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Restoring confidence and building a resilient banking system in Ghana through … – A post banking-crisis analysis with Banking Consultant, Dr Richmond Atuahene

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The financial system remains critical for the socio-economic development of any nation. Banks in particular play a primary role in the intermediation of savings and investment as well as the servicing the economic agents with an efficient payment system. A good corporate governance framework for the banking industry is thus deemed critical for any financial system to effectively play this economic role.

The Basel Committee for Banking Supervision defines Corporate Governance from a banking perspective as the manner in which banking business and the affairs of an individual banks are governed by their Board of Directors and senior management for the benefits of both stakeholders and shareholders.

Ghana’s banking crisis witnessed in the last two years was largely blamed on the weak corporate governance structures and failure to enforce provisions in the relevant laws. 

As part of initiatives to restore confidence and build a resilient banking system, the Bank of Ghana in 2018 issued a new directive that seeks to compel banks among other financial sector players to be more responsible in their corporate governance practices.

Banking and Corporate Governance Consultant, Dr Richmond Atuahene in an interview with the Vaultz Magazine sheds light on the directive, the crucial need for it and how best it could be implemented to yield the desired results in Ghana’s banking industry.

The directive in perspective
Ghana’s banking crisis was characterised by a few banks showing financial distress as a result of challenges with solvency, liquidity and/or Non-Performing Loans. Such banks invariably could hardly raise adequate capital to maintain their businesses much less provide a cushion against any unforeseen problems. This led to a total bail out of seven (7) indigenous banks by the central bank – as a climax of the banking crisis.

Dr Atuahene believes poor corporate governance and risk management practices have been the major common underlying factor.

“Banks reportedly had one or two main shareholders exercising absolute authority and control in the financial and operational management of their institutions. Some directors also apparently lacked the requisite knowledge and experience to govern these banks and in many cases failed to appreciate their responsibilities under the law.

Some failed banks were also said to have used depositors’ funds to finance businesses of their shareholders and affiliates through loans and other facilities with little or no interest earned on such facilities. Many of such facilities were not paid back, and depositors’ funds were therefore at risk”

In a bid to address these challenges in the long term and thereby forestall a recurrence of the banking crisis, the Bank of Ghana in December 2018 released the revised corporate governance directive for Banks, Savings and Loans Companies, Finance Houses and Financial Holding Companies.

The revised corporate governance directive also captured in the Banks and Specialised Deposit-taking Institutions (BSDIs) Act 930 (2016) is meant to restore and promote investors’ confidence in the banking sector following the banking crisis. This is to be achieved by compelling all these Regulated Financial Institutions to adopt sound corporate governance principles and best practices to promote the interest of depositors and other stakeholders.

Underpinning legal requirements

There are three (3) main legal requirements considered key among the provisions in the revised directive towards achieving the ultimate objective. These include appointment and disqualification of directors, key management personnel and other employees; disclosure of interests by Directors and Key Management Personnel and the power of Bank of Ghana to intervene in the appointment of directors and other Key Management Personnel.

According to Dr Atuahene, section 58 of the BSDIs Act 930 (2016) prohibits a person from being appointed, elected or accepting an appointment or election as a Director, CEO or other Key Management Personnel under any of the following circumstances:

“If he or she is adjudged to be unsound mind or detained as a person with mental disorder under the Mental Health Act. Also, if the person is declared as insolvent, or has entered into any agreement with another person for payment of that person’s debt and has suspended payment of debt.

Again if he or she is the Director, CEO, and other Key Management Personnel associated with the management of an institution which is being wound out, has been wound up by Court of Competent jurisdiction on the account of bankruptcy or offence committed under an enactment. A person is also no Director or Key Management Personnel without prior written approval from the Bank of Ghana before appointment or election. And finally any person that has defaulted in the payment of financial exposure to any BSDIs is also not eligible” he outlined.

In respect of disclosures of interest by directors and key management personnel, under section 59 of the same Act also requires that a person to declare to the Board and Bank of Ghana their professional interest or the office that person holds as Manager, Director, Trustee or by any other designation before assuming as a Director or Key Management Personnel of the Regulated Financial Institutions.

According to the Consultant, the investment or business interest of that person in an institution as a Significant Shareholder, Director, Partner, Proprietor, Guarantor is to prevent a conflict of interest with duties or interests of that person as a Director or Key Management Personnel of Regulated Financial Institution. He adds, a Director or Key Management Personnel of Regulated Financial Institutions is also required by the Act to declare their interest to the Board and Bank of Ghana any material changes in their business interest or holding of an office.

“This includes any Director or Key Management Personnel of Regulated Financial Institutions who has an interest in a Proposed Credit Facility to be a person by the BSDIs or a transaction that is proposed to be entered into with any other person to declare the nature and the extent of that interest to the Board whether directly or indirectly and shall not be part of in these deliberations and the decision of the Board with respect to that Credit request” he explained.

He added that Bank of Ghana’s power to intervene in the appointment of directors and other Key Management Personnel in regulated financial institutions is also drawn from this same Act.

“Section 60 of the BSDIs Act requires that all Banks and Specialized Deposit Taking Institutions seek prior written approval from Bank of Ghana before appointing Directors, CEOs and all other Key Management Personnel including DMD, Board Secretary, Chief Operating Officer, Chief Finance Officer, Chief Risk Officer, Head of Compliance, Head of Internal Control, Chief Internal Auditor, Chief Legal Officer and Head of Anti-Money Laundering” he noted.

The “fit and proper” test

The Bank of Ghana issued the fit and proper persons directive in July 2018 as part of the corporate governance directive.

This new directive set out new framework for the Regulated Financial Institutions or Banks and Specialized Deposit Taking Institutions to determine whether a “Person” is fit to be significantly shareholder (i.e. 5% of the total equity); Directors or to hold a Key Management Positions.

The Fitness Test seeks to assess the Competence of Shareholders, Directors and Key Management Personnel and their capacity to fulfil the responsibilities of their positions while propriety test assesses their integrity and suitability. To determine competence, previous experience, formal qualification and proven track-record in the banking and financial business is essential.

To further assess integrity and suitability, Bank of Ghana considers Criminal records, Civil Actions against individual to pursue debts, personal financial records, impeding criminal and civil actions, refusal of admission to or expulsion from professional bodies such Chartered Institute of Bankers, sanction applied by other regulators in similar industries and previous questionable business practices. The Probity and Soundness of judgement of the person for the purposes of fulfilling the responsibilities of that person is paramount.

Dr Atuahene says this directive is significantly important in restoring confidence in the banking sector as the previous Bank of Ghana’s supervisory reports showed that major cause for the 2015-2018 banking crisis was partly due to unfit and unqualified persons that held positions as Shareholders, Directors and Key Management Personnel in some of local or indigenous banks.

“The minimum assessment criteria required for this test include practical experience and theoretical knowledge in banking business – that is sufficient knowledge skills and experience to fulfil their function. Also is experience which covers both practical and professional experience gained in previous occupation and theoretical knowledge gained through education and training.

The third is, relevant qualification in Banking and finance, accounting, economics, law, administration, information technology, financial regulation, risk management, corporate governance and financial analysis. And last but not least is exhibiting practical experience covering previous position” he outlined.

Dr Atuahene insists, the strict enforcement of this “Fit and Proper Person” directive for bank Shareholders, Directors and Key Management Personnel will promote high standards in the banking industry.

A new board regime  

Dr Atuahene identifies key provisions in the new directive which highlight more extensive constitution and dynamic role of Board of Directors of the institutions in question as critical in ultimately strengthening the banking sector.

He first cites board composition and qualification which the Act stipulates that board members shall be and remain qualified, including through training, for their positions.

“The Board should be composed of people of integrity who can bring a blend of knowledge, skills, objectivity, experience and commitment and led by a capable Chairperson who brings out the best in each director. The Board should be composed of the Executive Directors; Non-Executive Directors and Independent Directors” Dr Atuahene stated.

“The competencies and experience of Boards shall be diverse to facilitate effective oversight of Management and shall ideally cover a blend of the fields such as Banking, Law, Finance, Economics, Information Technology, Business Administration, Risk Management and Corporate Governance among other areas that the central bank deems fit”

“The Board shall also collectively have a reasonable knowledge and understanding of local, regional and where appropriate, global economic market forces as well as legal and regulatory environment in which the Regulated Financial Institution and its subsidiaries operate.

 Ghanaian nationals, ordinarily resident in Ghana, shall constitute at least thirty percent (30%) of the Board composition of a Regulated Financial Institution.  Independent Directors shall constitute at least 30% (thirty percent) of the composition of the Board of a Regulated Financial Institution. No Regulated Financial Institution shall have more than two (2) members serving on its Board that are Related Persons or Connected Persons,” he further noted.

The limited size of the board as well as the unitary or single board structure, Dr Atuahene believes is also worth highlighting as international best practice.  

“The Board shall have at least five (5) members including the Chairperson and a maximum of thirteen (13) members, the majority of which must be non-executive and ordinarily resident in Ghana. There shall be an appropriate balance of power and authority on the Board between the executive, non-executive directors and independent director such that no one individual or group shall dominate the Board’s decision-making process”

“Ghanaian banks have one-tier board structure. This means that one single board comprising executive directors, non-executive directors and independent directors. This form of board structure is predominant in the U.K., the USA and most Commonwealth countries. Board independence is also key and it’s good to know in this case where a Regulated Financial Institution is a member of a financial holding company, NOT more than two (2) Related Persons shall be allowed to serve on the Boards of the bank and the financial holding company” he noted.

Dr Atuahene also hails the establishment of specialized Board sub-committees, the number and nature of which depends on the size and complexity of the Regulated Financial Institution and its Board and risk profile.  Audit Committee and Risk Committee are compulsory for all banks while banks listed on the Ghana Stock Exchange will have the Remuneration or Compensation Committee and Nomination Committee in addition.

“At a minimum, a Regulated Financial Institution shall have two (2) Board sub-committees, namely: An Audit Committee and a Risk Committee both of which shall be chaired by independent directors.    Other Board sub-committees may be established on optional basis per size, complexity, business lines and risk profile of the Regulated Financial Institution. Such committee(s) shall be chaired by a non-executive director(s) with the requisite qualification and experience in the specific functions of the committee. 

“The Board Chairperson shall not head or chair any of the Board Sub -committees and is only permitted to serve on one (1) Board subcommittee as a member other than the risk and audit sub-committees.  The Board shall issue in writing the terms of reference for each Sub -committee which shall be contained in a charter which sets out the committee’s mandate, scope and procedures. A copy of the charter shall be submitted to the Bank of Ghana”

“Each of the two (2) sub-committees shall have at least thirty percent (30%) of its members being Ghanaians who are ordinarily resident in Ghana.  The Chief Risk Officer and the Chief Internal Auditor shall report directly to the Risk Committee and Audit Sub-Committee of the Board respectively” he said.

According to him, the Board may establish on an optional basis other committee such as the Remuneration Committee to oversee the design and operation of the compensation system and Nominations/Human Resources/Governance Committee to recommend new members of the Board or Senior Management while undertaking assessment of Board and Senior Management. Also could be Ethics/Compliance Committee to ensure that the Regulated Financial Institution has the appropriate means for promoting proper decision making and compliance with laws, regulations and internal rules. 

Performance Evaluation

The board per the revised directive is also required to carry out regular evaluation or self-assessment of its performance as a whole, including its sub-committees, and of individual Board members in order to review the effectiveness of its own governance practices and procedures including on Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) issues, to determine where improvements may be needed and make any necessary changes. (Yearly Board Internal Assessment).

The Board shall in addition to the above, undertake a formal and rigorous evaluation of its performance with external facilitation of the process every two (2) years. (Every two years by External Consultant). An in-house performance evaluation of the Board is also required to be conducted annually and a copy of the results submitted to the Bank of Ghana not later than 30th June of each year.    

A separate in-house performance evaluation of the Board on AML/CFT issues shall also be submitted to the Bank of Ghana and the Financial Intelligence Centre for June and December each year before the end of the quarter following the evaluation period a statement on the external evaluation of the Board shall be included as a separate section of the annual report of Regulated Financial Institution and a detailed copy of the report submitted to the Bank of Ghana. 

The Board Chairperson versus the CEO

Dr Atuahene also lauds the separation of the position of Board Chairperson from that of the CEO in the Bank of Ghana’s Corporate Governance Directive.

According to the Act, the Chairperson of the Board shall be an independent director and shall be ordinarily resident in Ghana unless it can be demonstrated to the Bank of Ghana that the position can be held effectively by a non-resident who is able to attune the strategic direction of the Regulated Financial Institution with the developments in Ghana. The Chairperson who shall be proposed for re-election within the maximum tenure of two (2) terms consisting of three (3) years per term shall provide leadership to the Board and encourage constructive relationship within the Board and between the Board and Management.

According to the Corporate Governance Consultant, the specified tenure of office for the MD or CEO, Non-Executive Directors and Board Chairperson will also essentially minimise the entrenchment of positions which breeds familiarities which could impair the objectivity and independent judgement of the above persons.

“The tenure of the MD or CEO of a regulated financial institution shall be in accordance with terms of engagement for a maximum period of 12 years. Such tenure may be split into 3 terms not exceeding 4 years. The tenure of a Board Chair shall be for a maximum period of 6 years split into 2 terms of 3 years. The tenure of the Non-Executive Directors including Independent Director shall be a maximum period of 9 years. Such tenure may be split into 3 terms not exceeding 3 years. Non-Executive Directors must only serve for 9 years – e.g. three, three -year terms and they are subject to annual re-election ” he said.

Annual Certification

Dr Atuahene asserts, one of the outstanding requirement that the Bank of Ghana has introduced in the directives is the annual certification by the National Banking College or any other institution approved by the Central Bank to conduct training for Directors and Key Management Personnel of Regulated Financial Institutions and a report submitted to Bank of Ghana within 90 days after the beginning of each financial year.

“The certification should indicate that, the Board has independently assessed and documented whether the corporate governance process of the Regulated Financial Institution is effective and has successfully achieved its objectives or otherwise. Also, that Directors are aware of the responsibilities to the Regulated Financial Institution as persons charged with governance and the Board shall report any material deficiencies and weaknesses that have been identified in the course of the year, along with action plans and timetables for corrective action by the Board to the Bank of Ghana.  Moreover, Directors are required to obtain certification from the National Banking College or any other institution recognised by the Bank of Ghana to the effect that they have participated in a corporate governance programme and have completed a programme on Directors’ responsibilities” he noted. 

Ethics and professionalism 

In the Act, Regulated Financial Institutions are also required to establish a code of conduct which shall be made available to all persons to whom it applies. The code shall be reviewed regularly when necessary and shall contain among others practices necessary to maintain confidence in the integrity of the Regulated Financial Institution while committing the Regulated Financial Institution, its employees, management and Board to the highest standards of professional behaviour, business conduct and sustainable business practices. It shall also establish a policy to govern trading in the shares of the Regulated Financial Institution by directors, Key Management Personnel and employees while signing off by directors and employees that they understand the Code and sanctions for breaching it.

Remedial measures and sanctions

Act 930 stipulates that remedial measures and sanctions shall apply in addition to any others and specific directives that the Bank of Ghana may require where a person is disqualified to be elected or appointed as a Director, Chief Executive Officer or employee of a Regulated Financial Institution, that person shall immediately cease to hold office and the Regulated Financial Institution shall immediately terminate the appointment of that person, otherwise the Regulated Financial Institution or that person shall be subject to fine or imprisonment as provided for in the Act. Under section 59 of Act 930, a person who contravenes the required disclosure of interest shall cease to be a director of the bank.                     Any non-compliance by a Regulated Financial Institution with the requirements under section 60 of Act 930 shall make that Regulated Financial Institution liable to a payment of a fine of One Thousand (1,000) penalty units to the Bank of Ghana. In addition, Regulated Financial Institution which fails to comply with the Bank of Ghana directives is liable to pay to the Bank of Ghana under section 92(8) of the Act, an administrative fine of not less than two thousand (2,000) penalty units and not more than ten thousand (10,000) penalty units. Under section 102(3) of the Act, the Bank of Ghana may, amongst others, suspend or remove from office the Chief Executive of that Regulated Financial Institution or restrict the powers of the Chief Executive, or recommend the removal from any or all of  the directors on the Board of the Regulated Financial Institution or restrict their powers if it is satisfied that Regulated Financial Institution has, failed to comply with a provision of the Act or rules or directives issued under the Act, or if a Regulated Financial Institution has been conducting its affairs in a manner detrimental to the interests of its depositors and creditors, or if a Regulated Financial Institution no longer possesses sufficient net own funds or is unlikely to fulfil its obligations towards its depositors and creditors.

Enforcement and Compliance

Dr Atuahene is challenging the Bank of Ghana to ensure total compliance and enforcement of the new directives if the ultimate objective of restoring confidence and building that resilient banking system is to be effectively achieved. According to him, the Bank of Ghana should sanction them appropriately for non-compliance of the directives, by the revocation of licence, prosecuting shareholders, directors and key management personnel who persistently flout the directives as done in the Nigerian jurisdiction.

“In case in point is when the former MD of Oceanic Bank in Nigeria, Mrs Cecilia Ibru was jailed for fraud for six months and assets worth nearly 1 billion Euro was retrieved by Economic and Financial Crime Commission for the financial malfeasance.

So the Bank of Ghana directive if implemented and enforced to the letter will also ensure that depositors’ funds remain safe while the financial system remains stable and resilient to contribute to overall development of the Ghanaian economy. Enforcement and robust supervision should be the biggest tools among surveillance processes because Bank of Ghana has been empowered by the Act to enforce examination recommendations” he concluded.

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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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