CHAPTER ONE INTRODUCTION
Background of Study
Developments over the past decade in the banking sector has prompted the Central Bank on the need to strengthen both the supervisory and regulatory framework to create a more robust banking sector by beginning an exercise aimed at totally reforming the banking sector. Following the financial crises in the last decade, many countries including Ghana, have implemented stricter rules for their banking sectors to ensure stability of their banks. The rationale behind this is that the stability of the banking sector of a country plays a vital role in the growth of the economy of the country. Hence, the failure of banks impacts the economy negatively (Ramadan et al., 2011).
All over the world, banks are regulated to help ensure that they remain safe and sound to perform their critical role in the economy (Narh, 2013). Appropriate regulation ensures that banks operate with the rights amounts of high-quality capital contributed by their shareholders, in order to support the risks that they assume in accepting and managing deposits, lending, and other banking services they provide to their customers (Naceur & Omran, 2011). Simply put, banks must have the financial strength to meet their obligations to their depositors and other customers as and when they fall due (Bernard & Michael, 2014).
Quite recently, the Ghanaian banking sector experienced some turbulence which resulted in the Central Bank initiating certain reforms in the industry. The most significant being all Universal banks required by a minimum capital directive issued by the Bank of Ghana on 11th September 2017 to increase their minimum paid-up capital to GHC400 million by 31st December 2018
(Bank of Ghana, 2018). At the end of the recent banking reform which was undertaken over a period of two years, the Ghanaian banking sector is left with 16 banks successfully recapitalized, 3 other banks merging with 5 banks and obtaining bailout from the government and 1 voluntarily exiting the industry (Bank of Ghana, 2019). The introduction of the bank recapitalization policy in 2018 by the Bank of Ghana was motivated by the need to encourage careful management of banks.
Determined, presumably, to foster a reformed, resilient and sustainable financial sector, the Central bank introduced a higher minimum capital requirement for banks. This policy is premised by comparable recapitalization policies in other jurisdictions. One of such cases is Malaysia. After financial crises in Asia, Malaysia commenced a similar recapitalization exercise which saw 80 banks reduced to 12 within a period of 2 years. South Africa’s case is another example which led to the consolidation of a number of banks in the industry in 2003 which resulted in a significant reduction in the number of banks (Akomea & Adusei, 2013). The recapitalization exercise in Nigeria is one that presents a better reference for the impact of bank consolidation in Ghana. In the case of Nigeria, 89 banks existed in the banking industry before the recapitalization and banking reform exercise in 2004. After, 14 banks had their licenses revoked and the remainder consolidated resulting in 25 banks by 2005.
Before the recent re-capitalization, the Ghanaian banking industry saw an adjustment of the minimum regulatory requirement in the banking sector in 2013. This adjustment resulted in an increase from of the minimum capital of banks from GH¢60 million to GH¢120 million. These increments in capital requirement in the banking sector was expected to drive growth, foster competition between banks within the industry, create well-resourced, profitable and efficient
banking institutions, and also reduce high lending rates within the industry. Bank capitalization is identified to affect the lending behavior of banks owing to imperfections in the market for debt. Specifically, capital requirement affects the ability of banks to raise uninsured form of debt (Leonardo & Paolo, 2013).
The question remains if the Central bank was able to achieve any or all of these targets. Another one lingers as to whether high bank recapitalization is enough to avert another banking crisis? In the near future and at what cost? The effect of high recapitalization is the topic of many current discussions. It is unclear how recapitalization will influence the probability of banks, the elements of the banking sector, or business cycle variations in credit.
Statement of the Problem
Low capitalization is a prevailing characteristic of the banking sector in Ghana. This has affected investment of banks in big projects as they lack the required financial power to invest in industries like the up-coming oil industry that require higher funds (Ametei, 2014). Recapitalization of banks causes structural changes which have associated merits and demerits. There were notable structural changes in the banking sector of the US between 1975 and 1997, as a result of recapitalization resulting in the reduction of commercial banks by about 35% (Angelini & Cetorelli, 2000). The relationship between banks and their customers can change because of the larger banks that are created through recapitalization (Akomea & Adusei, 2013). According to Dymski (2002), the consolidation of the banking sector led to the creation of larger banks which charge higher fees, pay lower interest on deposits and grant fewer loans to SMEs than the much smaller banks.
The few studies (Aboagye, 2012; Boahene, Dasah, & Agyei, 2012; Narh, 2013) done in Ghana on bank capitalization and performance, only looked at the relationship between capital and
performance and the determinants of banks’ profitability (Naceur & Omran, 2011). There is no clear study that tried to find the effect of the increases in the minimum capital requirements of universal banks in Ghana on their profitability and lending behaviour. Also, most of the studies undertaken in the area of bank recapitalization and profitability been conducted in large corporate developed and advanced economies, as opposed to developing countries such as Ghana, hence the need for this study.
This particular study, therefore intends to reduce the knowledge gap in the extant literature by specifically concentrating on the effects of the minimum capital requirements on the profitability and lending behaviour of selected universal banks in Ghana.
Objective of the Study
The main objective of the study is to examine the effect of the minimum regulatory capital requirements on the profitability and lending behaviour of banks in Ghana.
Specific Objectives of the Study
In order to achieve the main objective of the study, the following specific objectives have been outlined:
- To examine the effect of minimum regulatory capital requirement on the profitability of banks in Ghana
- To examine the effect of minimum regulatory capital requirement on the lending behavior of banks in Ghana.
Research Questions
The research questions that guided the investigation of the study are:
- What is the effect of minimum regulatory capital requirement on the profitability of banks in Ghana?
- What is the effect of minimum regulatory capital requirement on the lending behavior of banks in Ghana?
