Banks beat recapitalisation deadline — Financial Stability Fund supports process with GH¢4.9bn

In a significant development for Ghana's financial sector, about 15 out of the 23 bank’s operating in the country have successfully met prudential capital adequacy requirements without regulatory reliefs, according to the International Monetary Fund's latest assessment. 

This milestone, achieved between December 2023 and June 2024, marks a substantial improvement in the sector's stability and resilience.

The successful recapitalisation drive has been powered by multiple factors, including improved profitability and strategic capital injections. 

The Ghana Financial Stability Fund (GFSF) also played a crucial role in this achievement, contributing GH¢4.9 billion to strengthen banks' capital positions.

To help address the negative effects of the DDEP, the government introduced the Financial Sector Stability Fund with a seed funding of $750 million to help solve the liquidity and solvency challenges of the affected banks.

Recapitalisation 

Banks in the country have relatively been stable following the financial sector clean-up which saw them increase their stated capitals to GH¢400 million.

However, the domestic debt restructuring which saw the participation of all the 23 commercial banks in the country hit hard at the industry, with 16 banks recording significant losses in 2022. 

An analysis by the BoG indicated that the banks recorded losses totalling GH¢8 billion in the year under review.

The debt restructuring exercise forced the banks to set aside huge amounts of money as impairment losses and this is what led to majority of them recording losses in 2022.

This also led to severe liquidity and capital challenges for the banks, with the BoG having to introduce some regulatory reliefs to keep them afloat. 

As a result of the impairment in capital, banks were given a period of three years to recapitalise to pre DDEP levels, with a deadline of September 2023 to submit their plans.The central bank in July 2023 announced that all banks whose capital have been affected by the DDEP had submitted their plans ahead of the September deadline.

Ahead of plans

At the January 2024 monetary policy press briefing, the Governor of the Bank of Ghana, responding to a question from the Graphic Business said banks in the country were way ahead of their recapitalisation plans and are in line to restore their capitals before the 2026 deadline.

He said looking at the 2023 performance of the banks so far, it had become clear that a lot of them could even recapitalise from the profits they made in 2023.

He explained that a few of the banks have already recapitalised, with most of them also in the process.

“From what we have seen from the current data, a lot of them will be able to fill the gaps from the profits they made from 2023 so the situation has improved.”

“They are doing much better than we anticipated. We have given them up to 2026 to recapitalise but they are way ahead of their plans,” he stated.

The IMF has now confirmed that more than two-thirds of banks in the country have now recapitalised two years ahead of the 2026 deadline.

It is expected that early recapitalisation and effective risk management by banks would help promote overall banking sector stability and resilience and ensure effective financial intermediation to strengthen the economic recovery efforts.

In its latest monetary policy committee report, the BoG pointed to an impressive growth in the sector's fundamentals, with total assets surging by 42.4% to reach GH¢367.2 billion, a remarkable improvement compared to the modest 3.2% growth recorded in the same period of 2023. 

The capital adequacy ratio also shown notable improvement, increasing to 11.1% with reliefs (14.2% without reliefs), up from 7.3% (13.4%) in October 2023.

"The banking sector remains sound, well-capitalized, and liquid," the Bank of Ghana affirmed in its report, highlighting the success of the recapitalisation efforts.

High NPLsWhile the IMF commended banks for an early recapitalization, it noted that the sector still faces some challenges. 

The non-performing loan (NPL) ratio has increased to 24.1% as of June 2024, up from 18.8% in June 2023, reflecting broader economic pressures from the 2022 downturn and exchange rate volatility.

The IMF attributed the rising NPLs to the economic downturn in 2022, exchange rate volatility, and findings from the Bank of Ghana’s (BoG) review of asset quality across banks.“While NPLs are heterogeneously distributed across banks, the underlying trends reflect lingering economic challenges,” the IMF noted.

The Monetary Policy Committee of the Bank of Ghana in its November report also noted that Credit risk remains elevated in the banking sector.

The report highlighted that notwithstanding the elevated non-performing loans (NPL) profile, the banking sector remains sound, well-capitalised and liquid. In the outlook, the committee said performance would be contingent on a rebound in profits, continuous adherence to recapitalisation plans and enforcement of strict credit underwriting standards. 

In an earlier interview with the Graphic Business, Banking Consultant Dr Richmond Atuahene said the high NPLs was a major threat to the profitability and solvency of banks.

He said although the banking industry had been battling with rising NPLs for decades now, the level at which it is rising now threatens the financial stability agenda of the country.

He, therefore, advised the government, the Bank of Ghana and the banks to put in place measures to immediately address the rising NPLs in the country.

Ghana has historically recorded high levels of NPLs in the banking sector, with NPLs reaching a record high of 24 per cent in 2023.

He said the repayment challenges were a reflection of the weak macro-economic imbalances in the form of higher inflation, higher lending rates, persistent depreciation of the local currency, higher energy costs and a harsh business environment.Risk management framework

The banking expert also advised banks to implement a well-designed risk management framework that has been considered a must for a best-practising bank.

He said universal banks should be immediately required to strengthen their internal controls and risk management practices, including strengthening their credit risk assessment, legal perfection of collateral, monitoring and collection systems, as well as debt collection.

“To decide whether to approve a loan application, banks should evaluate the riskiness of the loan, decide on an appropriate risk premium on the loan, devise measures to prevent, as well as deal with possible loss events and assess their ability to absorb losses when NPLs occur.

“Putting such a framework into practice would be expected to increase operational efficiency. If the risk management framework does not work, a plan for the reduction of NPLs is necessary,” he said.