Demystifying the banking sector clean-up

On the morning of Monday August 14, 2017, Ghanaians woke up to news that the Bank of Ghana had revoked the licenses of two prominent indigenous banks – Capital Bank and UT Bank. At the same time, the Bank of Ghana (BOG) had approved a Sale and Purchase Agreement that allowed GCB to immediately take over the assets of the distressed two banks. That was just a tip of the iceberg.

Issues and interventions

The first major hint of crises in the financial sector was given when Dr. Mahamudu Bawumia revealed in a 2016 lecture that the BOG’s asset quality review of 2015 showed that eight banks exhibited “significant weaknesses with capital adequacy ratios of below 10 percent and some below 5 percent and nearing collapse.”

In President John Mahama’s Sessional Address to Parliament in 2016, he mentioned that lack of effective supervision by the then leadership of the Bank of Ghana was responsible for the liquidity challenges of DKM, a microfinance company and remained reticent or complicit in the liquidity issues of those struggling banks.

Apart from lack of effective supervision, the then government realized that the Central Bank did not have the legal basis to take certain drastic measures. To address this, steps were taken to pass the Banks and Special Deposit-Taking Institutions Act, Act 930 (2016). With this Act in place, the Central Bank now had sufficient legal basis to take crucial steps to resolve that challenges that confronted the banking industry.

However, the BOG and the government could not take the difficult but necessary steps, as elections were around the corner. Perhaps, if the Mahama administration had won the 2016 elections, same or similar measures would have been taken to address the crisis.

It is on this basis that new leadership at the Central Bank took advantage of the new Act to correct the defects of the banking sector.

Thus the revocation of the licenses of UT and Capital Banks w the beginning of steps of rectitude. A year later, licenses of uniBank, The Royal Bank, Beige Bank, Sovereign Bank, and Construction Bank were revoked and merged into the new Consolidated Bank Ghana (CBG). Governor Ernest Addison explained at a press briefing that these banks were vulnerable with inadequate capital, high levels of nonperforming loans, and weak corporate governance.

The bank found instances of shareholder lending without due process, related party transactions, and unsupported operational licenses. These banks were dissolved, receivers were appointed and selected assets passed on to the newly formed CBG. Bonds were raised by government to undergird funds of depositors. Subsequently, Premium Bank, Heritage Bank were assumed under CBG for similar reasons.

Other banks such as UMB, ADB, NIB, Prudential and Omni-Sahel Banks which were unable to meet new capital requirements but were solvent and had good corporate governance got support from Ghana Amalgamated Trust (GAT) to shore up their capital.

Hundreds of savings and loans and microfinance companies that had similar capital inadequacy and governance issues also had their licenses revoked and a receiver is in the process of verifying and liquidating assets, validating customers’ claims and making sure that they do not lose their money.

Concerns

Finance Minister Ken Ofori-Atta has reported to Parliament that the clean-up has placed a weight of GHC 21 billion on government purse. Jobs have been lost. Entrepreneurs have lost their businesses and assets. Some depositors are still yet to receive their funds.

Could the government have bailed them out instead of revoking licenses? Bank of Ghana says the banks were given several opportunities to propose remedial measures, but the proposals were not cogent enough.

Government’s motive for revoking licenses of some of the institutions have been questioned as some of the shareholders are known political opponents.

GN Bank, uniBank and Heritage Bank were known to have as significant stakeholders people who have affiliation with some political parties.

Government has parried off these claims as speculative and unfounded.

According to President Akufo-Addo, “These measures saved not only the deposits of one million, one hundred and forty-seven thousand, three hundred and sixty-six (1,147,366) Ghanaians and their businesses and the people they employed, but also minimized job losses in the banking sector.”

Questions

Could the government and BOG have taken milder alternative measures instead of the outright revocation of licenses? Could more jobs have been saved? Is the banking system stronger now? What has happened to the about 3,000 workers who lost their jobs? What systems are the Central Bank setting up to ensure the blips that necessitated the clean-up do not recur? Is the criminal justice system robust enough to bring perpetrators to justice to serve as deterrent?

Necessary evil?

Considering that the asset quality reviews of 2015 and 2016 exposed disturbing capital inadequacies, it was imperative that BOG took profound and urgent steps to correct the defects. Although painful and embarrassing to shareholders, distressful to employees, discomforting to customers, and burdensome of the public purse, the essence of the clean-up should not be overlooked. Failure of BOG could have led to an explosive situation with far-reaching consequences.