Ghana’s banking regulator vs the regulated

‘Knights in shining amours on a national mission’ is how many industry watchers and the public at large perceive the Governor of the Bank of Ghana and his team who have demonstrated a steadfast commitment to drain the obviously dense swamps in Ghana’s banking sector. Others scream ‘Don Quixote’ , and rail out a myriad of reasons why the Bank of Ghana could have been complicit. The big contention of the second group is that the Bank of Ghana ought to have acted much earlier and quicker, and must apply the same rigour and standards to all banks without exception.

Controversy, it would appear, has become a new staple of Ghana’s embattled banking sector, as the Bank of Ghana applies increasingly stringent measures to strengthen the sector and rid it of its fragilities.

A growing number of critics seem to find fault with how those measures are being applied. The latest twist, in which five erstwhile privately owned local banks have had their operating licenses revoked, replaced by one state owned bank, has given a new wind to the criticism. Counted together with the revocation of the licenses of two other local banks – UT Bank and Capital Bank – a year ago, this has brought to seven the number of privately owned local banks BOG have had to sanction.

All these banks lost their licenses despite extensive efforts by the central bank to rescue them. The two banks who went down in August 2017, UT Bank and Capital Bank, were found to be beyond redemption. For a while they only survived on emergency liquidity assistance from the BoG. This emergency facility, going by leaked reports in the public domain, was also grossly abused by the two banks. Similarly, two members of the August 2018 Group namely – Unibank and The Royal Bank – suffered the same malaise. The other three – Sovereign Bank, The Beige Bank and Construction Bank – were said to have used primarily borrowed funds to meet the minimum startup capital requirement of GHc120 million. This illegality effectively meant these banks did not have adequate capital from get-go.

BOG’s spotlight revealed widespread poor corporate governance and risk management practices in many, if not most locally owned banks, that has left them with unsustainably high non performing loan portfolios, inadequate equity capital and crippling insolvency.

Hidden under layers of false financial statements, the full view of the difficulties in these banks had been obvious to the BOG in recent years. The leaked reports confirm same. Also beyond doubt is the extra and extensive efforts by the BoG to rescue these banks.

It is the banks that failed to recapitalize adequately that have lost their licenses.

Some critics though question why last ditch commitment by Unibank’s shareholders, to recapitalize that bank was turned down. The riposte from the Central Bank was that beyond the sheer scale of the issues at hand several engagements with Unibank yielded no results.

But criticism keeps rising on several other grounds too. One is that the central bank seems to be following a deliberate agenda to curtail the participation of locally owned banks in Ghana. Critics point to the 233% increase in the minimum capital requirement by the BoG under which all banks have up to the end of this year to raise their capital to at least GHc400 million or lose their licenses. Within the short time frame given them – the BoG only announced the 233% increase in minimum capital requirement in September last year – and what the central bank itself admits are “unfavourable market conditions”, most indigenous privately-owned banks, lacking the financial muscle of an international parent bank or the state as the case may be, are hard put to raise the new capital required within a 15-month time frame.



Indeed, the BoG did this on purpose, with the objective of inducing consolidation in the industry through mergers and acquisitions that would not only create bigger stronger banks, but would also diversify banks’ ownership structures enough to prevent their main shareholders from having the authority to use them for their own narrow, imprudent purposes; a trend which the BoG itself publicly claims has been the biggest cause of their financial woes in the first place.

The expectation was that some indigenous banks would merge among themselves while others would be acquired by their better financially endowed foreign counterparts. But the local banks themselves have failed to merge among themselves, in part because they lack the know-how, but also in part because their owners are loath to lose absolute control over their investments, along with the authority to use them as they like. Rather, they have intensely lobbied government for an extension of the deadline by up to five years to enable them use retained earnings over that period to recapitalize, a method that would allow their owners to retain their current ownership stakes and consequent unbridled authority. Meanwhile the foreign banks have declined to acquire their local counterparts in part by the exposes of eviscerating imprudence and outright financial misconduct by the owners and managements of the collapsed local banks .

This means that with the recapitalization deadline looming closer and closer, several local banks are on the brink of losing their licenses too, in this case because of inadequate capital rather than insolvency.

Most have applauded the efforts of the BoG to clean the Aegean stables and expect the same standards to be applied evenly across the financial services industry. That has not stop chatter about some other banks with similar poor financials who the BOG is yet to touch. contend that does not appear to be the case now as the travails of other banks on the right side of incumbency appears to have been ignored.

But this has not stopped similar criticism from rising against the state-owned banks. It is instructive that National Investment Bank has still not released its financial statements for 2017, despite relations requiring that this should have been done latest by end of March. Financial analysts point out that this tends to be a sign of financial troubles; indeed, three of the five banks whose licenses were revoked recently had similarly failed to release their financials for 2017 to the public.

The demise of Unibank Ghana, The Royal Bank, Sovereign Bank, The Beige Bank and Construction Bank, a fortnight ago, birthed Consolidated bank , for now a wholly government owned commercial bank with initial capital of GHc450 million, which is well above the GHc400 million minimum capital requirement set by the Bank of Ghana.

Without doubt there is overwhelming evidence that financial troubles of the five banks are the results of poor corporate governance and risk management at best, and outright fraudulent practice at worst. For instance, Unibank’s capital deficit of GHc7.4 billion and negative Capital Adequacy Ratio of 74.65%, was mainly the result of interest free loans and other advances given to shareholders and other related parties. By the end of May 2018 its non-performing loans accounted for 89% of its total loans portfolio. Unibank’s owners have contested the dire financial performance figures released recently by the BoG insisting that they have been deliberately doctored to justify the Central Bank’s actions.

The Royal Bank has followed a similar path, resulting in a capital deficiency of GHc567.78million and a negative CAR of 80.53% by May 31, 2018 by which time its non-performing loans constituted 78.79% of its total loan portfolio.

The other three banks involved though have had problems of a different nature. Simply put they each presented borrowed funds as their share capital to the BoG in fulfillment of the minimum share capital requirement of GHc120 million at the time, in order to secure their banking license. Not only does this contravene the law, but it also prevented the banks from effectively having access to their own purported share capital, when their deteriorating liquidity positions required them to do so.

What all five banks had in common though was grossly inadequate capital and severe illiquidity, both of which were putting depositors’ funds at risk. With a new minimum capital requirement of GHc400 million, the new capital needed to recapitalize each bank separately was simply too much. Indeed, right from the start, the BoG had intended to force consolidation in the industry by setting a minimum capital requirement that would force banks to merge in order to meet it and this is precisely what it has done in establishing the aptly named, Consolidated Bank.



Starting out with GHc 450 million in share capital and the proceeds of a GHc5.76 billion bond issuance by government to enable it bridge the combined capital deficit of the five constituent banks, Consolidated Bank has become, right from the start, Ghana’s third largest bank and one with nationwide branch network spread, primarily due to the extensive branch network of the erstwhile Unibank.

However, there are worries. The primary one is the logistical problem of integrating the processes and procedures of five different banks, without any time available to perfect the integration before offering services to the banking public under one umbrella. Indeed, initially, while the bank has one managing director and chief executive, a distinguished banking professional in the person of David Ashong, there are different top managers responsible for overseeing the individual inherited asset and liability portfolios of each of the five banks.

Another is the spectre of substantial job losses. Although the BoG governor, Dr Ernest Addison claims that there will be no job losses, analysts agree that this is a very unlikely prospect since there is currently multiple duplications of job responsibilities among management staff and close geographical proximity of branches of several of the five constituent banks in some locations which will warrant branch closures.

Add to these challenges the issue of sheer asset quality. Although the clearly bad loans of the five banks have been handed over to the receiver rather than to the newly established bank, it is definitely starting out with a less than ideal loan portfolio in terms of asset quality. This will curtail income streams at an initial stage when the bank will have to meet bloated staff and other running costs as well as prepare to begin amortizing the bonds issued by government on its behalf.

Most importantly though the BOG’s strategy has ensured the immediate preservation of depositors’ funds placed with five banks that were in regular need of emergency liquidity support just to cover deposit withdrawals as they were being made.

The revocation of five banking licenses and the establishment of a new state-owned bank that immediately ranks among the biggest in the country has dramatically changed the structure of Ghana’s commercial banking industry.

No matter one’s take on the BOG’s interventions and actions these are very bold steps that should serve the country well. The full merits or otherwise would become self-evident in the course of time. Immediate attention however is on what would happen at the expiration of the deadline for recapitalization. For sure things would never be the same again.