Bank Recapitalization and Market Concentration in Ghana’s Banking Industry: A Herfindahl-Hirschman Index Analysis

Abstract

ABSTRACTUsing Concentration Ratio and Herfindahl-Hirschman Index techniques, the paper investigates the concentration levels of the banking industry in Ghana and forecasts the future concentration levels of the industry should consolidations triggered by the new bank recapitalization policy occur in the industry. The study finds that the HHI indices provide evidence for the contention that for the past eight years the banking industry in Ghana has been highly competitive with no signs of concentration. Evidence also exists to underpin the conclusion that any consolidation of four banks or less stimulated by the new bank recapitalization policy will not upset the existing market concentration. However, consolidation of five or more banks will culminate in high concentration which will be inimical to the interest of customers. The paper, therefore, recommends that, all things being equal, policy makers should permit consolidation of four or less banks if that is the only way the banks will meet the new bank recapitalization requirement.JEL: D40, D41, E02 ,G21KEYWORDS: Banking, Market Concentration, Herfindahl-Hirschman Index, Ghana(ProQuest: ... denotes formulae omitted.)INTRODUCTIONDriven, ostensibly, by the desire to promote prudent management of banks in Ghana, the Bank of Ghana introduced a bank recapitalization policy in 2007. In this policy, universal banks operating in Ghana were required to recapitalize from GH0 7 million to GH0 60 million (approximately US$ 60 million at the time) by the end of 2012. Two roadmaps were set for the implementation of this new policy. All majority locally-owned banks were given up to December, 3 1, 2010 to achieve minimum capitalization of GH0 25 million, and December, 31, 2012 to recapitalize fully. Foreign banks that predated the policy were given up to 31st December, 2009 to recapitalize whilst banks that were licensed after the announcement of the policy had to start with the new capitalization. All foreign banks that existed before the policy have since met their obligations at the completion point in 2009. However, indications are that their indigenous counterparts are still struggling to meet the target. What seems plausible to conjecture is that some of these may have to consolidate to keep themselves in the industry. This conjecture is premised on the precedents obtainable from similar exercises that took place in other jurisdictions.After the Asian crises, Malaysia undertook recapitalization in its banking sector whereby about 80 banks shrunk to about 12 within two years. South African experience is also available for reference. A similar policy stimulated bank consolidations in South Africa in 2003 which led to a reduction in the number of banks in South Africa (Akomea, 2009). Nigerian experience obviously lends more credence to prediction of bank consolidations in Ghana. In the Nigerian situation, out of 89 banks that were in existence before the recapitalization exercise in 2004, 14 lost their licenses and the rest consolidated through mergers and acquisitions into 25 banks by the end of 2005 (Ezeoha, 201 1).Bank consolidations bring in their wake some structural changes with concomitant advantages and disadvantages. Between 1975 and 1997, the U.S banking industry experienced significant structural changes as a result of intense process of consolidation (mergers) .The number of commercial banks decreased about 35% from 14,3 18 to 9, 215 (Cetorelli, 2000). Consolidation leads to larger banks and that could change the relationship between banks and their retail customers (Akomea, 2009). Evidence from the United States suggests that larger banks charge higher fees and pay less interest on deposits. They also make fewer loans available to small businesses than the smaller banks they take over from (Dymski, 1999). Studies on bank consolidation and consequences abound in many countries. In Nigeria, for instance, many studies have been undertaken on bank consolidation and consequences (Somoye, 2008; Ezeoha, 2011). …