Prior to today, there were 37 universal banks in Ghana. Now there are 35. People complain that this number is too many for our $40bn economy. I don’t know what magic number such critics have in mind and how they come by that number. In my opinion, the relevant metric is that only 30% of the population is banked. This small proportion is simply because all 35 banks are offering similar services to the same target market of high net worth individual and corporate clients. Some banks are not doing well because other banks are better and the laggards don’t offer any compelling value to their genuine customers. Banking is a value game, not a numbers (of banks) game.
We all expect a review of the minimum capital requirement. Because the justification and quantum of the revision has historically always been the same, I can safely predict 2 things:
1. It will be the GHS equivalent of $60 million at approximately today’s exch rate;
2. The justification will be that the banks need the capital to enable bigger transactions. Never mind that they never execute any ‘large transactions’.
About a decade ago, all banks in Ghana were required to procure universal banking licenses, regardless of their business model. Basically, they were compelled to be licensed to do everything a bank could possibly do, even if they had no intention of offering some of the services. And they are regulated as such. But what if I only want to be a community bank in Achimota, Dansoman or East Legon?
If you define East Legon as EL itself, Adjiringarnor, Ashale Botwe, Madina and Adenta, the GDP of that area is probably comparable to (or higher than) the GDP of Ghana’s second city, Kumasi. So what if I only want to operate in EL, offering current, savings and fixed deposit accounts, extending small loans (for working capital and small capital investments) to my customers? If my customer wants to an LC or take a large capital loan, I intermediate with a larger universal bank on their behalf through syndication or advisory services. I may opt for this restricted service because I want to offer tailored services to my customers by getting to know them so well that I even know the names that they would prefer for their unborn grandchildren! What current license regime would this community bank fall under?
We should have properly tiered banking licenses. If I want to grow, I should have the opportunity to apply for a universal banking license but if I don’t want to grow, as a bank, then there should be licenses that allow me to offer a restricted banking service that’s a step or two below a universal bank. Consequently, my minimum capital requirement and other regulation should be consonant with a Tier 2 bank.
One might argue that there are already licenses available for rural banks, savings and loans and finance houses. Rural banks operate where their name (rural) implies that they should. Finance houses and S&Ls are not banks. Particularly, they do not take deposits and offering checking accounts in the same way that banks do. There is a gap in the market between S&Ls, finance houses and banks, and I suggest that it will be filled by tiering the banking license itself.
When banks are forced to raise capital in excess of the requirement for the business that they are actually doing, they possibly become like a fool and his gold, they are easily parted…because equity is expensive and imposes a pressing obligation to invest it in some assets asap, even if those assets are not of the highest quality. If a bank can step down to a lower banking tier without losing it’s primary banking status, then the cost of that step down might be preferred to the cost of a forced capital raise and a bank may not be compelled to grow beyond it’s ambition.
Having said that, a bank’s business model must make sense. It must either be better than it’s competitors at doing what everyone else is doing or it must offer a new proposition that extends the service beyond current customer boundaries, for instance, extend banking to the unbanked (in Ghana’s case). If the model doesn’t make sense, it’s not necessarily because there are too many banks but perhaps it’s simply bad business.
