The significance of banks in market economies cannot be overemphasized. There is indeed an apparent convergence of thought about the crucial role of banks in facilitating economic growth. Early theoretical analysis regarding the unidirectional relationship between the financial system and economic growth received immense empirical support from both academia and monetary economists alike.
Goldsmith (1969), Gertler and Rose (1994) and Levine (1997) all concludes with empirical data, that suggests a positive relationship between financial development and economic growth. It is no surprise that rigidities in the monetary market, particularly retail banking and inefficiencies in the micro-finance sector has provoked such public uproar that threatens confidence in financial intermediation in Ghana. The purpose and focus of this article, is to address pertinent matters bordering on legal protections (mostly unutilized) at the micro level and regulatory response (or lack of it) to structural changes in the short-end of the market. An ancillary goal is to highlight two essential issues:
(1) information gaps, from the customer's perspective, that produces two kind of effects (a) market inefficiencies and (b) a pampered value chain that drives growth at speeds beneath its competitive potential.
(2) A regulatory and supervisory model that appears to offer very little weight in support of the buyer (customer) who clearly wields weaker bargaining powers, merits commentary. The logical effect of a cartelized market structure and growth of parallel downstream markets lends credence to the call for policy review in order to make regulation a responsive and proactive tool for financial market development.
In the concluding section, a strong argument is made for a more progressive regulatory agenda that looks beyond prudential reporting to address key performance metrics such as system uptime, complaints logged and resolved, innovation cycles and other customer-centric measurement approaches.
Generally, the term bank and banker are used interchangeably. The bank is used strictly to refer to the corporate body while the term banker may mean both the institution and the individuals that work within the corporation. The relationship between a banker and a customer depends on the activities, products or services provided by the bank to its customers. Thus the relationship between a banker and its customers is a transactional relationship.
The Banking Act 2004, Act 673 section 11 (1) defines permissible activities of a bank, hence essentially defining what a bank is, thus:
(a) acceptance of deposits and other repayable funds from the public:
(c) financial leasing;
(d) investment in financial securities:
(e) money transmission services;
(f) issuing and administering means of payment including credit cards, travelers cheques and bankers' drafts;
It is important to mention that this list includes security issues, guarantees, portfolio management and advisory services, inter alia.
The banker-customer relationship therefore emanates out of these basic services:
Debtor and Creditor
Leasor and Leasee
Investor and Broker/Issuer
Pledger and Pledgee
Bailor and Bailee
Trustee and Beneficiary
Agent and Principal
Advisor and Client and
Other miscellaneous relationships.
CLOSING THE GAPS - THE CONTRACT
To fully understand customer rights and legal protection of same within the context of banker-customer relationship there is a need to rehash the famous case of Joachimson v Swiss Bank Corporation (1921) which form the backbone of banking law as far as banker-customer relationship is concerned.
In this seminal case, Lord Atkin made this ruling:
'The terms of that contract involve obligations on both sides, and require careful statement. They appear upon consideration to include the following provisions. The bank undertakes to receive money and to collect bills for its customer's account. The proceeds so received are not to be held in trust for the customer, but the bank borrows the proceeds and undertakes to repay them. The promise to repay is to repay at the branch of the bank where the account is kept, and during banking hours. It includes a promise to repay any part of the amount due against the written order of the customer, addressed to the bank at the branch, and as such written orders may be outstanding in the ordinary course of business for two or three days, it is a term of the contract that the bank will not cease to do business with the customer except upon reasonable notice. The customer on his part undertakes to take reasonable care in executing his written orders so as not to mislead the bank or to facilitate forgery. I think it is necessarily a term of such contract that the bank is not liable to pay the customer the full amount of his balance until he demands payment from the bank at the branch where the current account is kept.'
The practical import of this case has obviously been overlooked by many financial service professionals in Ghana, due in part, perhaps, to the innocence of customers who may be ignorant of their legally enforceable rights that derives authority from the implied terms of the contract between a bank and its customer.
The Joachimson case clearly defines primary relationship between the bank and its customer as debtor and creditor, inter alia, and lays a framework for their respective duties, rights and responsibilities.
Off all the relationship dynamics, debtor/creditor and agent/principal seem to present the most contentious issues, particularly within the Ghanaian market and thus streamlining information asymmetry would help exert pressure at firm level that may contribute to market growth through power re-distribution.
Debtor and Creditor
In Foley v Hill (1848), it was held that when a customer opens an account with a bank and deposits money into the account the bank becomes a debtor of the customer. Thus an account that has a credit balance, makes the relationship between a bank and customer that of debtor (banker/bank) and creditor (customer). This presupposes that a court of law may look favorable to a plaintiff customer who has suffered damages due to a bank's refusal to honor a properly written demand on his credit balance, either presented in person or by an authorized agent or third party. The history of retail and indeed commercial banking is rife with anecdotes of customers who may have suffered such fate in one way or another for one reason or another. Unimaginable as it may seem, this unpalatable commercial practice seem perpetuated by customer's ignorance of their implied rights under the banker-customer contract. A case in point is the policy of daily withdrawal limit set for various customer segments, used evidently as a tool for liquidity management. Prudently as that may seem from a liquidity risk management perspective, it opens up new dimensions of operational risk from a legal perspective. Foley v Hill presents a sound legal basis for customers to challenge such operational policies that constraints a creditor from receiving full access to his funds on demand, in a prescribed manner as agreed, to the full extent of his credit. Unquestionably, increased access to this knowledge of basic legal rights by a broad range of financial service customers, would challenge inefficiencies in the supply chain and promote responsible competition.
Agent and Principal Relationship
The banker acts as an agent of the customer (principal) by providing the following agency services:
Buying and selling securities on his behalf.
Collection of cheques, dividends, bills or promissory notes on his behalf.
Acting as a trustee, attorney, executor, correspondent or representative of a customer.
The banker as an agent performs many other functions such as payment of insurance premium, electricity and other utility bills etc.
ISSUES IN PRACTICE
1. 'Go to your branch'
The list of customer complaints about poor service quality seem limitless in the current banking environment even after the so-called 'invasion' of the arguably more competitive and customer-centric Nigerian banks. A typical refrain that seem to encapsulate the state of poor service is, 'please go your branch'. An online survey conducted by Metis Decisions suggested that such refrain are particularly used in relation to big ticket (not necessarily high risk) transactions. Admittedly, this may be a result of an unchallenged unit (branch) sub-culture than a corporate sponsored policy. Interestingly, all 122 survey respondents, adjudged it an unpleasant experience and indicated that it may be evidence of poor operational decision-making. A close examination of the reasoning behind this refrain reveals a certain implicit assumption that domicile branches possess comparative advantages in risk assessment. This assumption is obviously invalid given the currency of wide area networks that makes customer data available per click. It is interesting to observe that the marketing communications approach of many banks taut network status as value propositions to woo customers. Suffice to say, that a weak corporate culture is a great contributor, in that systems are more internally focused than externally focused, thus creating needless conflict between compliance requirements and superior customer service. Service quality demands and compliance obligations clearly needs delicate balancing in order to sustain the growth trajectory of the financial service market.
2. Transparency in Pricing
Per the implied terms of the contract, the banker has the right to apply reasonably priced charges and interest for services and facilities offered to the customer.
The contention in the Ghanaian market between suppliers and consumers of financial products, have always been the definition of what is 'reasonable'. Indeed, the Investigation and Consumer Reporting Office of Bank of Ghana, acknowledges, that service charges, particularly; unexpected charges, excessive charges, discriminatory pricing and insufficient notice prior to new tariff implementation by banks, as some of the key causes of consumer complaints.
Controversial as such claims may be, the wide spread market perception provides sufficient warning signal for monetary authorities to diffuse the negative perception by using responsive policy options. The dearth of sufficient legal precedence bordering on excessive or unfair bank charges makes it a tricky exercise to fully analyze the credence of arguments against financial service providers in such controversies.
This notwithstanding, it is indeed a reasonable call for more responsive regulation since primary responsibility for financial deepening and promotion lies with the regulators, as drivers of monetary policy.
SHARING THE RISK
Rulings in certain common law cases (Tai Hing Cotton Mill Ltd v Lui Chong Hing Bank - 1986) obviously leans towards customer protection, thereby posing risk to banks as counterparties to the banker-customer contract. Many banks are now incorporating into account opening documents, express terms that places obligation on customers to examine and report any anomaly or unauthorized debit within a stipulated period. This clearly is designed to evoke Estoppel against any plaintiff who may be dissatisfied on account of unfair charges. In recent decades however, cases such as Henderson v Merrett Syndicate Ltd (1994) have offered bankers better protection, due to arguments that suggests that concurrent duty of care can be invoked as a defense against a plaintiff, in both contract and tort. Financial service consumers in the Ghanaian market must therefore appreciate the full import of terms and conditions in account opening documents and must insist on their right to receive regular statements of accounts, as this consolidates their legal position in the event of any dispute under the banker-customer contract or in tort.
MARKET REGULATION - THE ROLE OF ICRO
Investigations and Consumer Reporting Office (ICRO) is a branch of Bank of Ghana's Supervision Department charged with the mandate to investigate and resolve consumer complaints, inter alia. The Bank of Ghana has, overtime, stated clear policy objectives of deepening financial intermediation and moving gradually towards a cashless society where economic transactions are facilitated with reducing reliance on physical cash balances. This level of macro-efficiency cannot be achieved with a system fraught with process inefficiencies and rigidities, where imbalances in commercial relationships within the financial markets are exacerbated by lack of active mediation mechanisms, customer ignorance and passive regulatory approach. Fortunately, current statute presents Bank of Ghana (BOG) with clear powers in addressing this challenge. Section 53 of the Banking Act 2004, Act 673 empowers the Bank of Ghana to require of banks to file returns relating to financial and non-financial affairs as the Bank of Ghana deems fit, and consequently impose sanctions for non-compliance to the tune of 500 penalty units. In would seem intuitive therefore, that an indispensable market mechanism such as ICRO would utilize its statutory powers to institutionalize transparent reporting of essential market performance metrics by the banks. Such a proactive measure would serve two benefits:
1. Promote civil society engagement and encourage participation in the policy debate on financial intermediation.
2. Would serve as market pressure to shame laggards and applaud leaders, which in itself may engender a cycle of creative competition.
Given the current status of ICRO, it may not be far-fetched to argue, albeit without substantive data, that the policing model of the banking system seem heavily inclined towards prudential management without balancing out with essential metrics such as complaints resolved/unresolved, account attrition rates, innovation cycles, system uptime etc.
CONCLUSION AND RECOMMENDATIONS
Clearly, structural re-organization of ICRO as a broader part of regulatory reform, is a strategic necessity and requires an urgent policy attention in order to improve market outcomes. Our policy goal of realizing a cashless society may require bold and innovative approaches to regulation and supervision beyond caveat emptor guidelines and moral suasion. The following recommendations are therefore proffered for policy considerations:
1. Aggressive public education by consumer protection and civil society groups in alliance with BOG should be explored in order to empower customers for better financial choices.
2. ICRO must improve its market persona through better engagement with financial service consumers.
3. BOG through ICRO must fully utilize its mandate under Section 53 of Act 673 to institutionalize more responsive market reporting beyond prudential standards, as is currently the case.
4. Bank of Ghana should further explore mechanisms for lowering switching cost for customers.
The writer is the founder and C.E.O of Metis Decisions Limited, a professional services company that offers B2B value propositions such as; Mystery Shopping, Employee Opinion Surveys, Corporate Training and Strategy Advisory. For further info please visit www.metisdecisions.com or email to [email protected] Kindly send comments or feedback to author on [email protected]