Consolidation of Ghanaian banks should improve assets and strengthen confidence

Avoiding a crisis in the investment industry will involve a clear-headed, firm approach from the regulator. Media coverage has mostly highlighted failed banks and the crisis in the banking sector, but few firms in the broader financial services industry have been left unscathed. Across the industry, firms that may have been exposed to the failed banks have had a difficult run as they struggle to shore up their liquidity in the wake of the crisis. Investment firms have not been spared the correction.

Ghana’s asset management industry is a moderate contributor to the larger banking sector. Assets under management in 2018 totalled GHS45bn ($9.7bn), equal to 17% of GDP and close to half the banking sector’s assets of GHS104bn ($22.5bn). The industry’s growth of 45% per annum over the five years to 2018 suggests that it is playing an increasingly important role in serving as an engine for wealth creation in the country. Growth has been fuelled by two key factors: pension reforms and a growing middle class. However, the increasing size and reach of the industry mean that problems elsewhere can easily cause havoc for its players, which has been the case with the recent bank failures.

Crowded Space

Although the prominence of the sector may increase in 2019, investment firms operate on wafer-thin capital of GHS100,000 ($21,600). Over the years this low-entry barrier has served as an incentive to attract several firms into the industry. There are currently 148 firms in the industry, crowding the relatively small space. Intense competition has translated into a race to the bottom as firms use pricing to attract investors. The average management fee charged on industry assets is 50 basis points per annum, barely enough to keep firms afloat. Add in competition from outside the industry, and the risks are heightened.

Asset managers in Ghana face a peculiar situation: competition from the scores of shadow and near-banks operating locally. These offer unsustainable high rates of return to investors increasing pressure on asset managers to outperform. To compete, asset management firms have resorted to operating like banks themselves, guaranteeing client returns and capital on their already slender balance sheets. This model worked temporarily. However, with toxic assets threatening the entire financial system and a newly assertive regulator, the stability of the sector broke down.

Projection

The pathways to a full consolidation are limited. A full-scale immediate clear-out carries clear political risks and could rapidly dent public confidence in the sector. A slower resolution will be even more costly in the long term, slowing growth and ultimately dragging the economy down. On balance, a quick, painful resolution is the more optimal path. The right initial steps have been taken, allowing seven banks to fail and setting up a bank, Consolidated Bank Ghana, to take over the assets of five of them while guaranteeing the deposits of investors. Issuing a tradeable long-term bond to pay institutional investors reduces the real cost to the issuer and imposes a penalty on exposed investors marginally reducing moral hazard. However, the process must be carried out swiftly and fully, as further delays could worsen the liquidity crunch and dent already weakened confidence in the financial system.

Providing a long-term cure for the investment industry’s ills will prove a sterner test. The Securities and Exchange Commission has asked firms that have guaranteed investments to unwind their positions by the end of 2018 but may have to stay its hands for now. Unwinding exposures in banks and entities that are already failing will only worsen an already volatile liquidity situation. Old contracts should be allowed to mature to ease the pain of correction while new ones should be immediately halted. The drive to increase the minimum capital required for companies should be fully implemented to encourage consolidation and healthier balance sheets. Investment guidelines from the regulator should be temporarily more restrictive to provide guidance in clearly uncertain markets, and these should be eased as soon as tranquillity returns.