Protect The Banking Sector To Save The Economy

The Author

Financial institutions mobilise savings from individuals, households and institutions, and channel them as capital to those who need them for productive uses in the economy.

The Bank of Ghana (BoG) has the overall supervisory and regulatory authority in all matters relating to deposit-taking and lending business as enshrined in the 1992 Constitution of Ghana, the Bank of Ghana Act, 2002 (Act 612) as amended, and the Banks and Specialised Deposit-taking Institutions Act, 2016 (Act 930).

Banks have a responsibility to ensure prudent management of funds, and engage in practices and behaviours that make them safe and sound, so that they are able to attract and retain the trust and confidence of the public.

The BoG has recently revealed that the banking sector is afflicted with solvency challenges, poor corporate governance practices, weak risk management practices, liquidity challenges and regulatory breaches.

In August 2017, the BoG closed two banks (UT Bank and Capital Bank) and appointed KPMG as official administrator of UniBank to help protect the interests of depositors and avoid the possible collapse of the bank. The BoG increased the minimum capital requirement for banks to GH¢400 million, based on an analysis of the inherent vulnerabilities within the banking system.

To save five struggling banks (Sovereign Bank, Royal Bank, The Beige Bank, Construction Bank and UniBank) and maintain confidence in the financial system, the BoG has created the Consolidated Bank Ghana Limited to take over the five banks. The government has made GH¢450 million cedis available for the Consolidated Bank as starting capital.

During the Asset Quality Review update in 2016 exercise, UniBank and Royal Bank were identified as being undercapitalised. The two banks subsequently submitted capital restoration plans to the Bank of Ghana. These plans, however, yielded no success in returning the banks to solvency.

In the case of Royal Bank, an on-site examination conducted by the Bank of Ghana on 31st March, 2018 revealed a number of irregularities. Its non-performing loans constitute 78.9 percent of total loans granted. The bank overstated the capital position for the purpose of complying with the capital adequacy requirement.

In the case of Sovereign Bank Limited, as part of Bank of Ghana’s investigations into the failure of Capital Bank Limited, it emerged that Sovereign Bank’s licence was obtained by false pretences through the use of suspicious and non-existent capital.

Beige Bank and Construction Bank were each granted provisional licences in 2016 and launched in 2017. Subsequent investigations conducted by the BoG revealed that, similar to the case of Sovereign Bank, both banks obtained their banking licences under false pretences through the use of suspicious and non-existent capital.

It is clear from the above that the negligence on the part of some leaders of the merged banks led to the current state. There have been various violation of the banking laws as well as other legal provisions and some of them may border on criminality.

But we cannot exclude the BoG from this failure. The BoG must carry out due diligence before granting licences to a yet-to-become bank. Also, the BoG must not renege on its duties to ensure banks in the country regularly submit reports and annual financial statements to it. The supervisory role at the Bank of Ghana was inadequate.

The government’s numerous deficits and some citizens’ unpaid loans to some of the banks contributed as well. The Central Government and the District Assemblies must resist the temptation to award contracts, when funds are not available to pay for the certificates.

The steps taking by the BoG as regulator to salvage these struggling banks are commendable. The regulator has followed laid-down regulations and rules to ensure customers of the banks do not lose their money.

The BoG must operationalise the deposit protection scheme established under the Ghana Deposit Protection Act, 2016 (Act 931), and address specific risks from high non-performing loans, poor corporate governance and poor risk management systems.

The BoG must continue to rollout the Basel II and III supervisory agenda, ensure that banks implement the International Financial Reporting Standards, and strengthen the capacity and resources of the Banking Supervision Department to improve supervisory procedures.

The BoG’s banking supervision unit must take preventive measures in order to avoid any type of crisis in the financial sector by predicting, in advance, any major change in factors that may weaken the situation of this sector as a whole, or the situation of any specific unit that may affect the entire sector.

There is the need for the regulator to set comprehensive indicators to monitor the activities of banks in the country and to supervise banks on an on-going basis to ensure that they comply with regulatory requirements for conducting banking business.

Dr Eric Akobeng (Economist and Development Policy Expert)