CHAPTER ONE INTRODUCTION
1. 0. Background of the Study
Banks are central to the growth of the financial sector and economy of any country. Banks are financial intermediaries that accept deposits from surplus spending units and channel these in the form of loan products to deficit spending units in the economy (citifmonline.com/2015/06/19/the-changing-face-of-banking-in-ghana/).
Due to the sensitive nature of the banking sector, attempts have been made globally and locally to bring standardization and stability to it. Such attempts included the global adoption of the Basel Accords (I, II & III) and CAMEL rating model as well as local Banking Acts. These global regulations are to be enforced by central banks in addition to their local regulations. The implementation of these regulations have resulted in many mergers and acquisitions (M&As) across the world. These have become a worldwide occurrence of greater market share and survival (Kemal, 2011). Mergers and acquisitions have also become the most sought after strategy that firms use to achieve competitive advantage (Kumar & Bansal, 2008).
The investigation of mergers and acquisitions and how they affect financial performance have been conducted in various countries across the world. However, the major M&As actions occurred in the western nations especially in the USA. It is estimated that about 1500 M&As occurred in the nation‟s banking industry between 1993 and 1996. This was considered the largest occurrence during a period of three years (Botis, 2013). In Nigeria, eighty nine (89) banks were reduced significantly to twenty five (25) between 2004 and 2005. Kenya, India and others have all experienced major M&As in their banking sectors all in attempt to improve the sectors.
However, research findings on the subject are generally mixed. Some findings point to the positive and significant relationship between mergers and acquisitions and bank financial performance (Agyapong, 2015; Haruna et al., 2017; Nkrumah, 2016) while other findings also point to the negative effect M&A have on the profitability of firms (Oduro Marfo & Agyei Kwaku, 2015).
This study therefore seeks to evaluate how M&As impact the financial performance of some selected Ghanaian banks; Access Bank Ghana Limited, Ecobank Ghana Limited, Ghana Commercial Bank Limited (GCB), Republic Bank Ghana Limited and Consolidated Bank Ghana Limited (CBG) in Ghana covering the period of 2012 and 2018.
1. 1. The Banking Sector and M&As in Ghana
The banking sector had been under many challenges such as high non-performing loans, insolvency, inaccurate financial disclosures, poor corporate governance, and illiquidity which had the tendency to collapse the sector if something drastic was not done. Even though the Bank of Ghana had previously provided assistance to these ailing banks with liquidity, it decided to address the fundamental challenges in the sector. The Bank of Ghana therefore embarked on a comprehensive reform agenda, with the aim of tackling the problems to make the banking sector more resilient.
As part of this reform exercise, the banking licenses of seven (7) insolvent banks were revoked over the last sixteen months using the CAMEL parameters. Steps were taken to ensure that they exited the market in an orderly manner.
Furthermore, the Bank of Ghana on 11th September 2017 issued the Minimum Capital Directive (BG/GOV/SEC/2017/19) by which all universal banks were required to increase their minimum paid-up capital to GHC400 million by 31st December 2018.
Banks were required to comply with the new minimum paid-up capital requirement through a new capital injection, capitalization of income surplus or a combination of both.
This Minimum Capital Directive was part of regulatory measures aimed at strengthening and making the banking sector more resilient to shocks as well as to help reposition the banks to better support the growing needs of the Ghanaian economy. It was also the expectation of the Bank of Ghana that the recapitalization exercise would help promote consolidation in the banking industry through sustainable mergers and acquisitions along with stronger corporate governance structures and risk management systems and practices.
