Ghana’s State-Owned Agric Development Bank must go public to avert collapse

By Emmanuel Buadi Mensah & Abdul Basit | Alert| IMANI Center for Policy & Education

IMANI feels compelled to speak on the contentious issue of a state bank going public not because it did so when other state-dominated banks and private banks were going through similar phases, albeit under dubious circumstances, but primarily because in the case of Agricultural Development Bank (ADB), the times simply do not favour continuous state-ownership, so there really is no option than for it to go public. To be sure, the government is cash-strapped and cannot bail out ADB in crisis without implications. Any attempt to do so implies that government would have to borrow or use tax revenue to rectify the bank’s books. This will put the ‘bail-out cost’ on the books of government. This runs counter to the Medium Term Debt Strategy of removing the debt of State Owned Enterprises, SOEs from the books of government, and also reiterated in the conditions of the IMF program.


The Issue

In creating the Agricultural Development Bank, ADB’s future in a competitive environment, the bank must position itself to attract and retain customers through expanded asset base, product differentiation, competitive pricing, marketing and brand promotion. To achieve this ADB is proposing to list its shares on the stock market. Having received the approval of the Securities and Exchange Commission (SEC), the bank is expected to offload  about 100 million shares to the public with the hope to give out 75% of the bank and raise about GH¢200 million to increase investments in its core operations of financing Agricultural  related activities and more.

The Unfounded Misconception

The Bank has operated since its establishment as a state owned enterprise with current shareholding structure of 51.8% by Government of Ghana through the Ministry of Finance and 48.2% by the Central Bank of Ghana. Between the years 2009 and 2013 the bank has exhibited respectable growth in revenues, assets, deposits and profits. First, from 2009 to 2013 the bank’s revenue more than doubled. It grew from 117 GHC million in 2009 to 316 GHC million representing a compound annual growth rate (CAGR) of 28%. In the same period net profit grew significantly from 13 GHC million to 70 GHC Million, reflecting a CAGR of 54%. Likewise assets and deposits grew by 22% and 26% respectively.

Despite the growth recorded in revenue and other indicators, capital constraints have had an adverse impact on profitability and capital adequacy levels. The bank recorded, on average, capital adequacy ratio of 11.6% for the years under consideration, which is marginally above the Central Bank requirement of 10%. This suggests that the bank is struggling with raising the needed capital for investment and operations.

This is happening at a time when most peers of the bank have improved their capital adequacy through increases in stated capital by raising equity funding. This puts ADB at a competitive disadvantaged position. Despite its competitive disadvantage, the Bank has delivered good performances in recent years and it is projected to maintain sustainable growth with additional capital injection.

This has motivated the decision of the bank to initiate an IPO. For instance the proposed capital injection is expected to increase capital adequacy from the current average of 11.6 percent to 16.6% in 2016. Also total loans and advances are expected to improve by 11.7%.

The failure of the bank to acquire this capital injection will lead to a situation similar to that of Merchant Bank and its subsequent sale to questionable equity financial organizations.

Restructuring ADB

In an effort to prepare for the listing, the bank is restructuring in order to meet standard practice. One of such activities is the acquisition of a new office complex. Per the information available to IMANI, the bank went into an agreement with a private estate agency to construct a new office on a property provided by the Bank. As apart of the agreement ABD is to own parts of the property.

ADB is reported to have sold the old head office complex, which if true, in our opinion, could have some economic merit which the bank must explain. Considering the facts enumerated, the debate on the ADB deal should be framed around the counterfactual question of what could happen to ADB without the needed capital injection rather than the  sale of old office.

Counter Arguments

Some staff of the bank have called for the dismissal of the MD and board over the intended listing exercise. There are fears that ADB is on sale. The fact is that the bank is seeking capital injection from the public and thus the people of Ghana have been invited to take ownership of the bank by acquiring shares and by so doing investing their money directly in the bank. This is more promising than the sale of Merchant Bank under bizarre circumstances to some unknown organizations.

There are also fears that the IPO will lead to retrenchment of staff. It is important to note that the present restructuring underway in the bank will lead to the reallocation of resources. Hitherto powerful and influential individuals and departmental units are more likely to lose their influence, thus, the attempt to stop the right thing from happening. And of course, going for an IPO means the bank will have to get rid of unnecessary cost elements that may include some form of rationalization of staff and other operational units in order to conform to global industry standards. ADB is a typical state owned company, therefore, the resistance is to be expected.

Although the bank has reported some non-performing loans up to the tune of GHC260 million, the alternative to an IPO is for ADB to be sold out like the Merchant bank. The ideal thing to do in the midst of this struggle is for the bank to turn to the stock market to raise the needed capital.

The Way Forward

With current rate of Non-Performing loans, the bank may find itself in unsustainable position without capital injection and restructuring. Predictably, if the bank fails, government would want to bail it out or sell it out like Merchant Bank. To be sure, the government is cash-strapped and cannot bail out ADB in crisis without implications. Any attempt to do so implies that government would have to borrow or use tax revenue to rectify the bank’s books. This will put the ‘bail-out cost’ on the books of government. This runs counter to the Medium Term Debt Strategy of removing the debt of State Owned Enterprises, SOEs from the books of government, and also reiterated in the conditions of the IMF program.

Going forward, we argue that the ADB should go public with relish as this will put the bank in a competitive position and increase its operation efficiency. It will also prevent imminent unsustainability and free government books. Finally, the proposed IPO will give Ghanaians the opportunity to own the bank and improve the corporate governance of ADB. This is conclusively a better deal than allowing its books to deteriorate and as result trigger a murky sale like the case of Merchant Bank.  Nevertheless, ADB must come forward and explain clearly to Ghanaians the issue of the Old head office space and ensure that the strategic vision of the bank is maintained and fully implemented.

Emmanuel Buadi Mensah and Abdul Basit are research officers at IMANI. They both work with the Economics Department.

  • Oasis

    In my opinion, there are too many wholes and shrouded statistics in your article.

    1. You indicate non-performing loans as an amount without clarifying its relation to the total portfolio
    2. You site liquidity problems as reasons for a sale off
    3. The bank is running at a CAR of 11.6%, above the 10% benchmark of BoG…and yet, your analysis points to this as a major challenge for for which it should be sold?

    There are too many inconsistencies in your article…In one paragraph, the ‘Although’ word is used without bringing out the intended contrast but then you throw in non-performing loans; as if to push the value through to the reader.

    My take on your article
    Many banks in Ghana have liquidity problems. Going public is not a bad move. However, the import of your article seems to reek with loads of insinuating undertones . Do keep in mind that posterity will judge it.
    1. If a bank is performing above the stated CAR, do you still tag it as struggling?
    2. We do not know their non-performing loans ratio per your article. Hence, any argument on that is not informative and any conclusion is rather hastened.
    3. Issuing an IPO does not necessarily mean there should be retrenchment. Are you insinuating that ADB has been running below standards all these years. If so are you now knowing this?
    4. What exactly is making ADB under-perform? Your article does not answer that question. At best, its conjecture. No factual basis is provided. Rather, ample information has been given as to the viability of ADB.
    5. Is your final paragraph insinuating that the bank could have been run down for sale? If so, lets know your basis so we can follow your work.

    I agree with you though on 2 issues;
    1. The board and management of ADB through the appropriate channels can decide to go public. That in itself is welcome…but the said IPO should be purely local and Ghanaian owned to reflect the wisdom of going public in the first place.
    2. ADB has to answer to Ghanaians regarding the sale of its Head Office. If the allegations are true, then there are too many questions to be answered and the IPO can just as well wait.

  • fantosis

    I endorse the decision by adv to issue an IPO to raise needed capital. If I also read that this offer will be restricted to Ghanaians, I also endorse that. But there should also be a perpetual injunction against directors ganging up to offer shares to foreign banks. In our experience foreign ownership of banks has been exploited to grant cheaper credit to foreign owned industrial and services entities to enrich foreign countries and companies at the expense of local entities. “Transfer pricing” of sorts. Adv needs strengthening for the purposes of the development of Ghanaian owned businesses. Local directors on boards are so easily compromised into selling our interests to foreign owned business hawks.