand that we need few bigger, well capitalized banks to offer bigger loans.
Another reason why bigger banks are preferred could be that they tend to have the funds to open more branches and install more Automated Teller Machines (ATMs) in many regions and towns across the nation. It costs tens of thousands of dollars to set up a full bank branch and this is one of the reasons that constrains smaller banks from having wider reach. Having more branches and ATMs nationally helps banks to reach the unbanked members of the population, extend credit facilities to business operators. This point I confirmed by he fact that the banks that have the most branches in the country have tend to be the bigger ones with bigger capital (See table below).

Bank Number of Branches Nationwide
Ghana Commercial Bank (GCB) 157
Barclays Bank Ghana 140
Agricultural Development Bank (ADB) 79
Ecobank Ghana Limited 78
Source: Various
Another argument in favour of bigger banks is that they are able to survive financial turmoil, credit crunches or even losses from stock market speculation. Many financial systems go through challenges. The global credit crunch that began in 2008 whose effects have still not gone away led to the collapse to some financial institutions. A smaller bank like Northern Rock in the United Kingdom (UK) nearly collapsed and had to be taken over by a bigger bank from Spain, the Banco Santander.
In financial difficulties, many governments see bigger banks as “too big to fail”. Their general contribution to the economy in terms of taxes, support for businesses and employment generation are deemed to significant for them to be allowed to go bust. In the UK again, during the height of the credit crunch, the government provided funds to bail out big banks like the Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (now part of the Lloyds Banking Group). Similarly in the United States, the government set up a fund to support major banks Citigroup, Morgan Stanly, Bank of America and so on.

Lastly, big commercial banks enjoy brand leverage that smaller banks do not get. Bigger banks tend to have better brand awareness in the minds of consumers. They enjoy good reputation even if their services are not so appealing. In times of uncertainty, customers are more likely to patronize the services of a bigger well-known bank as they are seen as less riskier.

Not all is rosy with bigger banks. Studies of interest rates in the United States reveled that bigger banks have higher interest charges on their loans. They also pay the smallest interest on savings.
Additionally bigger banks do not have personable and very good customer service that one can get from a small bank with few customers.
In spite of the disadvantages, the benefits of having bigger, well-capitalised banks far outweigh those of a smaller bank. S whiles Ghana’s bankers’ close later, the debate about having bigger or smaller banks can resume on the golf courses!
Written by Anthony Sedzro
Email: sedtony@yahoo.com
Telephone: 0204-914420.