Ghana Rising with Nuong Faalong: State of Ghana’s Financial Sector [Part 1]

Ghana is going through a financial sector crisis, most Ghanaians are either feeling the crunch directly or lucky enough to watch it unravel in the news.  On August 1, the Bank of Ghana announced the revocation of the banking licenses of 5 universal banks. Beige Bank, Construction Bank, Royal Bank, Sovereign Bank and Unibank. Why is the Bank of Ghana doing this?  Simply put, the banks have become insolvent, meaning their liabilities have far outweighed their assets and put them in a position where they cannot meet liquidity demands. The business of banking relies on the liquid asset of cash. The inability of a financial institution to meet cash demands is a crisis. These banks are so badly run down that shareholders funds have been eroded down into depositor funds. The Central Bank reports that Sovereign Bank’s license was obtained under false pretenses, meaning they had set out deliberately to cheat the system. Beige and Construction Bank had done even worse by obtaining their licenses using fictitious and nonexistent capital. Although the banks are 5, there is more public attention on Unibank because it is the biggest of the affected banks and has already been in the news for liquidity challenges. Earlier On March 20, 2018,  the bank of Ghana appointed KPMG as official administrator of Unibank. Reason being that Unibank had persistently maintained a capital adequacy ratio (CAR) below zero and was running a CAR of negative 24%. Note that Minimum CAR in Ghana is set at 10%. KPMG released a 90 day report on the state of Unibank’s books which showed that Unibank remains balance sheet insolvent. The report also shows that Unibank’s operations are not sustainable, “Among other things, the bank’s interest income and other sources of income are insufficient to cover the associated cost of funds of underlying borrowings and liabilities, as well as overheads of about GH¢0.31 billion per annum”. It’s loan book is non-performing and the  earning capacity of the bank continues to deteriorate, the bank’s governance and internal control environments are also reported as weak with significant deficiencies in credit underwriting and loan approval process, compliance and reporting. The bank of Ghana intervened by law as the regulator to create the Consolidated Bank Ghana Limited  (fully capitalized with 450 Million Ghana Cedis) which assumed responsibility over all 5 banks. The Government also provided financial support by issuing a bond to the tune of 5.76 billion Ghana Cedis. I have not been able to find information on the coupon rate of the bond, but the figure is bound to have an adverse effect on Ghana’s debt stock. Let’s take a fast look at the causes of bank failure in Ghana so far.  1. Bad Loans. 2. Inappropriate loans to bank insiders. 3. Rogue Employees. 4. Bad Risk Management decisions. 5. Proprietary trading. 6. Asset liability mismatch. 7. Involvement in non-banking activities. 8. Poor Corporate Governance,

9. Political interference
10. Funding Issues and finally,
11. Bank run which is usually a final result. It occurs when many depositors rush to withdraw their funds at the same time. This happens when depositors have lost confidence in the financial institution. [caption id="attachment_93772" align="aligncenter" width="600"] Five Managing Directors of the dissolved banks: L-R: Stephen Kpordzih (Construction Bank) Osei Asafo – Adjei (Royal Bank) Dr Duffuor II (uniBank), Johan Rheeder (Royal Bank) , Mike Nyinaku (Beige Bank)[/caption] Why am I calling it a crisis? 

Between August 2017 and today, 7 banks have lost their licenses beginning with UT and Capital Bank who were taken over by the Ghana Commercial Bank. In March 2018, the Bank of Ghana took the directors of 30 microfinance companies to the Economic and Organised Crime Office (EOCO) for alleged embezzlement and fraud. Today, many micro finance companies remain in the news as they struggle to fund daily withdrawals. The gaps are so deep that an estimated 8 billion Ghana cedis is required to fix the system today. When the Bank of Ghana tells you it is bailing failing banks, do you know where the money comes from? Your pocket.  If you pay tax that is. Ghana will probably end the year with more bank takeovers and Savings & Loans, Rural Banks, Microfinance company closures. As a taxpayer you should be angry enough to demand answers. Who is guilty? The Banking supervisory team of the Bank of Ghana needs to explain to Ghanaians exactly how they failed to detect the rot early enough and why they let it fester to crisis point. Auditors need to clear themselves of criminal intent. Top level executives especially of the 7 banks need to explain why they observed poor corporate governance practices and why they willfully set out to cheat the system. EOCO needs to be investigating every single board member and director of these banks. From the Bank of Ghana down to micro finance, the culprits need to be dragged out. The Bank of Ghana needs to give us names of who did what. However, it must be noted that this situation although unwholesome is not historically peculiar to Ghana. Why you should not panic,  -The Consolidated Bank is 100% solvent. -Depositors will not lose their funds. In fact the action of the Bank of Ghana is aimed at protecting you. You will have access to the full amounts you deposited with any of these banks. – Your investments with the above listed banks are safe and there is no need to take rush decisions. -Your old bank branch and your new bank branch are one and the same. – Staff of the named banks will not lose their jobs unless where over employment is detected. And before I go, How can GHANA RISE out of the mess? The regulator (Bank of Ghana ) must take control and be independent of political interference. December 31, 2018 is a date to look forward to in Ghana’s banking history because it is the final day for compliance of the 400 million Ghana Cedis new minimum capital requirement directive for banks given by the bank of Ghana in September 2017. The Bank of Ghana needs to stick to plan and enforce this directive. Ghana needs to compel banks that cannot meet the requirement to merge or get taken over.  It is time to protect the depositor and ensure strict corporate governance. Persecute bank owners who set out to con the central bank as a deterrent. Implementation of Basel 2 principles under the Basel Accords will also ensure that banks avoid market risk and operational risk. Every Ghanaian irrespective of political affiliation must support the bank of Ghana’s efforts to sanitize the system and take out criminal financial enterprises and bad financial set ups. We should all be supporting the efforts of the Bank of Ghana. [caption id="attachment_94226" align="alignleft" width="150"] Author[/caption] By Nuong Faalong | Ghana Note: Ghana Rising is my fortnightly column on Ghana’s pressing issues.  Talk to me on [email protected].  ]]>