By Rafiq Raji, PhD
After the failure of a couple of banks recently, the public is on edge. That is, even as the Bank of Ghana, the central bank, has provided assurances that depositors’ funds are safe. Not that a banking crisis is at hand. Far from it; although some might argue otherwise. But there is definitely a lot more that the BoG could and must do to restore confidence. For instance, culprits behind the failure of Unibank, hitherto Ghana’s sixth largest bank, where directors were found to have helped themselves to depositors’ funds to the tune of $1.1 billion, about 75 percent of the bank’s assets, should in addition to being relieved of their positions, also be prosecuted to the full extent of the law. Loan defaults have also become rampant, with non-performing loans (NPLs) accounting for 21.3 percent of all loans in August 2018; albeit largely unchanged from the same period last year when they were 21.9 percent of loans. Naturally, banks are reluctant to lend, preferring to buy government treasuries and bonds instead. Consequently, the government accounts for a great deal of banks’ exposure. And although private sector credit extension (PSCE) has been growing in real terms, at 5.4% in August 2018 from -5.0% in same month last year, it is not the case when compared to GDP in nominal terms; based on Bank of Ghana data. In August 2018, nominal private credit extension was 14.7% of GDP from 15.2% in the same month last year. A great deal of regulatory drive would be required for a turnaround. Thus, the central bank’s directive in September 2017 for banks to beef up their capital base to a minimium of 400 million cedis from 120 million cedis hitherto should be pursued with the utmost determination. And there should not be a shifting of the end-December 2018 deadline. Better capital adequacy reporting via Basel II at the direction of the central bank in July is also laudable.
More consolidation & liquidation
To date, the BoG has taken the following actions to clean up the banking system and restore confidence. It liquidated and gave control of UT Bank and Capital Bank to Ghana Commercial Bank in August 2017 “due to severe impairment of their capital.” A year later, it revoked the licenses of Unibank, Royal Bank, Beige Capital, Construction Bank, and Sovereign Bank and put them together under Consolidated Bank Ghana Ltd, a special purpose vehicle, which it capitalised to the tune of 450 million cedis. The authorities also issued a 5.8 billion cedi ($1.2 billion) bond to cover their liabilities. Considering when put together, the five banks have pending obligations that require funding of about 5.8 billion cedis, the measures put in place by the central bank should suffice for now. Much more funds would probably be needed in due course, however, as more information is discovered and perhaps other banks are found to be in less than ideal positions.
Not only were the failed banks found to be struggling but some obtained their licenses fraudulently; Sovereign Bank, Beige Capital and Construction Bank for instance. With the benefit of hindsight, the BoG was not quick to act. Unibank and Royal Bank were known to be significantly undercapitalized as far back as 2016. Almost 80 percent of Royal Bank’s loans were non-performing, it was discovered. It is certainly curious that it was only until 2018 that Unibank was declared to be “beyond rehabilitation.” Surely, there was no need to wait that long. The reason might not to too hard to determine. Unibank had some influential board members, including former Ghanaian finance minister and central bank governor Kwabena Duffuor, the founder. In early September, KPMG, an audit firm and receiver for the now defunct Unibank, asked a High Court to declare unlawful, loans made to Mr Duffuor, other named shareholders and their so-called related interests. KPMG is also asking Mr Duffuor et al. to pay back 5.7 billion cedis ($1.1 billion), about 75 percent of the defunct bank’s assets, of allegedly misappropriated funds of Unibank. According to Bloomberg, a news wire service, Nii Amanor Dodoo, a partner at KPMG in Accra, says Mr Duffuor and co. have committed to the repayment; albeit Daniyal Abdul-Karim, Mr Duffuor’s attorney, raises doubt about that when he remarks in the same report that “[KPMG’s] claims are extremely weak…[and]…are defeated both on facts and the law.” And in a report by Reuters in mid-August, Mr Duffuor disputes the figures: “We believe the figures the central bank is putting out are not right.”
Other banks would definitely not want to become part of “Consolidated Bank.” Thus, there is almost certainly going to be more consolidation in the industry, as smaller banks or those not able to raise enough capital in time to meet the BoG end-December deadline, merge with bigger ones or come together to become bigger and stronger. Others are looking to raise capital on the stock market. But considering the supposedly lucractive 1.14 billion cedis ($238.5 million) initial public offering (IPO) of MTN Ghana, a telecoms firm, in late August underwhelmed below its 3.47 billion cedis target, there are doubts about how successful the banks looking to take this route would be. That is not deterring them, it seems. In September, just weeks after the MTN listing, Energy Commercial Bank secured approval from the Securities and Exchange Commission (SEC) to raise 340 million cedis via an initial public offering to enable it meet the new minimum capital requirement. There should probably be a few more before the December deadline. Additionally, a couple of merger talks are ongoing; some not so well, though. In late July, for instance, there were reports Premium Bank and BSIC Ghana were abandoning merger plans with GN Bank. A merger proposition between Sahel Sahara Bank, GN Bank and Premium Bank also fell through. Instead, Sahel Sahara Bank chose to go with Omni Bank in mid-August, making it the first potential merger since the scramble to meet the new capital requirements, having since received a no objection nod from the central bank.
Firm up oversight
The recent bank failures are evidence of poor banking supervision by the central bank. If confidence is to be restored, the prominent people found to be responsible for the mess in the banking sector should not only be required to pay back the depositors’ funds they misappropriated but also face the full wrath of the law. Their collaborators at the central bank should also be punished severely. It is heartening to know that the authorities’ rhetoric reflect this sentiment. In mid-August, the BoG told Reuters, a news agency, that it planned to prosecute the errant executives of the failed banks. More specifically, BoG deputy governor Elsie Awadzi said the central bank was “working very hard on submitting a dossier on each of these banks to the law enforcement agencies…to further investigate criminal behaviour or what could potentially be criminal behaviour and to prosecute,” adding further that the regulator was “going to ensure that integrity is returned to the financial sector by ensuring that persons whose conduct contributed to the banks’ failure will not be shielded.” According to Moody’s, a rating agency, the new state-owned bad bank would raise the already worryingly high indebtedness of Ghana to 70 percent of GDP from 64 percent in May. The authorities’ words must be backed by action to matter.
An edited version was published in the Q4-2018 issue of African Banker magazine
Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. https://www.businessdayonline.com/columnist/rafiq-raji/article/ghana-need-for-stronger-banking-supervision/