UT & Capital Banks Closed Down: Would this open a can of worms? Or we would see no more banks’ collapse?

A takeover deal has already been sealed. Forensic audit is likely to kick in soon, according to Bank of Ghana (BoG).

Would this open a can of worms? Or we would see no more banks’ collapse?

Gordon Offin-Amaniampong writes
If you didn’t believe the banks had collapsed did you also not see men with ladders tearing down signs and inscriptions of UT& Capital Banks from atop of the buildings?

Yes they’re gone. They were suffocated and couldn’t stand the test of time.

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The collapse of Capital Bank Limited (CAL) and UT Bank limited on Monday 14 August 2017 must not be viewed as a disaster for Ghana’s banking industry says this writer. This is nowhere near a typical financial crisis. Rather, it must be seen as a blessing in disguise or reawakening as it would ginger the ones already in the system to remain vibrant, vigilant as well as take pro- growth measures to prevent such recurrence in the future.

Also, I believe this isn’t an investor- threatening development that should trigger alarm in the business world. The reason, banks rise and banks fall like governments and empires if they fail to take the right measures to consolidate their gains and fortunes. Certainly, this wouldn’t be the last and not the first. We’ve seen banks and other financial institutions collapse across the world. Perhaps the most recent and catastrophic one was the financial crisis that hit the United States in 2008.

In fact by 2010 more than 30 banks had collapsed including mortgage institutions.

Nevertheless, we must be reminded that the collapse of the two commercial banks didn’t happen overnight. What the world witnessed on Monday, I believe, might have started first as some challenges or like teething problems which generally many banks face but the managers failed to address them properly and then they morphed into crisis.

Would this open a can of worms?
Well the Apex Bank has given the hint that it would begin a forensic audit into the operations of the acquired banks. The findings of such investigation would inform or give the public a sense of what is to come or not to come. Of course we will know whether there are still some ailing banks that need resuscitation or complete takeover as it did happen to Capital and UT banks.

But that seems unlikely to happen, referring to bail-out. In the meantime, the Central Bank has given the publics assurance and an insight as to what actually triggered the collapse of the banks. At a press conference on Monday the Governor of the Central Bank Dr. Ernest Addison said the two banks, UT Bank Limited and Capital Bank Limited had had their licenses revoked due to what the Apex bank described as “deeply insolvent”.

According to the governor the two banks had been supported by the central bank for two years in the hope that they would experience a turnaround, but the never happened necessitating the buyout on Monday.

Couldn’t the Central Bank bail out the banks as the US government did in 2008?

The Obama administration provided what it called ‘stimulus funds for distressed financial institutions to help them get back on their feet. There was such consideration yours truly learned. That package was an option BOG considered initially, but it refused to have its hands tied at its back after realising the degree of the banks injury. It’s understood that would have constrained the Apex Bank and it would also compelled it to manage both banks. Indeed one cannot cry more than the bereaved.

Dr. Addison also used the platform to assure the business community and prospective investors that there were no more banks in distress that would call for the revocation of their license.

“Ladies and Gentlemen, you will recall that after the AQR [Asset Quality Review] exercise, a number of banks were not compliant with the capital adequacy ratio. I am happy to report that most of these banks have put in place credible action plans to restore the capital deficiency, and majority of these banks are already compliant as at today, and the overall banking system remains solid and well capitalized”, the Governor said at a press conference organised at the central bank on Monday, August 14.

So what is insolvency?
Insolvency can be defined as the incapability to ones debts. This usually happens for one or two reasons. Basically two reasons have been assigned to this. First, for some reason the bank may end up owing more than it owns or is owed. In accounting terminology this means its assets are worth less than its liabilities. Second a bank may become insolvent if it cannot pay its debts as they fall due, even though its assets may be worth more than its liabilities. This is known as cash flow insolvency, or a lack of liquidity.

Was that the case that befell the two banks?

According to Bank of Ghana (BoG), despite repeated agreements with UT Bank and Capital Bank to put them back on track following their capital and liquidity shortfalls, the two failed to implement action plans agreed to. In effect, the Bank noted that “the owners and managers of UT Bank and Capital Bank were unable to increase the capital of the banks to address the insolvency.

“Consequently, to protect customers, the BOG has decided to revoke the licenses of UT Bank and Capital Bank under a Purchase and Assumption transaction. UT Bank and Capital Bank were heavily deficient in capital and liquidity and their continuous operation could have jeopardized not only their depositors’ funds, but also posed a threat to the stability of the financial system”, the Governor added.

The Purchase and Assumption transaction model is very common in planning for the exit of banks in distress. With this model, healthy banks take over the running of unhealthy banks, significantly ensuring that the process is smooth so as to avoid any possible industry-wide problems.

The Bank of Ghana has approved a Purchase and Assumption (P&A) transaction involving UT Bank and Capital Bank and the GCB Bank. This action, the governor stressed was taken to protect depositors’ funds and strengthen Ghana’s financial sector.”

GCB Bank Ltd., the largest indigenous bank in the country with an asset base of GHS 6.3 billion, has assumed the businesses of UT Bank Ltd. and Capital Bank in a purchase and assumption transaction by the Bank of Ghana, effective Monday, August 14, 2017. The Bank has assured Customers of UT and Capital Bank of unconstrained access to their funds through their known channels and staff of the assumed banks, working with GCB staff to ensure seamless transactions. Also GCB has in effect assumed the 53 branches of the two banks thereby, growing its network to 214 branches across the country.

Capital Bank was established in July 1990. At the time it was considered as one of the most innovative banks in the country. As of March 31 2012 it had total assets of GH 843,705 million and customer deposits of GHS 558.840 million.

On the other hand UT Bank (formerly UT financial Services (LTD)—A medium-sized financial institution in Ghana with total assets of GHS 720, 007 million and customer deposits of GHS 600.288 million as of March 31, 2012. UT Bank commenced business as a finance house in 1997 under the name Unique Trust Financial Services.

What could prevent future banks ’collapse?

There are several preventive measures, but I will leave herewith the following two factors:

The current Bank of Ghana minimum capital requirement is pegged at GHC120 million cedis. This was reviewed from GHC 60 million cedis it set previously. The upward adjustment was to stream line the mushrooming of banks across the country , which currently stands at about 34 even more than neighbouring Nigeria—Africa’s populous nation. This writer believes the current development might compel BoG to raise the bar. And I believe any attempt by the central bank would trigger more mergers, the next factor.

In December 2011, Pan Africa Bank Ecobank Transnational Inc. acquired 100 per cent of Ghana’s Trust Bank Limited (also known as The Trust Bank -TTB) in a $ 135 million deal. The merger involved the swap of shares for Ecobank Ghana shares.