One Financial Sector Cleanup; Too Many Contrasting Costs – A Dive into the Contentious Exercise

Although the financial sector cleanup exercise in 2017 was aimed at ensuring a strong, resilient, and highly capitalized banking system that can support the country’s economic growth, the aftermath continues to raise serious transparency and accountability issues.

One major issue after the banking sector cleanup is the cost incurred from the exercise. It appears there seems to be no common ground for the actual cost of the exercise with different institutions and personalities involved throwing about different figures in different situations.

Moreover, various authoritative sources have provided differing figures. The inconsistent reporting of the actual cost of the exercise has started raising eyebrows as some analysts and industry watchers believe there could be suspected foul play.

Before delving into the issues of the various contradictory figures regarding the cost, it is important to emphasize the reason for the exercise and its outcome to lay a proper foundation for the issues.

The Trigger
The new leadership of the Bank of Ghana in collaboration with the then government in 2017 took what was referred to as a bold decision to reform the country’s financial sector. This was in response to an asset quality review conducted in 2015 and 2016.

The outcome of the review showed that there were prevalent issues of insolvency, liquidity challenges, under-provisioning, rising non-performing loans, and bad corporate governance principles in some banks. The sector as of 2017 was described to be in a “considerable state of distress” requiring stringent measures.

The then-new leadership under Dr. Ernest Addison, introduced some drastic measures to clean up the sector. The first two banks to go down in 2017 were UT and Capital Bank. Dr. Ernest Addison recently revealed that this was the strict order of the International Monetary Fund (IMF) when Ghana wanted to extend the bailout programme.

“The two banks were due to significant capital deficiencies, the underlying reason was poor corporate governance practices within these institutions. Co-mingling of the banks’ activities with their related holding companies. For instance, one bank was paying royalties for the brand name, even at the time that the bank’s financial performance was abysmal and could not pay dividends,” the Governor on December 2, 2017 revealed as some reasons necessitating the collapse of the two banks.

The mother bank subsequently introduced a new minimum capital requirement to ensure strong capitalization of the sector. All universal banks were required to shore up their minimum capital of GH¢ 400 million with a deadline date of December 31, 2018.

The Outcome
By 2019, a total of nine (9) banks had collapsed. These banks failed to meet the new minimum capital requirement and hence the Central Bank revoked their licences. As a result, a new bank – Consolidated Bank Ghana (CBG) was established to take over their assets and liabilities. Some of these banks include; Beige Bank, Royal Bank, Construction Bank, Heritage Bank, etc.

The Central Bank also gave approval for some banks to enter into a merger; First Atlantic Merchant Bank with Energy Commercial Bank; Omni Bank with Sahel Sahara Bank; and First National Bank with GHL Bank. By 2019, 16 banks had met the new capital requirement by capitalization or securing funds including seeking support from the Ghana Amalgamated Trust.

From over 30 universal banks in 2016, the country had 23 universal banks by the end of 2018 due to the pruning exercise by the Bank of Ghana. To ensure that the reforms undertaken stood the test of time, the Central Bank further issued new Corporate Governance Directives to all banks which is still in force today.

The Cost of the Clean-Up
To the contentious issue of the cost of the entire exercise which does not only include the the universal banks but also the cleanup of the Specialized Deposit Institutions (SDIs) comprising Microfinance Institutions and Savings & Loans and Finance Houses.

At least, on three different occasions and on authoritative grounds, contrasting figures have been quoted for the entire cost of the whole financial sector cleanup exercise.

Let’s take a look at these contrasting and confusing numbers;

1. President Akufo-Addo’s GH¢21 Billion Claim

   The outgone President, Nana Addo Dankwah Akufo-Addo under whose tenure the exercise was conducted has at least on one occasion confirmed that about GH¢ 21 billion was spent on the entire cleanup. This he said represents 7.1% of the country’s Gross Domestic Product (GDP). The former President did not just make a sweeping statement but made the announcement on the floor of Parliament which is deemed as a “House of Records.”

   Delivering his message of the “State of the Nation’s Address” to dissolve the 7th parliament, he made an emphatic statement that an amount of GH¢21 billion was spent on the exercise.

   He told the parliament that “an amount of GH¢21 billion was used to fund the cleaning up exercise. These are painful lessons we all have to imbibe.”

2. The GH¢18.99 Billion Claim of the Ministry of Finance

   A direct contrast to former President Akufo-Addo’s claim is another quote from the Ministry of Finance under his term. A Ministry of Finance document titled GH-MOF-FSD-315018-CS-INDV published on its website of September 27, 2022, which sought to hire a short-term consultant to support the Bank of Ghana Resolutions Office also stated that the cleanup exercise cost the Government of Ghana an amount of GH¢ 18.99 billion. This figure quoted by the Ministry also represents 5.49% of GDP.

   “The Government of Ghana spent GHȻ18.99 billion (5.49% of GDP) to fund the repayment of the deposits of affected depositors’ including the establishment of a bridge bank (Consolidated Bank Ghana Limited). The Banking Sector Clean-up was aimed at ensuring orderly exit of insolvent institutions to protect depositors’ funds and also ensure the safety and soundness of the banking sector which was in a state of distress,” portions of the document cited by The High Street Journal read.

3. The IMF’s GH¢15.75 Billion Claim

   The International Monetary Fund’s Country Report on Ghana published in April 2019 also rather revealed a lower cost compared to the claims of the former President and the Ministry of Finance. According to the IMF report, about GH¢ 15.75 billion representing 5% of GDP was spent by the government in funding the exercise. Interestingly, the IMF report gives a breakdown of the total cost spanning from 2018 and 2019. It also reveals the cost for all exercises carried out for universal banks, MFIs and Savings & Loans and Finance Houses.

Implications
Financial analysts and other experts like Dr. Richmond Atuahene believe that the very fact that three high-profile authoritative sources are providing different figures for the cost of the exercise raises serious concerns about financial accountability.

This begs the question, were there hidden costs, unaccounted expenditures, or inflation of the actual cost?

Dr. Atuahene further tells The High Street Journal that the exercise which has been described by the World Bank as an “expensive exercise” where billions of cedis have been spent still has some outstanding payments to be made to GN Bank’s customers.

“There are major inconsistencies in the amount of funds supposed to have been used up in the banking sector clean-up exercise in 2017 and 2018. Apart from the huge sums of money used in the banking sector clean-up exercises, there still remain unpaid funds to the GN Bank’s customers,” he told The High Street Journal.

These discrepancies suggest inefficiencies, overpayment of misappropriation of funds. There is a need for clarity on how the taxpayers’ money was spent. Experts argue that such inconsistencies in figures create doubt and could potentially erode the trust in government, financial regulators, and institutions.

Moreover, foreign and local investors monitor such inconsistencies as a measure of financial sector governance. A lack of clarity also deters investment, as it suggests weaknesses in regulatory oversight and financial reporting.

A call to action
The new government has promised to review the circumstances leading to the mass collapse of indigenous banks. Although the idea is laudable, it will be important for the government to conduct a forensic audit of the cost involved in the exercise. Such clarity on the true cost through an independent audit which will publish detailed expenditure items will help to restore confidence in Ghana’s financial institutions and regulators.

Ghana’s banking sector cleanup may have been necessary to stabilize the financial system, but the conflicting cost figures pose serious transparency and accountability concerns.

Source: thehighstreetjournal.com