Ghana’s financial sector heads for crisis

…As Committee of Regulators cease meetings

The Financial Intelligence can confirm that there is currently an uneasy calm among experts in Ghana’s financial services industry with regards to regulation, as the sector becomes increasingly fragmented, with some banks, insurance companies and other financial houses offering services that were hitherto outside their domain.

Such fears have heightened in view of the fact that under the current fragile global financial system, consultations among regulators of Ghana’s Financial Services Sector has broken down.

This follows the collapse of ‘a Committee of Regulators’ that was set up to meet periodically and discuss developments of common interest.

The Committee of Regulators, said to be an initiative of Dr Charles Asembri, a past Director General of the Securities and Exchange Commission (SEC), saw key officials from the Central Bank, Insurance Commission and the Securities and Exchange Commission, meeting regularly to synchronize the activities of the functional regulators, to deal with challenges that came up.

Without any legal backing, the arrangement was said to have broken down as a result of lack of commitment among members, and subsequent changes at the top hierarchy of some of the institutions.

The development is causing discomfort among certain market participants, who believe the work of this inter-institutional agency is much crucial now in the wake of current global developments.

The past government had initiated consultations on a possible legislation for the eventual merger of the regulatory roles of the National Insurance Commission (NIC), the Securities and Exchange Commission (SEC) and the Banking Supervision Department of the Bank of Ghana (BoG), in favour of the UK style single-spine regulation.

The Bank of Ghana was to be left to work independently on its monetary policy under the new order.

The putting together of that Act, our sources at the Finance Ministry indicate, has been suspended until the next two years.

In the absence of the single-spine regulatory system, market experts say there should be regular interaction between regulators of the Financial Services Sector, so as to avoid possible instances where industry players could manipulate the system, and introduce products outside their domain. Many experts attribute the recent financial meltdown in the United States and other developed economies to the situation where financial sector regulation was fragmented, with each regulator operating in a separate compartment.

Back here in Ghana, there have been instances when institutions with investment advisory licenses, micro finance houses, and non-bank financial institutions have turned deposit-taking institutions doing commercial banking business, with others engaging in other businesses they have not been authorized to engage in.

With the incidents of Pyram, Resource 5000, (R5), and CDH still fresh in the minds of many, it is not surprising to hear calls for strict vigilance on the part of regulators this time round.

In the more recent CDH case, the Bank of Ghana, Securities and Exchange Commission and National Insurance Commission on Monday August 9, 2004, placed a two-week moratorium on the operations of the CDH Group (made up of the CDH Financial Holdings Ltd., CDH Discount Ltd., CDH Securities Ltd., CDH Asset Management Ltd. and CDH Insurance Ltd) when some inconsistencies were detected.

The objectives of the moratorium, which was later extended a further 90 days, was to enable the companies update their financial records and properly establish their financial positions and viability.

This was precipitated by findings of individual and joint review visits by the Banking Supervision Department of the BOG and Market Surveillance Department of the SEC.

It was the constant interaction between the various regulatory agencies at the time that enabled them unravel the alleged shifts in assets from one portfolio to the other.

Ever since the onset of the Financial Crisis, the issue of whether domestic markets should be regulated by a single, consolidated regulator or through functional regulators working in concert has become topical among sector participants, and the debate is expected to take centre stage at the on-going Africa Regional Market Development Conference.

Many argue that cross-sectoral financial conglomerates and the blurring of the boundaries between financial products make consolidated regulation a necessity, because, without it, these conglomerates may face multiple regulators and possibly conflicting regulations. It has also been suggested that consolidated regulation offers economies of scale and scope and is better able to allocate scarce regulatory resources efficiently and effectively.

Other schools of thought have it that Ghana’s financial sector is still at its infant stage and will therefore require functional regulation to see to the development of the individual sectors before going for single-spine regulation.

Source: Financial Intelligence (Charles K. Amoah & Ebenezer Asare) also available on wwwmyfinancialintelligence.blogspot.com