Ghana’s banking crisis: The underlying-causes, ripple-effects and way-out – Dr. Richmond Akwasi Atuahene – Banking consultant
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”.
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 the same. The British Government had to bail The Royal Bank of Scotland out of the 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? The government had to step in to ensure the 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, 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.
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.
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.
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 the 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.
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.