Recapitalisation and Bank Performance Indices: Evidence from Ghana Using the Slems Framework.

Recapitalisation and Bank Performance Indices: Evidence from Ghana Using the Slems Framework.

Eugene Asiamah-Boadi

Regulators and monetary institutions over the period have used various recapitalisation reforms to promote stability within the banking fraternity. The fallout of the global financial crisis in 2007 has confirmed the inadequacy of these reforms and same has led to many reforms within the banking space particularly on the matter of bank recapitalisation. Recapitalisation entails increasing the capital stock of an organisation either in equity or debt components in order to achieve a desired capital structure, - optimum capital structure. In the context of banking, recapitalisation is a regulatory tool that results in a bank securing a long term capital stock by altering its capital structure substantially through the use of equity funding. This regulatory tool is aimed at providing additional cash cover to support a bank’s operations in a given economy. Prior to the year 2008, the Bank of Ghana had caused banks to increase their capital levels in smaller lots to achieve some desired levels. The Bank of Ghana in February 14, 2008, the Bank of Ghana directed banks in Ghana; Foreign Controlled Banks (FCBs) and Domestic Controlled Banks (DCBs) to shore up their capital levels to attain a minimum recapitalisation threshold of GH¢60 million (equivalent to USD 30 million) by December 2009 and December 2012 respectively. Subsequent to the 2012 recapitalisation deadline, there have since been two other directives on bank recapitalisation by the Bank of Ghana with the recent one being the new recapitalised amount of GH¢400 million (equivalent to USD $85 million) to be attained by all banks come 31st December 2018. The 2008 recapitalisation policy was the major recapitalisation reform the Ghanaian banking industry had experienced at the time and same gave the researcher the pleasure to measure the impact of such an exercise on bank performances and whether or not the recapitalisation exercise has achieved its desired outcomes, recapitalisation motives. The 2008 recapitalisation reform was also to enable banks undertake big ticket transactions in the economy, be able to absorb losses and also to improve the overall performance of these banks.
The study therefore discusses the subject matter of recapitalisation and how its regulation has affected bank performances in Ghana over the period. The study provides empirical evidence on how additional bank capital introduced in a bank’s capital structure impacts bank performances – through testing of relationships and establishing causality among variables. Performances of banks were measured using the SLEMS framework; solvency, liquidity, earnings, management and sensitivity ratios to market risk via banks system and controls. The study adopted a quantitative research approach and largely used secondary data for a ten year period spanning 2006 -2015. Purposive sampling method was used to sample 20 banks comprising of Nine (9) FCBs and Eleven (11) DCBs. The model specification was developed along the production function theory where output (dependent variables) is deemed a function of inputs (independent variables). This model was further developed using multiple regression equation to include all other variables for purposes of predicting output. The research findings from the study show that it is easier and faster for FCBs to recapitalise than when it comes to DCBs. The research findings also suggest that FCBs do better than DCBs in the short run. The findings however suggest that DCBs recorded higher recapitalisation levels than FCBs thereby improving the positions of DCBs in the long run. The study revealed that there was a positive relationship between recapitalisation and all other independent variables. There were mixed results and outcomes with respect to how dependent variables impacted dependent variables. These mixed results form the basis of future research to interrogate further why a particular approach to achieving regulators recapitalisation directive have been used over the years, and whether or not another type of recapitalisation reform could be used going forward. The research outcome is aimed at helping stakeholders particularly regulators within the financial system; pensions, securities and insurance industries to better appreciate the effects of the recapitalisation in their respective industries and the Ghanaian financial system as a whole.

Doctor of Philosophy (PhD) Thesis

Ghana Technology University Library

April 2018