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

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

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 license, 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 the overall development of the Ghanaian economy. Enforcement and robust supervision should be the biggest tools among surveillance processes because the Bank of Ghana has been empowered by the Act to enforce examination recommendations” he concluded.