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The retrospect of Ghana’s economy and its prospect: Franklin Cudjoe’s surgical views

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Ghana’s economic slump from the top 5 economies with the highest growth rate shocked many economic watchers across the globe. Ghana in 2011 historically achieved a record high GDP growth rate of 14%.

The country however failed to sustain that growth and by 2014, it had crashed to a record low (in about 25 years) of 4.2%, below the Sub-Saharan African average of 5%.

On the streets of Accra, the real impact of the economic nose dive had resulted in high cost of living, spiraled prices of goods and services as a result of the direct bearing on the weakening Cedi against the major trading currencies.

The Cedi cumulatively depreciated by nearly 15% to the international currencies by the third quarter of 2015 alone. The Finance Minister, Seth Terkper, in his 2016 budget statement told Parliament in November 2015 that the estimated growth rate for 2015 was 3.5% but it was expected to improve to 4.1% by the end of the year.

As if government’s struggles to deal with this weak economic fundamentals were not enough, the country’s energy crisis, popularly known as ‘Dumsor’ worsened. It literally crippled the country’s productivity, forced businesses to close down, while others with astronomical increase in cost of production had to dismiss workers.

In 2014 alone, the power crisis caused the country, a conservative figure of nearly GHc1 billion, according to the Institute of Statistical, Social and Economic Research (ISSER).

In April 2015, the Employers Association of Ghana announced that about 13,000 jobs had been lost in just four months into the year. As a result of all these, many would agree that the Ghanaian economy suffered an undeniable crisis in the year 2015.

In finding lasting solutions to this endemic cankerworm, Team Vaultz, called on the President and Founder of one of Africa’s foremost think tank group (IMANI), Mr. Franklin Cudjoe to assess the country’s economic condition and proffer practical solutions that can boost the economy coming into the year 2016 and beyond.

VERDICTS ON GHANA’S ECONOMY IN 2015

“The Ghanaian economy is expected to slow down to an estimated 3.9% growth rate in 2015 from 4.2% in 2014, owing to a severe energy crisis, unsustainable domestic and external debts burdens, and deteriorated macroeconomic and financial imbalances”, said the African Development Bank Group on Ghana Economic Outlook 2015.

It was in no surprise then to many economic pundits and analysts when the economy suffered such a setback in performance in the year 2015.

But the expectations of the populace were for the government to find solutions to curbing this situation when the warning signals were alarmed on the outlook for 2015 by all concerned actors such as the World Bank Group, African Development Bank Group etc.

Coming into the year 2015 with the challenges rolling from 2014, many believed government could have salvaged the situation based on his Better Ghana Agenda assurance. But the survey conducted by The Vaultz proved otherwise.

The year 2015 will forever be remembered by many Ghanaian as a result of its many negative impacts. Many businesses on a random survey attested to the economy’s slowdown.

“It was a complete shambles. Even if you use the government’s own parameters it set in terms of the single digit inflation, it failed. Growth rate of about 8% that the government wanted to achieve, it couldn’t achieve.”

Mr. Franklin Cudjoe lamented. In February 2015, the IMF announced the deal revealing that Ghana will receive US$940 million from the Fund to help turn the ailing economy around.

This and many more simply portrayed the economy was failing and it needed the requisite support. “That is why I said the economy was in shambles; otherwise we wouldn’t have gone to the IMF in the first place…

For anybody to suggest the economy did any better in 2015 obviously was not living in Ghana, I mean with all the energy problems we faced.”

DEPRECIATION OF THE GHANA CEDI

Government and the Bank of Ghana have struggled to curtail the recurring depreciation of the Cedi against the major international trading currencies.

In the second quarter of 2015, the Bank of Ghana (BoG) intervened on the foreign exchange market with a daily supply of $20 million to allow foreign investors to participate in the country’s short-term debt instruments.

This was in a bid to boost liquidity on the money market, after another nose dive by the Cedi. Ghana’s economy, which is heavily import dependent, is usually very exposed as a result of such activities.

Also the po licies – monetary and fiscal, that are supposed to guide the currency looks incoherent and hence affect its effect in the market space.

“Monetary policies and fiscal policies are supposed to go hand in hand. But we have a disjointed process where the fiscal policy is out of gear because the government borrows exceedingly and does not necessarily use it as expected and that results in such situations that lead to the depreciation of the currency.

The government is not just borrowing too much and crowding out the private sector, it is also because the government is the dominant player in the economy.

It does a lot of the investment and it is expected that such investments would yield the right dividends.”

In solving this perennial issue on depreciation of the currency, IMANI boss suggested that Bank of Ghana should be strengthened to demand effective answers from the Central government as well as publish the minutes of the committee’s meetings to inure transparency in the overall activities of the committee.

He further advised that the foreign minister instead of requesting ‘freebies such as school buildings’ should rather consider technology transfer or take advantage of the EPA’s which are tax free and all these shall help to reduce the exposure of the local currency.

“To some extent, Bank of Ghana may even decide not to lend money to the government. One of the things it should do is to make sure that government’s borrowing does not exceed 10% of the previous year’s revenues – which previously has been flouted several times.

I think, we need to now give a lot of power to the central bank to be autonomous,” the IMANI boss advocated.

INFRASTRUCTURE, POWER & ENERGY

 

The World Bank had previously suggested that $10 billion dollars could solve the infrastructure gap of the country.

Mr. Cudjoe believes that if successive governments had committed to putting aside $1 billion yearly to narrow the infrastructure deficit, it would be too simplistic to believe that would automatically deal with the infrastructure gap in 10 years.

“It sounds simplistic but if we were in a society in which pragmatism, honesty played a particular role, then the issue about simplicity will not probably matter.

Given the fact that we have a situation in this country where we are not so clear in terms of our budgeting processes and contracting arrangements, it is very difficult for anyone to understand why putting a billion dollars a year aside may actually solve the problem.

As a sequel to this, the sources of revenue for these kinds of projects have got to vary. It has to be more of, probably, a Public Private Partnerships (PPPs) approach i.e. 70%- 80% private and 20% public.”

The Ghana Shared Development Growth Agenda clearly states how some of these gaps should be narrowed by the government.

However, it seems to be a contest between realistically what the party in government would do as against what they believe would bring in a more sustainable growth.

“It is largely dependent on the priorities of government indeed. If the priority of the government is that they would like to support people who they believe are vulnerable and excluded and so would set up all manner of funds to secure the livelihoods of these people, then of course automatically, it will affect some of the money that should have gone towards such projects.

It will be based purely on the objectives of the government. To solve that issue it will require pragmatic approach from the government on what it wants to achieve during its tenure of office. ” “At the end of the day, politicians do what they have to do in order to stay in office,” Mr. Cudjoe added.

He however believes that the media and civil society organizations should force governments to make the hard choices of a more sustainable development for the country vis-à-vis the options of making political decisions that will keep them in political power.

In the area of power and the privatization of the Electricity Company of Ghana (ECG) to solve Ghana’s worsening energy crisis, Mr. Cudjoe said previous and the current governments failed to look into the future to add to the energy stock, hence the current situation.

“Sometimes when these discussions come up and someone assumes the problem can be fixed in a twinkle, I find it difficult to understand where that source of power will come from.

This is a challenge that has accumulated over the period and resolving it all of a sudden looks quite impossible.

It requires a carefully calculated methodology that will tackle the root-cause upwards else it shall compound for a future explosion which shall be very difficult to tackle.”

According to Mr. Cudjoe, the power sector is very “disjointed” and does not work in a synchronized manner with stakeholders such as the Volta River Authority (VRA), Electricity Company of Ghana (ECG) and this makes it difficult to achieve any significant results in the permanent expiration of the power crisis.

‘DUMSOR’ IS A PLANNED ACTIVITY IF…

 

On Saturday 28th November 2015, the first of emergency power barges ordered by the Ghana government from Turkey, docked at the Tema Port, to supply about 250 megawatts of power to the national electricity grid.

This was after a few postponements of the deadline dates within the year. However, Ghanaians got more interested when a Norwegian newspaper VG, in a publication alleged that the Ghana government has been duped by a wanted criminal who was a signatory to the deal that produced the power barge.

According to the publication, Ghana signed off on $510 million deal for the facility, when it could have paid just about half, but the Power Ministry denied and argued that the cost of the facility was in indeed value for money.

However, in a total disagreement, the IMANI boss said; “… I’m not saying government is not doing anything, but it was essentially the wrong arrangement.

Nobody seems to have seen the Karpower deal… I’m beginning to think that any time we have embarked on such haphazard, speedy but very dodgy arrangements to fix a problem, it is actually in somebody’s interest to first of all let us be in such a situation… I want to believe that this ‘Dumsor’ of a thing was actually an organized plot to make us be in this poverty of power for a while and then a saint comes around to say, I’ve managed to fix it because I’ve brought in barges.”

He argued that the solution to the power crisis must be systematic and urged parliamentarians and the executive body to desist from passing similar bills under certificates of urgency for “humongous sums” under the pretext of solving the problem which they know cannot be solved within a short time.

IS ECG REALLY A BIG FACTOR?

The inefficiencies of the Electricity Company of Ghana were thought to be the reason for the massive load shedding, especially when about 25% of the total power produced for the country was either stolen or wasted.

As things stand now, majority of the problem really lies with generation of power to meet the demands of the country. However, Franklin Cudjoe believes that nonetheless, ECG is also very key factor to the current energy problems.

His organization, IMANI, is on record to have supported the privatization of the company to improve efficiency. “… Some people have suggested that the government also owes ECG, well I could blame successive governments for owing and not paying– something that has to change.

But ECG itself has received some significant amount of investment from the state and unfortunately don’t want to show their books. I know, on authority, that out of the over GHc3 billion ECG owes, government debt is about GHc800 million, this is as of about 5 months ago.

If we did a serious analysis of that debt, it will be cancelled out; if we quantify how much government seems to have pumped into ECG. We need to see the books and rest the argument about government’s indebtedness to ECG.”

Privatization of government’s parastatals have most times proven futile in the past or burdened the populace in other countries and that is the major panic in the minds of Ghanaian citizenries on privatizing ECG.

OIL SLUMP AND IMPACT ON GHANA

The whole world is in shock about the continuous slump in oil prices and its impact on global economies. The world’s biggest exporter of crude oil, Saudi Arabia cut down on fuel subsidies by about 50%, after it suffered a $98 billion dollar budget deficit in 2015 as result of the fall in crude oil prices.

Ghana is not a huge producer of crude oil and as a net importer of the commodity; the reduction is rather expected to be a welcoming news, according to some industry watchers.

However, government still depends heavily on oil revenues and when the oil prices dropped significantly by the middle of 2015, Ghana’s Finance Minister, Seth Terkper, returned to Parliament to review the oil revenue expectations for the year.

Based on the new revenue assumptions, total petroleum receipts for 2015 was estimated at GH¢1.5 billion (1.1 percent of GDP), compared with the 2015 Budget estimate of GH¢4.2 billion (3.1 percent of GDP).

The difference of GH¢2.7 billion is 64.4 percent lower than the 2015 Budget target. “We are not necessarily a promising oil producing country in a way that we should hinge all our fortunes on the oil sector because these were things most people had warned about long ago.

The barrels of oil to be produced was problematic coupled with a sector that was quite unpredictable and so its impacts on the budget were bound to happen.

So to even hinge your financial plan on the price of oil itself without necessarily being a major producer of oil was in itself a bit ‘foolhardy’ because it creates a false sense of hope and that false sense of hope causes spending anyhow.

This was very evident in the way we spent part of the petroleum revenues of which part went into the controversial bus branding – which was not a priority,” Mr. Cudjoe argued.According to him, it is not “smart” for Ghana to continuously hinge its development outcomes on the price of oil considering its production rate and the current challenges engulfing the industry globally.

PROSPECTS OF GHANA’S ECONOMY IN 2016

2016 is an election year in Ghana and historically, successive governments have exhibited gross indiscipline in terms of spending- in some cases, stretching the budget deficits to unimaginable levels.

This usually takes a toll on the economy in later years. The government of Ghana, being hopeful of having the deficit situation of the country under control, has argued that it has reduced spending and that will be evident in the year 2016 spending.

Mr. Cudjoe in assessing the statement supposes the argument is rather baseless considering the elections that shall be holding in the later part of the year.

GHANA’S BUSINESS CLIMATE

Every businessman in Ghana will testify that doing business in Ghana can be likened to fetching water with a basket; extremely difficult. This is simply because of the inflexible requirements that besiege the business environment.

Starting a business in Ghana as a foreign investor requires a capital of $250, 000 as well as other stiffened conditions which scares many investors.

All these and many more contribute to Ghana’s ranking 102 in terms of “starting a Business” of the Ease of Doing Business Index of the World Bank. IMANI boss, Mr. Cudjoe, said his team discovered that countries like Burundi, Sierra Leone and other “small” countries even do better than Ghana in terms of starting a business.

Ghana’s ranking in the World Bank’s Ease of Doing Business Index has worsened from 112 in 2015 to 114 in 2016 which makes the country’s business climate unattractive to foreign investors.

He cautioned government to be concerned about the drop because according to him, investors across the globe take critical look at such rankings to make business decisions on investments in such countries.

“Once International Investors watch these indices, they tend to advise their potential clients about the business environment of such countries on the possibilities of recouping their investments. Once they notice such rankings, they tend to focus on more reliable and dependable markets. For example, America has decided to increase its interest or policy rate, and that may be an attractive avenue for such an investor since he is sure of the right set of investments will be done. So all these indices send signals to the global market.”

Mr. Cudjoe believes there must be a proper competition policy in Ghana to allow businesses to thrive. This follows previous attempts by the Ghana government to restrict foreigners from engaging in retail trade in the various markets.

“The whole idea of competition is good and must be encourage. We need serious competition policy in this country otherwise we will keep on slumping on the doing business report. And it is not just when you automate your restriction process, it is also probably about access to financing and all these business laws and how to arbitrate when these issue come up”.

In the midst of the difficult economic conditions in the country, it is suggested that some businesses could consider mergers or cuts in employment.

To make Ghana’s business environment more attractive, government should decentralize its operations to have hands on approach to encourage small business owners and not to focus only on the prime businesses listed in the Ghana Club 100.

GOVERNMENT’S CROWDINGOUT EFFECT ON BUSINESSES

Government’s borrowing spree in the last two years domestically has had an adverse effect on Ghanaian businesses and crowded out many.

Business watchers and commentators have complained about government’s uncontrolled borrowing that is ‘destroying’ local businesses leading to massive unemployment. This situation has put some of these businesses in a very tight corner.

Accessing finances both locally and internationally has not been an easy condition to fulfil. “It’s difficult, but everything points to policy.

But not all businesses can position themselves to take advantage of international money”. Attracting foreign financial aid to boost private local businesses in the country requires proper positioning of such businesses and the kind of trade the firm engages that can guarantee the source of repayment.

This, therefore, makes international financing for local businesses a rock to be axed. To make accessing finance for local entrepreneurs very easy, there must be a certain direction from the government so that companies that have signed up to protocols under for instance the Economic Partnership Agreement (EPA) can get some level of support from the local banks.

“That is the only way the banks can grant loans to such companies considering government’s involvement in such businesses,” he noted.

All these, he suggested, are as a result of the policies government puts in place.

AFRICA AND ITS GROWTH OPPORTUNITIES

2015 was quite a difficult year globally and Africa had its own share of the pie. The Greek bankruptcy and bailout drama with its attendant problems for the European Union cannot be over-emphasized.

The Syrian crisis and subsequent migration to Europe and its related effects on Europe, the slump in oil prices and the teething effects on some global economies among others made 2015 quite a challenging year.

In the midst of all these Africa’s growth was optimistic despite its uncertainties. Africa is projected to be the next growth destination and investment hub of the global market but characterized with many uncertainties.

For Africa to take hold of this opportunity to lead the global market, it needs to reposition itself to become attractive enough to attract these investments.

However, Mr. Cudjoe believes that leadership on the continent has to change to facilitate Africa’s efforts to take advantage of its growth opportunities. “The narrative has to change.

Some of the bad governance that we see on the continent has to be changed. Bad leaders must be exited from power through a proper democratic election.

Some of the issues of corruption on the continent must be fought against and also security issues must be combated to abate the threat it poses on the continent. For instance, in some parts of the continent especially in Nigeria – obviously the Boko Haram effect is also not helping.

With bad governance, it affects even the policies that are made. If policies are not clear, it will be difficult for investors to come in and invest. So I think positioning ourselves, we need to be smarter in the way we run our public bureaucracies.”

THE GLOBAL PERSPECTIVE

The global economy is expected to rebound in 2016 says economic experts. The year 2015 had many challenges that confronted the global economy and as a result stunted its growth.

The big question, however, is whether things will change significantly in 2016, giving the efforts stakeholders have put in place to change things for the better.

In Franklin Cudjoe’s view, the global economic growth will largely be driven by America considering trifling challenges that confront Europe and Asia.

“I’m not sure the world will be safer; it will still be a bit turbulent,” he predicts.

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Business Interview

Recapitalization– The panacea to the woes of Ghana’s insurance market? – Mr. Justice Yaw Ofori -Commissioner of Insurance, Ghana

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In a bid to ensure a robust Ghanaian insurance industry, the National Insurance Commission, NIC, has initiated moves towards recapitalization. The initiative, yet to be officially announced, involves a planned increase in the Minimum Capital Requirement (MCR) for insurance and re-insurance companies by over three (3) fold. The industry regulator has engaged stakeholders to ensure smooth implementation of the exercise which has seen financial analysts draw a parallel with that witnessed in the banking industry last year.

This has prompted questions- some comparative analysis with the banking one as well as questions about its economic significance. The Insurance Commissioner, Justice Yaw Ofori, in an interview with the Vaultz Magazine, gave a detailed explanation of the exercise.

 

State of the Ghanaian insurance sector

Ghana’s insurance industry has in recent years witnessed a significant growth especially in terms of the number of new entrants recorded. The industry however continues to record low insurance penetration which still hovers around 3%.

The Insurance Commissioner believes this among other issues highlight the need for the industry recapitalization.

I would say Ghana’s insurance industry is strong despite the challenges with respect to recapitalization. The market is still virgin and there are a lot of areas which are untapped and that is why we see foreign companies coming into Ghana to do business. The oil sector is booming and so is agriculture as well as inclusive insurance and all we need to do is to make sure companies are well capitalized so far as they want to operate in Ghana” Mr. Ofori stated.

According to the NIC’s annual report, Return on Equity (ROE) for insurance companies has consistently been less than the corresponding year’s prevailing treasury-bill rate with the overall picture worsening year on year especially for life insurance companies. Mr. Ofori attributes this to the tendency for investors to choose high-yielding financial instruments over insurance which is a relatively long-term investment option.

MR. JUSTICE YAW OFORI -Commissioner of Insurance

“I think it’s all because people get more returns when they invest their monies in T-Bills and other non-banking financial instruments.  For instance, there was a time people were promised 25% to 35% on their investment which was more attractive so they didn’t see why they should invest in other assets like insurance. So some insurance companies were consequently recording underwriting losses” he explained.

The insurance industry has been contributing significantly to Ghana’s economic growth– albeit constantly at less than 2% of GDP through the provision of long-term investment finance to the economy whilst influencing production and consumption, internal and international trade among others.

“Insurance is a vital pillar of every economy. In Ghana for instance, it contributes about GH¢ 5billion in terms of business generated annually. About 12, 500 people earn a living directly from the industry and many more indirectly such as lawyers, doctors, carpenters, masons, and mechanics. Without insurance you can’t get bank loans because they need some kind of guarantee that they can recoup their money in the event of default”.

 

Insurance recapitalization– the facts and figures

Following its engagement with stakeholders including brokers and shareholders alike, the NIC has proposed an increase in the Minimum Capital Requirement (MCR) for life and non-life insurance companies from the current GH¢ 15million (approximately US$ 3million) to GH¢ 50million approximately US$ 10million).

Re-insurance companies will also see their MCR reviewed upwards from GH¢ 40million (approximately US$ 8million) to GH¢ 125million (approximately US$ 25 million) while that of brokers will be increased from GH¢ 300,000 (approximately US$ 60,000) to GH¢ 500,000 (approximately US$ 100,000).

“We came about these figures by taking into consideration how much a company would need to break even and stay profitable. We realized it will take 4 to 6 years for a newly established insurance company to break even with GH¢ 50 to GH¢ 60 million capital” the Commissioner noted.

The last time the market underwent recapitalisation was in 2015 and this was pegged against the dollar with an initial plan of an annual increment which after a considered review, was implemented differently.

“On an annual basis, the minimum capital was supposed to be adjusted to reflect inflation but it has not been done for about 4 or 5 years. But even if we had those increments, the current minimum capital would have been around GH¢ 25million which is about half what we are proposing now because Ghana’s economy is not like it was about 10-15 years ago; it’s bigger now” he stated.

In 2017, about three (3) companies reportedly had challenges meeting the then minimum capital requirement of GH¢ 15million. Mr. Ofori confirmed this as a normal industry development.

“It’s always been so in every insurance industry. There are times that companies will have challenges meeting the minimum capital but that does not mean that it’s time to shut them down. We, as regulators, try as much as possible to encourage the shareholders to recapitalize because shutting down an insurance company is not an easy thing and it is the last thing a regulator wants to go through,” he disclosed.

 

The ultimate goal

The Insurance Commissioner reiterated that the purpose of the recapitalisation was to ultimately grow the industry to the benefit of the economy by protecting the interest of the policy holder.

“Following our stakeholder engagements, we’ve done our concept paper which has been reviewed by the board. We’ve explained to stakeholders, the rationale behind the calculation and of course not everybody is going to like it but at the end of the day, we want the best for the industry. The Commission is not interested in closing any entity but rather building a strong market that takes care of the interest of the policy holder,” Mr. Ofori stated.

“Our economy has also grown. The GH¢ 15million was implemented some years ago. Now we have the oil boom and the country is losing so much revenue, we are actually sending money out because our companies are not financially strong to take much of the risks,” he added.

“Over 90% of our risks have to be insured on the international market and these are some of the reasons our cedi is always affected by the dollar. There is more demand for the dollar than the cedi and this actually arises because we are sending these risks out which demands paying insurance premium in dollars. So, what we are trying to do is, we want everyone to increase their intake. The more absorption they can take, the less flight of insurance premium,” the Commissioner asserted.

He also defended the proposed 300% increase in the capital requirement as crucial in stimulating the desired growth.

 

Correlation with the banking crisis and recapitalisation

The NIC has already indicated the banking crisis and recapitalisation somewhat delayed its planned exercise in the insurance sector. This, according to the Commission is because banks were already looking for capital from the same market the insurance companies will be considering to recapitalize.

A recapitalisation directive in the insurance sector would have thus led to competition between banks and insurers in raising capital– making it a lot more difficult for both entities.

With the bank recapitalisation now over, analysts believe the way has now been paved for a similar exercise in the insurance sector. The Insurance Commissioner confirmed this assertion citing the banking crisis as a major factor affecting insurance recapitalisation efforts in 2017 which almost led to the collapse of about three (3) companies.

 “When we assess an insurance company, we don’t look at only the minimum capital but the totality of the risk that it carries. So GH¢ 15million is the minimum but we have companies worth over GH¢ 200million. So if you are worth over GH¢ 200million and you have risk of let’s say GH¢ 600million and you cannot pay your claims on time, it is a challenge despite meeting the minimum requirement. And most of the challenges some of our companies are facing are linked to the banking crisis because they have monies with these banks and they cannot access these monies,” he added.

The Insurance Commissioner also dismissed assertions that the insurance recapitalisation is a mere replication of that witnessed in the banking sector and states that the two exercises are mutually exclusive.

 

“No it’s not a replication for the fun of it. Everything is interconnected. Even some individuals have lost their monies because some of these banks have been consolidated. When such entities go under, it affects everybody. When insurance companies make their monies, these monies are kept in the bank for investment in the economy. Insurance companies go for those monies when there are claims or a need for it. Now we have an insurance company going to the bank and the bank has no money. Although on paper they have monies, once it’s inaccessible, it cannot be considered– affecting their Capital Adequacy Ratio,” he revealed.

This, according to the Commissioner, only makes a stronger case for the recapitalisation.

Meanwhile, banking and insurance operations are distinctly different with diverse inherent risks. Some analysts thus insist recapitalization may not necessarily be the way forward for addressing the woes of the insurance industry. Mr. Ofori however asserts, insurance companies even need more capital than banks.

 

Risk-Based Capital requirement

The NIC’s current regulatory approach is geared towards the global trend of Risk-Based Supervision framework and the Commission is still pursuing this approach by way of a Risk-Based Capital (RBC) requirement.

 

“The minimum capital requirement is also part of the risk-based framework because, that means, so much assets to absorb more risks. Risk-based means we’re looking at the totality of your portfolio to see the inherent risks and how we can manage them. It is a complex thing. Even though we asking for minimum capital, risk-based provisions will also come from it. When you suffer from malaria you don’t take only chloroquine. You add multivitamins and some pain killers to make you survive,” he illustrated.

 

Recapitalisation has always been used as a regulatory tool to check the financial soundness of the industry.  There is, however, an emerging school of thought that this is not as crucial as the regulator focusing on ensuring effective management of the capital of the companies by ensuring they maintain capital levels commensurate with their respective risks.

 

Mr. Ofori says all these complement each other in strengthening an industry.

“Even new companies entering the market are not allowed to start up with the GH¢ 15million which was the minimum but at least GH¢ 25million. We couldn’t ask for the GH¢ 50million and even with that, they are investing more.”

 

Local versus International standards

Internationally, capital is not necessarily used as the basis for assessing the strength of an insurance company as opposed to the company’s net worth– an assertion Mr. Ofori confirmed.

“In advanced countries, their capital requirement could be like that of Ghana or even less.      That doesn’t mean that the companies that applied for the license to operate insurance don’t have the capital backing. These companies know that insurance business is risky. So if the minimum capital required is US$ 3million, that company comes into the business with US$ 500million by way of net-worth.

When we say minimum like the GH¢ 50million, that money is not going to sit down doing nothing. It could be your businesses, assets and other investments. Insurance monies have to be working. So if you have an insurance company that owns apartments, it’s part of their total worth. When we assess your worth, we look at both your liquid cash and assets because an insurance company can have a chain of hotels which means it can take as much risks and when there is a problem, it can fall on them. The Aon’s, Allianz and CGI’s have big investments all over the world and when they have challenges, they know where to draw money from. So when we say minimum capital requirement, it is not only liquid cash but also investments in T-Bills and so on,” he further explained.

The MCR in the Pan-European Solvency RBC regime is only € 3.2million (approximately GH¢ 19million) for life and reinsurance companies and € 2.3million (approximately GH¢ 14million) for non-life insurance companies. Some analysts have in this light predicted Ghana may only end up being one of the over-capitalised industries in the world by end of the recapitalisation.

But Mr. Ofori is challenging such views insisting that the local insurance industry which is still a burgeoning one cannot be placed on a level pegging with such developed regimes when it comes to capital requirement.

The dollar equivalent of GH¢ 50million is about $ 10million or less depending on the exchange rate and other factors. Don’t forget the financial strength of those companies operating in those markets. One company is even worth more than all companies put together in Ghana. When we make reference to other places, Ghana is different. When you come to Ghana, the way people respond to work is different. Minimum capital has nothing to do with international best practices,” he emphasized.

Ghana is not the country with the highest minimum capital requirement in the world. There are African countries such as Kenya whose was higher than Ghana. We’ve done a lot of research. Kenya is about US$ 8million or so and in Ghana the GH¢ 50million which was supposed to be $10 million will probably come low depending on exchange rate and other things. Insurance is international and transnational and each company must be worth its weight in gold on the international risk market otherwise businesses coming from outside Ghana will not consider Ghanaians,” he elaborated.

 

Expected Outcomes

The Insurance Commissioner is confident the industry will respond positively to the exercise – citing special provisions to facilitate the process.

“If we should introduce the minimum capital, almost 50% of companies will meet it per our analysis. Looking at their portfolio, some of them qualify already, some with a little push will be there and a few may have challenges. But we will encourage them; that’s why we have transitional provisions.”

According to Mr. Ofori, the recapitalization is ultimately expected to reposition the insurance industry and the economy as whole on a stronger footing by addressing issues like low insurance penetration and undercutting.

“If you have a lot of companies on the market that are not financially strong, you will definitely have problems like undercutting because some of them are ready to sell for cheap. They take low premiums and when there is a loss, they are unable to pay. Strong companies have bad days but their account is so big and they are able to pay claims. So I think we’ll have a much disciplined market because minimum capital is not going to be easy. Recapitalisation will help eliminate undercutting because the more you undercut, the more it affects your minimum capital. So you’re going to do prudent underwriting”

In terms of the bigger picture by way of economic impact, he stated “I believe all in all, the industry can also retain much of their underwriting income and probably create more jobs. The more money we can create, more employment can be created, less monies leaving the country, our cedi might be more stable and the economic benefits are numerous”.

He also revealed a new bill is currently under consideration to complement the recapitalisation in addressing the longstanding challenge of low insurance penetration in Ghana.

“We’re working on a bill to make sure we can have more compulsory insurances. We are trying to make sure that these compulsory insurances will help boost the interest in insurance. We’re also increasing market conduct supervision to enable companies pay their claims on time. We’re providing a lot of insurance education to the industry and the general public. This year for example the Commission out of its own budget, through the Ghana Insurance College will train 10,000 Ghanaian youth as insurance agents nationwide for free so that there will be a pool of agents from which the industry can always fall on to recruit. We’re also doing much with respect to the compulsory fire insurance; creating awareness that it is compulsory to have these kinds of insurances. So we’re doing all we can.”

Even though the recapitalisation in the banking industry led to consolidation of several banks and lay-offs, Mr. Ofori believes the final narrative in the insurance sector may not necessarily be the same– allaying such concerns of concomitant job losses as a result of companies failing to meet the capital requirement.

With the banking recapitalisation, some banks were affected. We don’t want to have those challenges. We don’t want the companies to go under. Much as we want the minimum capital to go up, we want to do it in such a way that we move along with everybody,” he concluded.

 

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