Connect with us

Business Interview

AGI@60: A Persistent Private Sector Voice

Published

on

The AGI was established in 1958. Despite the country’s very young and unstable democracy, business leaders saw the need to have a stronger voice to represent their interest irrespective of who is in government.

As the adage goes: “Government has no business in running business”. This mean, businesses must focus on running business, creating jobs, paying taxes and sustaining economic growth. But to sustain business growth, businesses need a voice that cannot be suppressed.

Led by the iconic Dr Esther Ocloo, founder of Nkulenu Industries, the Association of Ghana Industries (AGI) was formed with only 10 local manufacturers with the initial name of Ghana Manufacturers Association. With time other manufacturers, including the multinationals, saw the essence of having a stronger production voice and within a couple of years, members soared.

In 1984, as though the membership was not enough, the association’s constitution was amended which opened to all registered companies engaged in manufacturing or the provision of services to the manufacturing sector and through associate memberships, other sectors including not-for-profit organisations have become members as well.

Such associate members include the Liquor Manufacturers’ Association of Ghana, Ghana Printers & Paper Converters’ Association, Furniture & Wood Products’ Association of Ghana, Ghana Timber Millers’ Organization, Advertising Association of Ghana, and others.

Today, the AGI now has over 1,500 members across over 20 sectors including advertising, agri-business, automotive & transportation services, beverages, business promotion & consultancy services, chemicals, construction, electricals & electronics, energy, exports, financial services, oil & gas, and food.

Others are hospitalities & tourism, information & communication technology, metals, building & construction products, pharmaceuticals & herbals, printing, stationery & packaging, rubber & plastics, toiletries & cosmetics, environmental and sanitation, garments, textiles and leather and wood processing.

With such a broad membership, the association has also increased its role in society beyond just the advocacy and advisory for policy and is now engaged in industrial sub-contracting and partnership, information gathering, analysis and dissemination, business plan preparation and development and trade promotion for members. Trade promotion, especially, has seen members, who hitherto would have struggled to enter particular markets are now operating on a global scale.

With the objective to contribute substantially to the growth and development of industries in Ghana and to create a supportive and competitive business climate, which will make Ghanaian companies internationally competitive, the AGI’s mission is to carry out proactive support services to the industrial sector with the view to contributing substantially to the growth and development of industry in Ghana.

Geographically, the AGI is physically represented all across the country with seven locations where members located in such areas report to the regional office and have their own sub groupings.

In an in-depth interview with Seth Twum-Akwaboah, Chief Executive Officer (CEO) of the AGI, issues such as relationship with government, industrial policy, local currency impact on businesses, power for operations, cost of credit, taxation, budget, trade, the AGI’s own Business Barometer and the future of the Association were extensively covered.

 

Relationship with Gov’t

Similar to any kind of relationship, Mr. Twum-Akwaboah, notes that there have been good and bad times. “The relationship with government has been good, but as every relationship it has challenges,” he says.

During the military regimes, he notes that, the AGI faced some of its most testing periods. While the AGI was pushing for and continues to push for a private sector led development, government was looking for state-led developments.

“At some point there was the tendency for the leadership of the association to be branded as anti-government. Most of the leaders of AGI were jailed or harassed by the military. Meanwhile all the AGI leaders wanted and continue to want is for the promotion of business at every point in time irrespective of who is leading the government,” he says.

Today, the AGI has become stronger for it and when it speaks through its regular statements, researches and the iconic Business Barometer, everyone listens. Since the commencement of the fourth republic, government has also recognised the significant role of the AGI in bringing in development to the country.

Significant roles played by the AGI now include making inputs in the national budget; by law and convention, the AGI is represented on several boards of public institutions, quasi government institutions and unions.

“If you want to influence policy, you do not wait till the end of year to make a statement. You need representation to influence policy at such levels. These are means of engaging. Due to our regional representatives, we engage policymakers such as regional ministers, district assemblies. There are some policies, at the local level, that have effect on businesses and industry,” he adds.

Despite the seeming strong power the AGI wields, Mr. Twum-Akwaboah, adds that not everything asked or requested of government is granted. Sometimes, he says, government blindsides the AGI with certain policies that could harm businesses especially in the areas of taxes, levies and laws.

“There are several government policies that have taken us by surprise and then we try to lobby for such policies to be reshaped to help businesses. We have such a regular working relationship with the government because it is needed to keep businesses growing,” he adds.

Budget Inputs

Touching on the AGI’s input on the annual and mid-year budget, Mr. Twum-Akwaboah, notes that the association presents inputs and afterwards holds a hearing with the finance ministry where individual AGI members speak about their views of the economy and what needs to be changed.

On the 2019 budget, the AGI presented a couple of inputs including the scrapping of the straight 5percent GETFund and NHIL on goods and services. “We thought its implementation was not the best and harmful to businesses because this is a cost happening across all levels of the value chain and has the potential to increase the cost of goods and services by as much as 20percent if the distribution chain is up to four,” he notes.

For big manufacturers with three distribution levels, he explains, the manufacturer will pass on the 5percent to the key distributor, who will now add another 5percent and move it to the wholesaler, who adds another 5percent to the retailer, who then adds 5percent to the consumer’s product.

“That is the cascading effect and will make the price of goods and services of local manufacturers very expensive,” he says, noting that for the importers, they just pay a flat rate of 3percent.

“For an agenda that seeks to promote local industries, this tax is inimical to local businesses. We engaged the minister and the tax policy unit with other stakeholders and we expected the 2019 budget to take it into consideration but it was not captured. We will continue to engage the minister,” he says.

But overall, the CEO of the AGI lauded the 2019 budget, describing it as “positive” but stressed that what matters is implementation. “A lot of the intentions are good including the making of US$1billion for industrial initiative, a stimulus package for struggling industries and industrial zones are good,” he says.

 

Industrial Policy Stutters

Government, in 2011, launched a comprehensive industrial policy to place industry at the centre of development.

The policy, which was started during President John Kufuor’s regime and completed when President Atta-Mills was in power, is a set of specific policy instruments and measures to be applied to increase access of the country’s manufacturing sector to competitive factors of production to enhance productivity, efficiency and competitiveness.

Key development objectives of the policy include expansion of productive employment in the manufacturing sector, promotion of agro-based industrial development and ensure spatial distribution of industries to achieve reduction in poverty and income inequalities. The implementation of the policy was expected to be done through an Industrial Sector Support Programme, which are time-bound interventions to speed up the rate of industrialization over a period of five-years.

The AGI, as the lead industry advocate, played a critical role in shaping the policy but since the launch of the policy nothing has come out of it and despite President Nana Akufo-Addo’s industrial agenda, led by the One District One Factory (1D1F) programme, the policy is still on the shelves.

When asked what is the current state of the policy, Mr. Twum-Akwaboah bluntly stated: “I do not think we have an industrial policy.” He notes that there was one, which was a good one, but implementation was poor and that led to the collapse of the policy.

To him, Ghana needs to incorporate the relevant aspects of the current government’s industrial agenda into the old policy and draw up a revised industrial policy and follow through. “Having a good policy and a plan is better than working on adhoc basis,” he says.

Does 1D1F fits into this policy?

He explains that what needs to be done for 1D1F to succeed is to allow the systems to work including using the 20percent of the District Assembly Common Fund, which is meant for district industrialization by law, to be used for its intended purpose.

“It was envisaged that, at the district level, you need industries to employ people and curtail rural-urban migration. That is why 20percent of the assembly’s common fund is dedicated to industrialization,” he says.

1D1F fits into the industrial policy because it envisaged the spreading of industries across the country and include locational tax incentives to push businesses into the other parts of the country and every location with specific raw materials. “That is an indication that we are encouraging industries,” he says.

But along the line, he notes, the AGI and businesses realized that such incentives were not enough due to the lack of markets, technology and infrastructure for businesses to thrive in such remote parts of the country.

1D1F requires patience

Asked about whether new members have joined the AGI as a result of 1D1F, Mr. Twum Akwaboah, advised that Ghanaians must be patient because 1D1F businesses will not just spring up overnight, especially when it is private-sector led.

Establishing an industry doesn’t happen overnight, especially sustainable private-sector led businesses. These businesses must be commercially viable, technically feasible and financially possible to get funding. To go through the process of acquiring technology, market assessment, right skills and have a proper corporate governance system does not happen overnight. The expectation that once you start, industries will spring overnight will not happen,” he says.

Secondly, he advised that one needs a very good funding arrangement to get the factories running, meanwhile, right from the beginning there was no funding for the programme.

To him, even though Finance Minister, Ken Ofori-Atta has made a pledge to mobilize US$1billion from various funding sources for small, medium and large scale enterprises to accelerate the industrial transformation agenda including the 1D1F programme, government should make a certain percentage for equity funding.

The AGI, he notes, tried to arrange funding to support the 1D1F, but he expects businesses interested in the venture to have some counterpart funding to attract investors. “We will love that the pace of the establishment of the 1D1F will be hastened so that we can all tell what is happening,” he adds.

 

The Business Barometer

One of the products of the AGI that any government is weary about is its Business Barometer. The Barometer is the true measure of business confidence in Ghana, spanning a period of over 11 years. It has consistently captured the views of 500 CEOs sampled from various sub-sectors of the Ghanaian economy.

Administered quarterly and largely through face-face interviews, the barometer touches several areas of economic activity across the 10 regions to ensure completeness of coverage. Assertions on the state of the business climate for the next quarter permit a ±5percent margin of error.

Often the Business Confidence index lies above or below the 100 base index with findings consistent with developments in the economy.

Starting as a Business Climate Survey, the survey was supported by the GIZ, a German development agency, as an annual report but when surveys were published which included key challenges faced by industry and businesses that were biting and needed quick interventions, the annual nature of it rendered it dud.

“We therefore converted it to a more frequent survey and allowed government and other stakeholders to quickly react to the needs of business,” he says, adding that it has helped a great deal in checking the policies being implemented by government in the short term.

 

The Thorny Issue of Power for Businesses

It is common knowledge that the AGI, for the best part of three decades, has been at the forefront of the campaign to not just reduce the cost of electricity or power for businesses, especially manufacturers to operate, but to overhaul the power sector to allow industries pay fairer prices which will allow them to compete especially against imports.

Earlier last year, government significantly reduced tariffs on electricity to as much as 25percent for big businesses but in the view of the AGI, the structure of the tariff regime is the problem not necessarily how much the reduction is.

Due to its squabbles with government over the cost of power, many believe the AGI is looking to run aground the power sector but Mr. Twum Akwaboah notes that that is not the case because power sector players such as the Volta River Authority (VRA), Electricity Company of Ghana (ECG) and Ghana Grid Company (GRIDCo) are all members of the association.

“How will we wish that our own members’ businesses collapse? We actually advocate for them as well. Power is a necessary input for production. What we have been asking for is simple: if you want Ghanaian industries to grow and be productive, they must have efficient power that can be given at competitive price,” he says.

The business principle of power

Apart from industry subsidizing residential users in Ghana, virtually the only country that still does this in the world, AGI’s main concern is the business principle of power being pursued by government which is killing industries.

“An instance is a company in Tema, with one metre, that pays GH¢3million in electricity bills per month. This business does not need a step down transformer because of the high volume of consumption and also does not need a lot of cables and poles to access power. To earn the same amount of GH¢3million from residential users, you need a whole community with several step down transformers, kilometres of cables and poles, hundreds of metres, and more manpower, all of which come at a cost.

That means it costs the service provider more to earn GH¢3million from residential communities than in industry for the same quantity or voltage of power. Also, the bigger the spread, the more leakages or waste occur and you are at a higher risk of illegal connections and other vices. Yet, the business, where the cost of service is cheaper, is paying more than residence where the cost of service is higher,” he says.

Ghana’s cost of producing power is too high

Another challenge the AGI has, when it comes to power, is the cost per kilowatt hour. In highly industrialised economies such as China and India, the cost per kilowatt hour hovers between 3 to 6cents but in the case of Ghana, it is near 20cents per kilowatt hour.

To Mr. Twum-Akwaboah, the Ghanaian industry cannot compete globally if it pays nearly four times the price in China and India, which are major industrial hubs. “It is important that we find ways and means to drive down the cost of electricity. We need to work hard, government and industry, because everybody is suffering when the price of electricity is high,” he adds.

‘Dumsor’

Touching briefly on the effect of the three-year power rationing, popularly called ‘dumsor’, he described its impact on industry as “devastating”.

To avert another power rationing and sustainably provide cheaper power for homes and businesses, he explains that what is needed is planning. “There is an eight-year cycle where the hydro source becomes inadequate and so you plan to get other sources in. unfortunately we did not plan in advance and that is what happened. In trying to solve it too, we signed countless Independent Power Purchasing (IPP) agreements that are not good for us.”

With the population growing, which is leading to sophisticated demands, the need for more energy is growing and so with efficient planning and regular investment in the sector, supply can stay ahead of demand so that Ghana will no longer experience the energy crisis we experienced between 2013 and 2015.

Renewables is the way forward

The AGI believes that with the advancement of technology in renewables, businesses and homes as well as government should aggressively consider the renewable option. “A few years ago it was very expensive to look into renewables but today the cost per production is getting cheaper and so government’s move in that direction is highly encouraged.”

With environmental protection in the face of climate change on the minds of the AGI, what the association wants to see is a flexible regulatory environment that will encourage a lot of private sector players into the space. “If you have a system that encourages the initial investment, then we can immensely benefit from renewables.”

 

Cost of credit, AGI’s bank and EXIM

With key macroeconomic indicators such as inflation, policy rate and Treasury Bill rate falling, AGI believes this should quickly translate into lower lending rates so that businesses can comfortably borrow and expand. “We welcome the consistent fall and we hope it continues to fall. Much as we want lending rates to fall quickly, we appreciate the gradual drops.”

The AGI, about four years ago, was pushing for the establishment of its own bank but not a word has been heard for the past year and a half. To Mr. Twum-Akwaboah, the establishment of the bank looked very good at the time it was being suggested but the economic climate and regulation makes it slightly challenging to run the bank in a manner that will be different from others.

“We wanted to create a scheme that will solve a major problem by providing medium to long term capital for industry. A lot of the banks today are not providing that, not even NIB and ADB, the development banks. With a universal banking license, you will have no choice but go by certain standards and that will make you no different from the others,” he says.

The AGI has repurposed the institution and has set up a fund, registered with the Securities and Exchange Commission (SEC) that can draw capital from government, development finance institutions and banks, and then AGI members can access this fund at much lower rates on medium to long term basis.

The ultimate aim, he explains, is to grow the fund to a level that AGI can secure a specialized license from the Bank of Ghana to operate as a specialized development bank.

Touching on the impact of recently established EXIM Bank, he notes that the AGI is very happy about its establishment but cautioned the business community to have patience for the institution since it is still early days yet.

“EXIM needs bigger capital and just the money coming from Import Levy is not enough. The whole idea of establishing an EXIM Bank is good because it can leverage its balance sheet to draw in capital from other institutions including other EXIM banks across the globe and create a bigger portfolio of funds and those moves do not happen in a day. We are monitoring and we can only be cautiously optimistic.”

 

Taxes and China’s US$2bn package

As businesses, paying taxes is unavoidable as taxes go a long way to develop economies and so with that the AGI wholeheartedly backs the government in pushing everyone to pay taxes. But AGI’s challenge is the implementation of some tax policies, especially the tax stamp, the frequent changing of the tax regime and the introduction of some new taxes.

The AGI, according to its CEO, has complained to government about some businesses that avoid taxes through under-invoicing and under-valuation and that led to the creation of a task force to monitor movements at the ports.

On the controversial tax stamp policy, which was welcomed by the AGI, the views of local manufacturers were not taken into account. The stamps, in the current format, will slow down high speed lines, especially for big beverage manufacturers such as Accra Breweries Ltd, Kasapreko, Cocacola, and Guinness Ghana Breweries Ltd.

But at the end, government and businesses have reached a compromise and now importers and local manufacturers are affixing the stamps and the Ghana Revenue Authority (GRA) is monitoring the situation aggressively. The textiles sector is the latest to start affixing the stamps, which is highly welcomed by players.

On the ECOWAS Common External Tariff, the AGI is still working on a comprehensive study to identify benefits and challenges but Mr. Twum-Akwaboah believes that being part of a common market is good for local businesses since the ECOWAS region is bigger than Ghana. “We just have to monitor how it is positively or negatively affecting our businesses.”

China’s US$2bn

The AGI truly secured a US$2billion credit facility with the China National Building Materials Company (CNBM) and so far several businesses have benefited. The whole idea, the AGI notes, is to use this to support the 1D1F.

The arrangement is such that businesses do not get direct financing but request for equipment when setting up factories and then repayment can be done till up to 10 years. The only challenges were guarantees from banks or government backing it with a sovereign guarantee but government is not prepared to do that.

So far, EXIM Bank and a few other banks have guaranteed projects for about 10 companies and construction is underway for some of the factories.

 

Future of AGI

For 60 years, AGI has become a stronger institution but the future is bigger and broader than one can imagine. Starting as a manufacturers association, it has moved beyond to encapsulate businesses. “As long as we continue to promote industry then AGI has a future but if we kill industry then there is no future for AGI. It is as simple as that.”

To Mr. Twum-Akwaboah, the current government has an eye for industry and a look at the 2019 budget leans heavily towards industry and initiatives such as 1D1F are industry focused and then there is the Ministry of Trade’s 10-point agenda. “As long as government itself has industry at heart, then AGI can only be smiling into the future and our core interest is to see members’ businesses grow.”

Therefore, the AGI will not relent in its efforts to engage with government to formulate business-friendly policies to see businesses grow. So far, the trend, he notes, is that global actions such as the ECOWAS Common Tariff and the Continental Free Trade Agreement are signs that the future looks promising for Ghana’s businesses.

“I am very positive that the future looks good but we need to advocate for the right policies and we need to have good entrepreneurs that are forward-thinking, committed and dedicated to doing businesses in a transparent manner,” he says.

 

Advice to members

To the members of AGI, over 1,500 of them including small, medium and large businesses, the association’s CEO believes that internally, implementing best corporate governance systems, good management style, recruiting the right talent, making sure efficiency is key and developing financial modules to survive during times of crisis, and prudent resource management will see businesses grow.

As the business grows, Mr. Twum-Akwaboah notes that there is the need for professional engagement. He further stresses “business leaders should not shy away from bringing in such help to develop and sustain their businesses. To go beyond generations, succession planning is key”.

For external factors such as inflation, interest rates, policies from government are not in members’ domain and so they should not be bothered about such actions. “Leave that to the association to handle.”

Continue Reading
Advertisement
Click to comment

Business Interview

Ghana’s banking crisis: The underlying-causes, ripple-effects and way-out – Dr. Richmond Akwasi Atuahene – Banking consultant

Published

on

A holistic overview with Banking Consultant, Dr. Richmond Akwasi Atuahene 

Ghana’s banking sector had been growing at a fast pace especially in the last 10 years which saw 10 more banks launch operations in the country.

In the last year or two however, the sector has been experiencing some financial turmoil which has seen a number of banks merged and others acquired. It all came on the heels of the Bank of Ghana’s announcement of an increase of the minimum capital requirement for banks from GH¢120 million to GH¢400 million in 2017.

Ghana’s banking sector is under the spotlight as we explore how the bank recapitalization triggered the crisis, the impact so far and the way out. Banking Consultant with almost 30 years’ experience in Senior Management Position and Former Academic Dean of the National Banking College, Dr. Richmond Akwasi Atuahene helps with some insights.

GHANA’S BANKING SECTOR IN RETROSPECT

The evolution of Ghana’s banking sector started with the Bank of the Gold Coast set up by the then Government in 1953. The Bank was later split into two: the Bank of Ghana, operating as a bank of issue, to be developed into a complete central bank; and the Ghana Commercial Bank, to be developed into the largest commercial bank with a monopoly on the accounts of public corporations.

More banks were established following the constitution of the new Government, elected by popular vote in 1957. The banks (all state-owned) incorporated between the period of 1957 and 1965 include: the Ghana Investment Bank as an Investment Banking Institution; the Agricultural Development Bank for the development of Agriculture; the Merchant Bank for merchant banking; and the Social Security Bank to encourage savings.

In 1983, the Government, with the assistance and guidance of the International Monetary Fund (IMF), introduced the Economic Recovery Program (ERP). This signaled the end of Socialism in Ghana and the beginning of a new dawn of privatization which saw among other initiatives licensing of more Ghanaian-owned banks namely Meridien BIAO, Trust Bank, CAL Merchant Bank, Allied and Metropolitan and ECOBANK.

By the late 1980’s the government introduced the financial sector reforms dubbed the Financial Sector Structural Adjustment Program (FINSAP) which largely transformed the banking sector by way of expansion in size and diversity. According to a research study in 2000 by the Overseas Development Institute of the University of Ghana, there were however some uneasiness in the sector about the Bank of Ghana’s tardiness in reacting to specific breaches of the law by some financial institutions.

Dr. Atuahene however believes the banking sector has performed creditably since the reforms.

“We’ve had two different financial reforms. The first one between 1988 and 1990 dubbed Financial Sector Structural Adjustment Program (FINSAP) was sponsored by the World Bank and saw millions of dollars used to restructure the distressed banks in the 1980s. The second was the Financial Sector Strategic Plan (FINSSIP) between 2010 and 2012 which was a home-grown initiative,” he noted.

As of the year 2000, competition among the banks was deepened with the institutions virtually chasing customers with loans. This marked the beginning of a new dawn which saw many more banks launch their operations in the country with significant expansion in branch network as well as adoption of more technology in operations which led to the introduction of Automated Teller Machines (ATMs), telephone banking, mobile banking and Internet banking.

According to Dr. Atuahene “the earlier part of the history was good but the challenges have been quite insurmountable since 2009 when for instance, the rate at which customers default in loan repayment started to rise and this has accumulated and affected the sector till 2018”.

TURBULENT TIMES

Some analysts have always cited the hitherto 35 banks in Ghana as too high for a population of just 27 million especially compared with Nigeria which has a far higher population of almost 200 million yet only 27 banks. This, they believed was only a recipe for disaster and  since the implementation of recapitalization exercise by the Bank of Ghana (BoG) in 2017, Ghana’s banking sector has been hit with a crisis which has seen a number of banks go under and subsequently acquired by others or merged.

This was when it became evident a number of banks (predominantly indigenous ones) could not meet the new capital obligation by the end of 2018 as required by the BoG. This compelled the Central Bank to take action against banks that showed such signs after a rigorous financial audit and stress tests.

UT bank and Capital Bank became the first casualties after the BoG revoked their licenses and subsequently approved for GCB Bank to take over all assets and liabilities of both banks in August 2017 as well as issue a GH¢2 billion bond to clear their outstanding debts. Exactly a year later followed consolidation of five (5) other distressed banks: Beige, Sovereign, Construction, UniBank and Royal Bank into a new entity called the Consolidated Bank of Ghana Limited due to insolvency challenges.

A leaked investigative report showed that officials of Capital Bank misappropriated some GH¢610 million liquidity support given by the central bank. Dr. Atuahene explains, the Bank of Ghana has itself to blame for the development.

“Emergency Liquidity Support is given to support the daily operations of banks. During cheque clearing, the Bank of Ghana as the Lender of Last Resort (LOLR) comes in to provide liquidity support to banks with negative balance. The IMF clearly states that the bank should be illiquid and not insolvent to attract such support. Being illiquid and insolvent are two completely different things. But in this case, the bank was simply insolvent yet was given the support.

Even the 9% of capital the banks keep with Bank of Ghana for clearing was about negative 10%. So Bank of Ghana could not let them go but give them the support till the time they could raise a lot of deposit and return the 610 million cedis,” he noted.

According to him, even after this in 2016, the IMF report charged BoG to have a credit policy for the banks involving collateralization and also put monitoring mechanisms of not more than 3 months in place. “The Central Bank however gave the money without monitoring and that’s how come the officials of the bank had a field day in what they used the money for,” he lamented.

The experienced banker however rejected assertions that the financial support offered by the Central Bank is tantamount to misuse of public funds since these firms are private companies.

“We are not the first country. Nigeria did same. The British Government had to bail The Royal Bank of Scotland out of financial crisis with millions of dollars. If you allow the banks to go down, the whole economy is gone. So unlike a private Limited liability like my business which when it goes down nothing happens, banks are different because of peoples’ deposits? Government had to step in to ensure safety of peoples’ deposit. For the figure, I agree with them that GH¢610 million is too much, unless they had a parochial interest,” he noted.

UniBank had also received from the Central bank, a total liquidity support of GH¢3.1 billion as at June 2018 but still inadequate to turn around the fortunes of the bank due to its capital deficit of GH¢7.4 billion compared to the regulatory minimum of GH¢400 million.  This, according to the Bank of Ghana followed an extension of about GH¢5.3 billion, constituting 75 percent of total assets of the bank to shareholders and related parties which was neither granted through the normal credit delivery process nor reported as part of the bank’s loan portfolio.

In the case of Royal Bank, an on-site examination conducted by the Bank of Ghana revealed the bank suffered a capital deficiency of GH¢567.78 million and a net-worth of negative GH¢498.63 million as at 31st May, 2018.

Dr. Atuahene says this is not the first time the sector has encountered such a crisis except that this is of a bigger magnitude. “The first sector reform was 4.4% of GDP with a total amount of $170 million injected by the World Bank as against the current involving billions of Ghana cedis,” he revealed.

A QUESTION OF MISMANAGEMENT?

The high levels of Non-Performing Loans (NPLs) in the sector has been cited as the major factor accounting for the crisis. The Banking Consultant also believes sheer managerial incompetence by way of poor credit-risk administration is largely to blame for the development.

“Sometimes they do not even understand the business model they operate. An example is when a founding executive of one of the collapsed banks walked up to me in 2014 and said they imported oil and the person has defaulted in payment of about $14 million. Obviously, they supported the person without understanding the funding and collateralization of oil. The fact is, you can import oil and store in tank farms in Tema and until the person pays you, you don’t release. But in this case they released the commodity to the person who sold it and bolted with the money,” Dr. Atuahene disclosed.

He adds, the crisis is also partly attributed to macroeconomic instability, poor corporate governance and regulatory lapses. Explaining the impact of macroeconomic instability, he said “sometime in 2009, the exchange rate of the cedi to a dollar was 1.4 but today, its approaching 5 – meaning that the currency has depreciated by over 200% – not to talk of inflation which has doubled between 2008 and 2018.  When inflation goes up, even appraising credit becomes difficult because the cash flow becomes unpredictable. So other exogenous factors also come to play,” he noted.

THE ROLE OF CORPORATE GOVERNANCE

According to the Banking Consultant, poor corporate-governance is the major factor that led to the crisis.   “If you want me to rank it; the macro instability is 30%, the regulatory lapses is 30%, and corporate governance is 40%,” he outlined.

He also challenged assertions by the Board Chairman of one of the collapsed banks that he acted in a non-executive position and thus not involved in the day-to-day management and operations of the bank.

“The Company Act, 1963 (Act 179) clearly states the onerous task of managing companies including banks rests squarely on the Board of Directors and here, the law did not stipulate whether executive or non-executive. Furthermore, best Corporate Governance practices around the world make it clear a non-executive doesn’t participate in day-to-day business but is responsible for whatever decisions an executive takes. So such persons cannot exonerate themselves as the law and the corporate governance practices would not let you go scot-free,” he explained.

The Former Academic Dean of the National Banking College believes all Directors of the failed-banks found culpable of insider credit, connected lending and dissipation of funds among others should be made to face the full rigors of the law per corporate governance practices.

“You can be fined on either civil and/or criminal grounds. However, we shouldn’t forget that in the banking law, any breach is not civil but criminal. So if its criminality let him face the bullets and if it’s civil let us put a civil mechanism in place. For instance, If there is need for restitution of something lost because of incompetence, the civil procedure could be used – failure which the law must act,” he said.

WARNING SIGNALS

A 2013 Lincoln University study on Bank Efficiency and Competition revealed that well-capitalized and/or larger banks in Ghana are technically efficient and competitive but have no influence on cost efficiency and competition.

Dr. Atuahene also insists the crisis was not unexpected given the rather negative trends witnessed in the sector in the last few years.

“Those of us who have been researching saw it as early as 2008 and even when I described it as a crisis, many called me an alarmist. But it is a proven fact that any industry whose Non-Performing Loans level consistently exceeds 10% and/or its emergency liquidity support exceeds 2% of the country’s GDP is in crisis. So today, those who called me alarmist say I’ve been vindicated,” he said.

According to him, managers of the economy failed to even take a cue from the periodic alerts by the IMF over the past years.

“Every year the IMF gave us a comprehensive report on the financial stability system and another whole 25 pages about banking and other sectors. Who was actually monitoring to ensure its full implementation,” he asked.

REGULATORY INTERVENTION

Many industry players have lauded the Bank of Ghana for the swift response to the crisis by way of the several remedial measures so far implemented.

“I commend them for the bold steps because if I heard the former Finance Minister right, he said he would have bailed them out with GH¢20 billion which is about 50% of the CAPEX, the Capital Expenditure of the nation. So if somebody has done it with GH¢8 billion, I want to commend them.               Plus also resisting the pressure to back down on the recapitalization to the extent that some even went to the presidency for them to be given 3-5-years dispensation in meeting the requirement,” Dr. Atuahane noted.

He added that the social cost of unemployment could have been worse but for the Central Bank’s interventions and pre-emptive approach.

He nonetheless agrees with views that, much as the Bank of Ghana deserves praise, it can’t extricate itself from the crisis and that it could be somewhat cited for dereliction of duty.

“The only worry I have is that we should have cut our losses earlier. We have what we call regulatory forbearances which tend to delay such crucial actions. Why did we have to wait until 2018 when the impact is that astronomical? If you delay an action by not taking the necessary measures quickly, it spreads rapidly,” he stated.

The Bank of Ghana has admitted its weak supervision and regulation coupled with poor banking practices significantly undermined stability of the banking sector. Dr. Atuahene is making a strong case for some BoG officials (both current and past) to be made to face the law just like the Directors of the defunct banks.

“Every one of them. That is why I’m calling for an independent commission to look into this case instead of the BoG self-evaluation.  A commission that would be given the power to invite people for interrogations and prosecution if necessary. We will continue to advocate and soon we would be mentioning names. We have the facts. People cannot take fat bonuses like that and runaway. Let them come and face the law,” he said.

Citing the full independence of the Central Bank by law, the Banking Consultant however dismissed suggestions some of the decisions by the Bank of Ghana are politically-motivated given that some of the collapsed banks are owned by sympathizers of the opposition party.

LEARNING FROM EXPERIENCE

Dr. Atuahene says Ghana has regretfully failed to learn from past mistakes as far as such financial crisis is concerned.

“We’re a country that does not believe in history and learn from history. But once you forget your past, you cannot move forward and Ghana as a nation is like that. We always talk about these things happening and in a very short time we forget. The financial crisis that happened in the UK changed the country’s entire financial system. Today they have moved away from the FSA, Financial Service Authority to a new regime,” he revealed.

He also explains that even though the bank recapitalization exercise exposed all these weaknesses in the system, it is not the panacea for the sector’s woes and that Ghana should have taken a cue from countries with similar experiences.

“Nigeria is our big brother. In the 1980s Nigeria did the same FINSAP which took it to the universal banking regime but when they realized it’s not helping them they reverted to their old regime and now they are fine. They did the restructuring as we are doing today and should have learnt some lessons,” he referred.

According to him, the BoG’s approach of same capital requirement for all the banks may end up being counterproductive to the bigger agenda of sanitizing the banking system. Despite admitting it’s already late, he says a risk-based approach in which the capital levels of banks would vary based on their respective risk exposures would have been the best option especially under the current circumstances.

“They have already gone too far. But if they had actually understood the concept from the beginning and looked at empirical evidence from other jurisdictions, they might have possibly gone the risk-based way. But now we can’t go back at all. We have only about 3 months to go. If you say you’re going that way now, you’ll have to retool and retrain because now you’ll be dealing with banks with different target markets like Commercial banks, Merchant banks etc. which I don’t think they are prepared to do,” he said.

GOING FORWARD

Dr. Atuahene says the acquisition of UT and Capital Banks by GCB Bank as well as the consolidation of the five (5) banks have both so far gone fairly well despite the expected challenges with such processes.

He is nonetheless urging management of GCB Bank, to be extra mindful and strategic in credit-administration and debt-recovery going forward in order not to compound their woes with Non-Performing Assets.  For Consolidated bank, the Banking Consultant is impressing on management the need to consistently reassure the staff of their job-security to ensure a successful integration of the five (5) different banks. 

Aside from approving and supervising the merger and acquisition processes of the failed banks, the Bank of Ghana has rolled out a road map towards cleaning the “mess” created by the failed institutions and also implementing reforms to sanitize the entire banking system.

Prominent among them are investigations into the issues, asset declaration by shareholders and ex-directors of the affected banks and a two (2) year cooling-off period for former Bank of Ghana employees as consultants and acceptance of board directorships in any BoG regulated institution.

Dr. Atuahene has hailed the ongoing reforms but insists they are not holistic enough to sanitize the financial sector as a whole. “Banking constitutes about 75% of the broader financial sector and so how about the remaining 25%? Even with banking, there should be more,” he noted.

He believes the current development is only a clarion call for the regulator to strengthen its licensing regime with clearer and stricter regulations.

“They have started doing proper field tests which is good. I even objected to the appointment of an individual who supervised the collapse of two banks as Chairman of another bank. This is because the rules from Bank of Ghana, the proper field guidelines, say that if anyone has ever been associated with a collapsed bank as a director he or she will not assume similar position but there we are, the man was being appointed as a board member.

Most of the problems emanated from the rather arbitrary way our banks were licensed because if I’m the majority shareholder in a bank, in the board representation I’ll also have the majority. But the BoG should be able to tell the majority shareholder that the person you’re bringing to the board is not qualified but they didn’t do that. So you can find the man as a Board Chairman and his son, the CEO. When you do that it’s a recipe for connected and related insider lending which has also contributed to the crisis,” he complained.

He added “the cooling-off issue is an area I have submitted a petition to the Governor on. In my petition, I emphasized that in no jurisdiction can someone serve at the Central Bank and proceed to serve on a board as a cooling-off package. Some of them leave the Central Bank with vital information and also come to influence their former subordinates in situations they have an interest in. The truth is, there is undue influence once they get in.

That is why I am so worried. You cannot leave that institution and just in two years assume a position on a board. In any jurisdiction, it takes about 5 to 7 years and so I want Ghana to do same else I will go to court and contest it. There’s nothing like cooling off period in Nigeria, likewise South Africa there’s nothing like cooling off period,” he stressed. 

POST-CRISIS EXPECTATIONS

Dr. Atuahene expects the number of banks operating in the post-crisis period to hover around 30 – comprising 17 foreign-owned and 13 Ghanaian-owned and admits the number remains too high for an economy like Ghana.

“For instance, South Africa with a population of 55 million has just about 15 banks, Nigeria runs into a population of about 200 million and it has 27 banks. How on earth can Ghana with just about 27 million people have 30 banks and also even in crisis,” he noted.

He suggests some of the foreign-owned banks should acquire locally-owned banks that are unable to meet the capital requirement. This he says is a pragmatic way to further reduce the number of banks operating in the country even though it would mean an economic sector as crucial as banking would be controlled by foreign entities at the expense of the much-desired indigenous ones.

“Once we insist the economy needs local banks, then we will not be able to address the situation. As we speak, none of the foreign banks including the Nigerian banks have failed. The reason for the failure of these local banks is basically the culture of aggrandizement of business owners and executives.”

The Banking Consultant says the crisis also highlights the need for a cap to be placed on licensing.

“That’s long overdue as the law can always be changed based on empirical evidence. Currently, that part of the law is going to be amended again to address identified shortcomings.”

He concluded by highlighting the need for enforcement of provisions in the laws – if the country is to effectively sanitize the banking system as expected.

“One of our failures is not that we have bad laws but the lack of enforcement to the letter. The Banking Act is good enough. Law enforcers and regulatory institutions must only strictly enforce its provisions with political will,” he concluded.

 

Continue Reading
Advertisement
Advertisement

Trending