In a press release on January 4 this year, Bank of Ghana (BoG) Governor, Dr Ernest Addison, announced that the reforms the central bank had sought to institute in 2017 has been completed and the country’s banks have been reduced to 23 from 33 at the start of the exercise.

The centrepiece of the reforms was the increase of the minimum paid-up capital requirement of banks from GH¢120 million (about $25 million) to GH¢400 million (about $83 million). 16 banks met the new capital requirement, 6 banks merged to form 3 new banks, 1 bank took the option of being downgraded to a savings & loans company, another bank voluntarily winded down operations, 5 banks are to benefit from fresh capital from an SPV called the Ghana Amalgamated Trust Limited, and 9 banks have had their licenses revoked for several reasons.

The rationale of the BoG for the exercise can be found in this quote taken from the press release:

The 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 recapitalisation 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.

The exercise by the BoG is similar to a recapitalisation exercise in Nigeria between 2004 and 2005, which raised the minimum paid-up capital from 1 billion naira ($2.7 million) to 25 billion naira ($69 million) and reduced the country’s banks from 89 to 25. There have been several studies on the effect of the recapitalisation on the banking sector in Nigeria which serve as an example of what the BoG can expect to result from its recent exercise. The results of the studies find a positive to mixed effect of the recapitalisation exercise on the banking sector.

One study found a positive significant impact of the recapitalisation and consolidation effort on the Capital Adequacy Ratio (CAR) and the management quality of banks but did not find any effect on the asset quality, liquidity and profitability of banks. This study is however challenged by another paper which identified a positive impact of the exercise on the profitability of banks. Another paper concluded that the recapitalisation improved the efficiency of banking operations. Two papers (1, 2) found a negative impact of the recapitalisation on the financial performance of banks as measured by their return on assets (ROA).

This mixed bag of evidence is to be expected in situations like this where there are so many variables at play. Each bank is different and recapitalisation may have different impacts on their operations. The recent struggles of Diamond Bank Nigeria in any case show that the work of central banks in ensuring the strength of the banking sector is never done. Dr Addison and his team are well aware of that, and they are considering not only what the exercise has on banks going forward but what could have happened had the exercise not been carried out. After all, the Governor described the previous situation as a tipping point.