How the banking crisis has entrapped the economy

The banking and financial crisis that hit the economy in 2017 and 2018, (resulting to the merger and consolidation of eight weak banks) is one of the major economic drawbacks we have carried into 2020. Had it not been prudently managed, the crisis had the potential to derail Ghana’s current and future economic performance.

The government’s decision to pay hundred percent of depositors’ savings will go down as the right diagnosis and prescription, which will save souls and restore confidence to banking system. In his Christmas and New Year message President Nana Addo Dankwa Akufo-Addo assured Ghanaians that, “we have had to take painful, but necessary measures, to sanitise and save the banking system, a process which, I know, has brought discomfort to many households.”

Many critics of the government’s response to the crisis argue that 4,000 jobs have been lost as a result of the consolidation of the failed banks. However, considering the enormity of the crisis on the economy, I think that argument is equally indefensible. President Akufo-Addo gave a befitting response when he explained that apart from the protection of funds of 4.6 million depositors, the jobs of some 6,500 workers were saved; instead of the 10,000 that could have been lost.

According to the President, depositors of microfinance and savings and loans companies whose licenses have been revoked would also receive hundred percent payment. Earlier in a response to the critics of the banking crisis, Vice President Dr. Mahamudu Bawumia pointed out that it is better to have a small number of banks that are strong and liquid than having weaker and illiquid banks.

Counting the cost

But the economic and financial interventions have come at a cost. It has been estimated that the entire intervention could cost the taxpayer some GHS20 billion. This could raise the debt to GDP ratio to about 67 percent, and possibly plunge the economy into another round of unsustainable debt levels; as in 2016 when the debt to GDP ratio rose to an all-time record of 70 percent.

Critics of the government may then point to the mounting debt levels as a sign of failure, given that the debt to GDP ratio in 2016 was a campaign issue used by then opposition New Patriotic Party (NPP) and now the ruling party. Strangely, but quite expectedly, it is those who supervised the collapse of the banks who are making the loudest noise about attempts by the government to restore credibility to the banking sector.

Some financial analysts have backed the government’s decision to take the “bull by horns” by paying depositors, to restore confidence in the banking sector. Any contrary decision would have sent worrying signals to local and foreign investors that the economy was on the downturn. And that would have meant failure on the part of the government, though they had no hand in creating the crisis.

Decision making

Sound decision making is the mark of good leadership. It is a fact that signals of the failure of the banking system were written on the wall as early as 2011, and by 2014 both the IMF and World Bank had made several publications that pointed to the weakness in the banking system.

By 2016 it had become clear that eight banks were on the verge of collapse and needed further life-support, after initial bailouts by the Bank of Ghana. During the 2016 Presidential election campaigning current Vice President and former running mate, Dr. Mahamudu Bawumia buttressed the IMF and World Bank findings that eight banks were on the verge of collapse.

This was largely attributed to weak supervision and political interference, as the Bank of Ghana at the time breached its own licensing regulations. Over time one-man banks and microfinance companies mushroomed across the country. With weak supervision, if any, these financial shenanigans succeeded in bilking millions of cedis out of unsuspecting depositors. The natural consequence is the price we are all paying. Money that should have been used to build schools, hospitals, boreholes and roads are being used to clear the mess created by a few self-seeking individuals.

Apart from the chaos in the financial and banking sector, unprecedented levels of government borrowing and reckless expenditure brought the economy to its knees by 2016. That compelled the government at the time to turn to the IMF for policy credibility with attendant harsh conditionalities, including a freeze on employment and wage increment.

Purpose of banking

Conventional banking norms indicate that banking regulation and supervision are to ensure that the banking system remains sound. Banking laws and regulations seek to promote policies that allow only financially sound banks to operate; limit excessive risk-taking by owners and managers of banks; establish appropriate accounting, valuation, and reporting rules; and providing for corrective measures and restrictions on activities of weak institutions.

Between 2012 and 2016 it appeared that the Bank of Ghana had relinquished its banking regulatory and supervision to politicians, given the multiplicity of banks and microfinance companies. In fact, a small and developing economy like Ghana did not need 33 commercial banks and over 3,000 microfinance companies to function properly.

Records indicate that the Banking Act of 1970 did not provide clear guidelines to banks and the banking authorities on the minimum capital requirements, risk exposure and prudential lending limits for banks, provisions for possible loan losses, and methods of interest accrual on nonperforming loans. Banking supervision, therefore, was beset by numerous problems, starting with poor organization. In many cases, regular reporting systems were not in place, and data were lacking.

It was not until 1988 that the Banking Supervision Department started on-site inspection and were heavily dependent on banks’ internal control mechanisms and external auditors’ reports to analyze and assess bank performance. In the case of the current bank failure, there was too much dependence banks’ internal control systems, which tended to be weak. For most of the collapsed banks, it came out that they failed to publish audited reports for two years prior to the collapse.

In a previous report the World Bank had disclosed that the Banking Supervision Department had serious staffing limitations. There were a few specialized, skilled, and qualified examiners who even lacked adequate training.

The lack of adequate regulatory enforcement and supervision of commercial banks had been a major cause of problems in Ghana’s banking sector and probably remained the same till 2017. As in the past, the poor regulation and supervision can be partly blamed for the large number of nonperforming assets, found on the books recently. Consequently, less attention was paid to the provision of required reserve and capital requirements. This was the major cause of the insolvency of the collapsed banks in 2016.

Accountability institutions

In the same Christmas and New year message, President Akufo-Addo disclosed plans to strengthen the accountability institutions to prosecute corruption among state institutions. He hinted that investigations into potential criminal conduct on the part of the shareholders, board of directors and management of the collapsed banks were proceeding. According to the President it appears there has been a massive diversion of assets of these financial institutions. “I assure you, that the outcome of these inquiries will be made known very soon, as well as the actions that will be taken to bring those responsible to book.”

In fact, one area that many Ghanaians are becoming restless with the government is the delay in prosecuting the brains behind such massive looting of depositor’s money. One may understand the frustrations and impediments the Attorney General and her team are facing in obtaining the necessary documentation for prosecution.

This is because there are many workers at the Attorney General’s office, the Ghana Police Service and other accountability institutions who are overly partisan to the detriment of promoting public interest. But this should not be an excuse to let the culprits off the hook. Many poor people, including the youth are languishing in jails for minor infractions, such as stealing cassava, goat or mobile phones.

Recently I read a report on social media, where a 12-year boy was sentenced for stealing a mobile phone because the police prosecutor convinced the judge that the boy was 18. Yet, the real criminals and economic saboteurs are walking freely, and boldly accusing others of being corrupt. Justice appears to be on sale for the highest bidder. In fact, the signals we are sending is that the political elites have a way of protecting themselves, no matter which party is in power.

At the inception of his government in 2017, President Akufo-Addo encouraged Ghanaians to be active citizens and not to sit the fence. Many Ghanaians have responded positively to the President’s call in many spheres; one of them being the demand for prosecuting all involved in the banking crisis and other corrupt deals.

It is for the sake of accountability that the framers of our 1992 Constitution made it mandatory that elections should be held every four years, so that ordinary citizens like me have the opportunity to choose from alternative policies. The NPP government rode to power on the wings of prosecuting corruption and must be seen to be doing that. The President’s promise to strengthen accountability institutions is a good intervention; however, the institutions must be up and doing.