Rural and Community Banks (RCBs) were established with untraded shares issued and purchased mostly by the people and businesses in the catchment areas within which they operate.
People residing in the communities were encouraged to own shares in these rural banks. The shares issued by these rural banks were not traded on the capital market, and each bank management set the price per share based on their evaluation of how much each share should cost.
This made some rural banks either overprice or underprice their shares. This, coupled with the difficulty in quickly selling off the shares when the holder needs funds immediately, made rural bank shares not too attractive to serious investors.
However, with expansion of the Ghanaian economy, banks – including rural banks – are facing increasing demand for more funds and credit facilities. The main sources of funds for rural banks are customer deposits and external credits, which are more expensive than raising funds from the sale of shares to the general public.
With the establishment of the capital market, most traditional banks are now sourcing funds from the general public through trading their shares in the open market. That is a cheaper source of funds than acquiring funds through traditional savings deposits and loans.
Rural banks by their sizes and capital are not qualified to have their shares traded on the main capital market, and are therefore disadvantaged in sourcing for cheaper funds available at the Ghanaian alternative bourse.
The government of Ghana, recognising the need of smaller businesses such as Rural and Community Banks for cheaper capital for expansion, encouraged the setting-up of the Ghana Alternative Capital Market.
The GAX offers a platform for smaller businesses which by their size do not qualify to list on the main Ghana stock exchange. The Ghana Alternative Capital Market structure therefore provides Rural and Community Banks the platform for a cheaper source of funds for their operations.
Recently, during the banking sector reforms, the Bank of Ghana directed all RCBs to increase their capital to a minimum of GH¢1million. That directive made the case for RCBs to consider listing their shares on the market – an imperative to raise cheaper funds to shore-up the capital and enable them to expand their loan portfolios and other investments.
There are many benefits that may accrue to RCBs should they go public. A few of such are discussed below:
Access to cheaper equity funds
When businesses require long-term funding to expand, they either source for bank credits or raise funds from the capital market by raising more shares.
Businesses listed on the bourse are able to raise cheaper funds from the public rather than through the banks or other more expensive credit lines. Such capital allows for expansion, growth, and a better chance to compete. RCBs need funds other than customer deposits to expand, and therefore going public would help to overcome the constraints imposed by loans or other expensive funding sources.
Enhanced Status
Going public would improve the visibility and credibility of Rural and Community Banks among financial institutions. The public image of RCBs would go up once they get listed publicly. They would get more recognition and attention from the investing public.
The RCBs themselves would begin to pay more attention to their compliance with Bank of Ghana regulations, ensuring transparency in operations and good corporate governance.
According to Investopedia, customers usually have a better perception of companies with a presence on the stock market, an advantage over privately-held companies. This is largely due to the regular audit and financial statement scrutiny that public companies have to undergo regularly.
Thus, RCBs stand a good chance of having enhanced status in the banking community of Ghana. Going public could also attract to the RCBs top-tier talents, thus improving their human capital capacity.
Reduced Risk
Traded shares enable new capital to be raised without the associated risks, restrictions, and high costs of debt associated with traditional cash deposits and commercial loans. The cost of equity is usually less than the cost of debt. Again, RCBs by their structuring would find it difficult to raise equity funds from venture capitalist and other investors, both corporate and private. Therefore, listing on the alternative stock capital brings the rural banks to the investing public and removes any risk that venture capitalists may associate with them.
More Liquidity
The RCBs can raise a lot of funds to boost their capital and reserves when listed on the capital market. The funds raised from the capital market also helps to lower the company’s debt to income ratio, and also provides more funds for better compensation packages, development of new products, and employment of better-qualified personnel. A more liquid RCB would also allow shareholders to realise the value of their investments earlier.
Shareholder Benefits
As shares are publicly traded, shares held by shareholders would become more easily able to turn into cash. Individuals would be more easily able to sell-off their shares on the stock market than is presently experienced. Again, when a bank is doing well it affects positively its share price – thus increasing the wealth of shareholders through share price appreciation in addition to any annual dividend they may receive.
Boost in employee-morale
By going public it would help increase the visibility of Rural and Community Banks, and improve public perception of what RCBs are. A good public perception of rural banks would also increase employee value and morale, as employees would feel proud to identify with them.
Furthermore, when the RCBs offer their staff shares or stock options at a discounted price it motivates them and increases productivity, as they now see themselves as part owners of the bank with real interest to increase productivity and increase their own shareholder wealth.
RCBs could use employee share option schemes to boost the interest of their employees to increase growth of the banks exponentially, reward their efforts, increase their loyalty and motivate them to work harder.
Easier to merge with other banks
As the RCBs’ shares are publicly traded, it becomes easier for them to merge or acquire other RCBs as the valuation of the RCB becomes market-driven. Valuation of the individual banks becomes easier to undertake.
To Proceed at being listed, the following must engage the attention of RCBs
Businesses, including banks, usually go public to raise capital for expansion. Such businesses are then faced with identifying the right investments in which to deploy the funds, make a profit and grow their shareholder wealth. They also have to deal with the challenges associated with the transition from privately-held shares to public ones.
Whatever benefits RCBs would accrue from going public, it must be pointed out there are a few challenges they have to surmount to be successful. Some of the major challenges of going public:
1) Cost
The transition from privately-held or untraded shares to publicly traded shares is not one without some cost. Investment bankers and accountants are required to revalue the existing shares to peg a fair price at the initial IPO. Often, when the revaluation would dilute the share of existing shareholders, they must be engaged for them to understand and accept that going public will ultimately be to their long-term benefit – and all these involve some cost.
2) Financial Reporting
Businesses that are listed on public bourses are required by law to publish their accounts every financial year. Any RCB that decides to go public will be required by law to publish every necessary detail of its financials and make public other data as may be required by regulators, including the stock exchange and Bank of Ghana. This would lead to more stringent scrutiny of the accounts and management being held to stricter accountability for all their operations.
Not only will board members and management be also held to more stringent standards, but periodic audits will be required to be conducted and findings published. Industry watchers such as investors, regulators, analysts, brokers, and bankers will subject audited accounts to stricter scrutiny than when they were being privately held. This will therefore require RCB management to expend more resources to publish these than they may have done if their shares were still untraded. The overall effect of such is that it will enable RCBs to be more alive to practicing a better corporate governance system.
5) Loss of Some Control over share pricing
As RCB shares are traded publicly their pricing will be subjected to the dictates of demand occasioned by investor appetite. The RCB management that had been hitherto setting the banks’ share price will now not be able to control it. The fate of the bank’s stocks will be determined by investors, and management will have to work extra hard to attract investor interest.
Conclusion
Before an RCB decides to list its shares on the alternative stock market, it must evaluate all the potential benefits and disadvantages which may be encountered and determine the best course that will enhance shareholder benefits.