Impact of Bank Recapitalisation on the Profitability of Banks in Ghana

Abstract

The scenario of banking in Ghana has been characterised by low capitalisation which exposes the financial system of the country to severe swallowing, together with widespread bank distress as a result of the prolonged economic crisis. Consequently, bank investments have been hampered. It was therefore imperative for the Bank of Ghana to take drastic measures of bank recapitalisation, which is the core of global bank reforms. The Bank of Ghana, in 2009, issued a directive for all banks and non-bank financial institutions to increase their equity capital. Class one banks were to increase their capitalisation to GH¢60.0 million. But in 2012, another directive was issued compelling new entrant class one banks to have a minimum capitalisation of GH¢120 million (in case of a Ghanaian Bank) and in the case of foreign ownership of banking business, it is not less than GH¢120.0 million. This was to help expand the economy and strengthen existing banks to be able to invest in “big ticket” deal and serve as a safety net for banks in their credit supply. While re-capitalisation of Ghana banks may address this concern, the effect of the exercise on banks‟ performance remains an empirical one. The main problem addressed in this study, is whether recapitalisation of Ghanaian banks has improved their profitability. I further investigated the effect of macroeconomic factors on the performance of the Ghanaian banking system over the period before and after the recapitalisation and also how the imposed regulatory increase in capital have affected the lending behaviour of the banks over the period.

This study adopted Athanasoglou et al. (2005) model of Generalised Method of Moments (GMM) using the paradigm of Arellano and Bond (1991) of one-lagged GMM to find the impact of bank recapitalisation exercise in Ghana on the profitability performance of banks. It also investigates whether economic factors have effect on the relationship between regulatory capital increase and the profitability of banks. It also used the student‟s t-test to test the equality of means of profitability measures before and after the recapitalisation period. The study employed secondary data which consist of annual bank level seven-year data from 2007 to 2013, gotten from the Bank of Ghana, for 22 banks out of the 26 bank existing as at 2013. The 2007 – 2013 annual average consumer price indices and the Gross Domestic Product annual growth rate was the macroeconomic variables used for the analyses. The study found that, the Return on Equity (ROE) using the test of equality of means was insignificant. The test on equality of means for Return on Assets (ROA) using the t-test of equality of means were insignificant. The result means there is no statistical difference between the mean of pre-recapitalisation ROE and post-recapitalisation of the banks. The same applied to pre and post-recapitalisation ROA. But the test was significant for the pre-recapitalisation After-Tax Profit and post-recapitalisation After-Tax Profit. This means that, the recapitalisation exercise have helped increase the After-Tax Profit significantly. From the empirical result, the recapitalisation exercise had a negative, significant impact on banks‟ profitability. This means that, the regulatory increase in capital for banks in Ghana, have not helped the profitability of the Ghanaian banking

industry as returns to shareholders is concerned. This study concludes that while recapitalisation raised the capital base of the banks, it is not all the time that it transforms into good financial intermediation. The study recommends that banks need to diversify their investment and should be more of the long-term type. The government too has a role to play in providing necessary enabling economic environment to ensure that the cost of doing business in Ghana is reduced significantly to allow the banks to make more profit, since funding from banks will no more be a problem.