The call for the increase of capital requirement started in 2008 when the Central Bank of The Gambia (CBG) issued a directive increasing the minimum capital of banks in two stages from D60 million to D150 million by end-December 2010 and to D200 million by end-December 2012.
By the time of the first deadline, December 2010, eight of the fourteen banks, then, were able to increase their capital requirement on time. Five of the six remaining banks did so at the eleventh hour when the Central Bank, through the Ministry of Finance, threatened to revoke the banking licence of any bank that would default in meeting the requirement.
However, it should be noted that increasing the minimum capital by more than 100%, that is from D60 million to D150 million, was such a mammoth task for the banks some of whom were barely making any breakthrough in their business turnover.
Since the Finance Minister publicly declared in December 2010 that six banks were yet to meet the capital requirement, there was big confusion among the country’s banking population who were in doubt as to whether “the bank I am banking with has met the requirement or is among those unable to meet it and therefore at risk of closure”.
The issue cast fear in the hearts and minds of many people in the country, including parliamentarians, who demanded to know the defaulting banks so that “we can take precautionary measures when dealing with them”.
The matter was only laid to rest when the Minister of Finance said there was no cause for alarm as the banks were rigorously been monitored by the Central Bank of The Gambia.
At last, all the banks, apart from Oceanic Bank (Gambia) Limited, met the requirement for December 2010. Oceanic Bank didn’t meet the requirement because of the fact that its parent company, Oceanic Bank International Plc in Nigeria, decided to divest from all international subsidiaries, hence its decision not to increase the capital of Oceanic Bank (Gambia) leading to the closure of the Gambia subsidiary. It should be noted that most of these banks met the capital requirement not from their own sources but rather with the support of their parent companies in Nigeria or elsewhere.
In the course of 2012, the banks are expected to start beefing up their capital at the Central Bank to gradually build it up from D150 million, which supposed to be the current level, to D200 million, the target by end-December 2012, in order not to default at the end of the year.
This year’s increment should not be difficult for any bank on a sound footing, financially, as it is just an addition of D50 million – from D150 to D200 million.
However, since in 2010, some of the banks have claimed they have increased their capital to D200 million two years before the deadline, while some say they have surpassed the 2010 amount but are yet to reach the 2012 level, and the rest say they are ready to increase come 2012.
It should also be noted that those banks that increased their capital at the dying minute in 2010 did so with the support of their shareholders to whom they virtually paid no dividend because they were not making any significant profit.
While pleading for the support of their shareholders, a managing director of a particular bank in 2010 told shareholders of his bank that “although the bank has operated at a loss for so long, without payment of dividends to shareholders, your patience is highly appreciated.”
A higher minimum capital requirement, the Central Bank says, serves several purposes. It would ensure that banks are better able to withstand periods of economic and financial stress and therefore support economic growth. It would also help in maintaining market confidence in the solvency of the banking system; imposing market discipline and providing a large cushion to protect taxpayers from the risk of being called to bail out failing banks.
The capital increase would further enhance the safety and soundness of the Gambian banking system which, in turn, promotes economic growth.
As in 2010, this year the CBG has resolved not to grant request for forbearance if a bank fails to meet the requirement. And to mitigate systemic risk that may arise from the revocation of a banking licence, the CBG shall take the following actions: invoke section 45 of the Banking Act 2009 and take over the bank; thereafter the CBG may invoke Sections 48 and 51 of the Banking Act 2009 and place the institution in conservatorship to be sold, merged or restructured; and apply to the High Court for compulsory liquidation under Section 52 of the Banking Act as a last resort.
Banking industry performance
The performance of the banking industry has been appraised by the 2012 national budget, which says that Gross loans and advances to the major sectors of the economy, accounting for 30.0 per cent of total assets, increased by 6.5 per cent to D5.4 billion in 2011.
Deposit liabilities continued to increase and totaled D11.9 billion, or an increase of 10.2 per cent compared to 2010. The ratio of non-performing loans to gross loans declined to 13.0 per cent in September, an improvement from the 16.2 per cent recorded a year ago.
The Net Foreign Assets (NFA) of the banking system, according to 2012 budget, increased significantly to D4.1 billion or 16.9 per cent mainly on account of the significant increase in the NFA of deposit money banks.
The net foreign assets of deposit money banks increased to D1.3 billion from D0.6 billion, mirroring the significant decline in foreign liabilities and increase in their balances held with other banks abroad.
In contrast, the net foreign assets of the Central Bank of The Bank declined by 5.1 per cent to D2.7 billion due mainly to growth in liabilities and payment of external obligations.
The Net Domestic Assets (NDA) are the sum of foreign assets held by in this case, the bank and, less their foreign liabilities of the banking system rose to D10.2 billion or 9.5 per cent mainly due to the increase in domestic credit, which rose to D11.5 billion or by 22.3 per cent compared to the 35.3 per cent growth recorded in September 2010.
The budget also says credit extended to the public sector increased significantly to D773.1 million or by 17.0 per cent relative to a contraction of 24.9 per cent in the preceding year. Credit to private sector, which constitutes 40.2 per cent of total credit, increased by 5.1 per cent to D4.6 billion in the twelve months to end-September 2011.
Furthermore, net claims on government increased to D6.1 billion or by 41.0 per cent due to increased borrowing from the domestic economy to finance government operations.