…but the future looks bright
In America today, Savings and Loans (S&L) Institutions have been the backbone of the massive growth and economic development we have witnessed in the United States Economy over the last century. Indeed, at the beginning of the 19th century, banking was still something only done by those who had assets or wealth that needed safekeeping.
The first savings bank in the United States, the Philadelphia Saving Fund Society, was established on December 20, 1816, and by the 1830s such institutions had become widespread. They provide many of the same services to customers as commercial banks, including deposits, loans, mortgages, cheques and debit cards. S&Ls were originally created to provide more economic opportunities, like home loans, available to more Americans such as members of the middle-class.
In Ghana, the story is not different, the S&Ls which is categorized as the Non-Bank Financial Institutions have been the forefront of economic development. They work closely with Small and Medium Enterprises and market folks. They provide an avenue for savings and some credit facilities to help them grow their businesses. I am much particular to associate S&L to Ghana`s development because they have been vibrant in meeting the needs of a certain class of individuals and firms that the traditional banks will not do.
Bank of Ghana clean up exercise
The financial sector of Ghana has undergone distress in the last few years with high non-performing loans and average capital adequacy ratio below the statutory minimum of 10 per cent that is required. Savings and loans sub-sector dominated the Specialized Deposit-Taking Institutions sector in Ghana, which are presented 42 per cent of the total asset size of the subsector.
According to the Bank of Ghana (BoG), only eight out of the 37 companies in the S&L industry had a paid-up capital above the minimum amount of GH¢15 million as at December 2017. These challenge ramifications on the sector’s ability to undertake and deploy effective financial inclusion.
It wasn’t so surprising when Bank of Ghana lifted its stick on 16th August 2019 to revoke and discipline recalcitrant S&Ls who were bringing the name into disrepute. According to the central bank, the revocation of the licenses of these institutions became necessary because they were insolvent even after a reasonable period within which the BoG had engaged with them in the hope that they recapitalized by their shareholders to return them to solvency.
The BoG also assessed that these institutions had no reasonable prospects of recovery and that their continued existence poses severe risks to the stability of the financial system and to the interests of their depositors. In line with the Government’s commitment to protecting depositors’ funds, the Government made funds available to enable the Receiver to pay depositors after their claims were validated. Some of the reasons that lead to BOGs decisions to revoke the license are stated below:
- The levels of capital held by some savings and loans companies and finance house companies were in violation of the minimum regulatory capital required by Act 930. This made it precarious for these institutions to continue to undertake the business of specialized deposit-taking institutions, given the risks they posed to their depositors and other counterparties to whom they were exposed directly or indirectly; b. Excessive risk-taking without the required risk management function to manage risk exposures;
- The use of depositors’ funds to finance personal or related-party projects or businesses on terms that were not commercial, leading to little or no income accruing to the relevant savings and loans companies or finance house companies and thereby compounding their liquidity challenges;
- Corporate governance weaknesses with weak Board oversight, poor accountability, and override of internal controls;
- Creative accounting practices and under-provisioning for impaired assets, thereby misrepresenting their true financial condition to the Bank of Ghana and other stakeholders; and
- Persistent regulatory breaches, involving non-compliance with Bank of Ghana’s prudential rules, and failure to implement Bank of Ghana on-site examination recommendations.
Addressing societal needs
There is a bigger question to address in terms of what has been the contribution of S&L Companies to savings mobilization and credit availability and more importantly, to what extent does their contribution address needs that have not been satisfactorily resolved by the traditional banking system.
The general clientele of S&Ls companies is essentially urban-based and largely female (Goldstein et al, 1999). These companies largely deal with clients who are able to contribute to their strategy of savings mobilization. The clientele is usually made up of individuals with peculiar financial needs. These are people with relatively low social status and low income. Also, a comparatively large number of the clientele needs to be served for the operations to be profitable. There is therefore a high risk of default which needs to be well managed.
Until recently where commercial banks leveraged on Financial Technology (FinTech) firms to provide micro-lending and loans to a session of the society to deepen financial inclusion, this was at the forefront of S&Ls. As the case has been for some time, with regards banking principles of lending, the credit methodology requires documentary evidence, long-standing banker-customer relationship and collateral, which most micro and small businesses do not possess at some point in time.
Somewhere in 2007, the banking system reached only about 5 percent of households and captured 40 percent of the money supply according to a report by the Bank of Ghana. Personal guarantors were proven to be relatively effective and enforceable as security for loans in Ghana. These companies tend to rely relatively heavily on personal guarantees of the borrowers while banks often insisted on third-party guarantors who are in a strong financial position and clearly understand their obligations.
Figure 1 shows deposits trends in some selected Savings & Loans in Ghana
Data Source; 2018/2019 Unedited Financial Statements
S&L traditionally have ensured to stay to their core mandate of dealing with small businesses, individuals to keep them afloat. Data from their financial statement has also shown that a total deposit received from customers continuous to increased within these two periods. For instance, total deposits received from customers by Best Point Savings & Loans increased from Ghs257m in 2018 to Ghs259m in 2019. Again, the data also revealed that deposits of Ghs62m and Ghs71m were recorded in 2018 and 2019 respectively by PAN-AFRICAN Savings and Loans.
Empowering the GHALSAC
As we know, the Ghana Association of all Savings and Loans Companies (GHALSAC) is registered under the laws of Ghana and also licensed by the Bank of Ghana. It was registered and also obtained a certificate to commence business in the year 2008 as a company limited by guarantee and not having any share capital and also shall be a non-profit making institution. Since its inceptions, GHALSAC has been very instrumental in ensuring sanity and instilling confidence in that sector.
Considering all the issues raised by Bank of Ghana that lead to the revocation of the license for some of the Savings and Loans, it becomes necessary for GHALSAC to continue to strengthen institutions and improve on the existing policies, framework and governance. Setting out its objective among many others; to serve as a platform for effective communication and collaboration among members and as a mouthpiece and a consultation body for discussions with key stakeholders in the sector.
Challenges of savings and loans
Savings and Loans Companies are often faced with the incidence of their clients not repaying loans granted to them as a result of many factors. Key among these factors is the poor credit risk management practices by credit officers of these firms. They may give loans to sole proprietors who may not repay their loans for genuine and intentional reasons. Poor due diligence prior to the granting of loans and poor monitoring. Some of their clients may change their locations making it difficult and impossible to reach them.
Corporate governance breaches
Anytime good corporate governance rules are breached, it is a recipe for chaos. Some of these savings and loans are owned by entrepreneurs who have no regards for due process. They push their employees to engage in fraudulent transactions and sometimes the genuine transactions with their related parties are not fairly priced. All these red flags are challenges that do not augur well for the survival of the organization in the long run.
Investments with risky companies
Some of these Savings and Loans companies offer their depositors very high-interest rates on their deposits with them. These high-interest rates cannot be obtained from solid financial institutions. They can only be obtained from weak financial institutions that are struggling and sometimes microfinance institutions. These eventually lead to defaults when the investments mature.
For savings and Loans companies to remain relevant and contribute their quota to economic development through the avenues they create for financial inclusion especially banking the unbanked, they need to address the queries raise by Bank of Ghana in so they don’t also get their licenses revoked.
What can shareholders do?
Shareholders of these savings and loans companies need to learn to practice good corporate governance going forward. The shareholders often interfere with the work of the professional they have employed to run their businesses by getting them to divert funds into other chains of businesses they own without due process. Not only is this unethical, but it is also equally criminal.
When these diversions of the fund is not controlled, it degenerated into liquidity and capital adequacy problems that can lead to regulatory infractions and compliance breaches. They can only be resolved when the shareholders and their senior managers adopt good corporate governance practices like accountability, proper risk management and following due process.
In the financial services industry, risk management is critical for survival and going concern. Poor risk management emanating from financial mismatch and over-concentration to one sector. When these savings and loans companies take short term funds from depositors and use them for long term projects. This would eventually lead to liquidity problems.
They should learn to invest with the only solid financial institution that offers risk-adjusted returns on investments and not gamble with depositor funds.
Additionally, they are not to be so exposed to one sector. For instance, the emergence of Covid-19 pandemic has brought some lessons to banks and humanity. The hospitality and the educational sector were the hardest hits. So, any institution that is overexposure to them would struggle. So they need to structure their clientele based in such a way that some eventualities would not affect their going concern.
Savings and Loans companies give loans to a clientele base who may not have stable residential premises. They need to carefully give loans that they know they can retrieve based on thorough analysis and client appraisal. The interest rates on these loans should be very reasonable to make the repayment much easier. Loans granted should be well monitored so early signs on defaults can be seen and addressed. They also need to build the capacity of their client by encouraging good bookkeeping practices etc. This would go a long way to help them mitigate the chances of default.
They need to find creative means of tracing their clients to retrieve funds from them. They need to give loans to their clients in tranches so they do not misappropriate it.
The way forward
S&L has become an integral part of the financial system in Ghana and no doubt the impact continues to be great. Admittedly, their current relative shares of total deposits and total credit may not be very significant. However, as the saying goes, we are not in normal times and not in normal times require a rethinking of a process to serve customers. There is a need to improve the quality of credit administration, as well as underwriting standards.
It`s important for S&Ls leverage on technology to drive business. Fintech–broadly defined as technology-driven financial innovation–is rapidly changing the nature of financial products, services, marketing, and even institutions worldwide. Amid all the excitement over its potential impact on financial inclusion, the gender dimension of fintech is often overlooked.”
Savings and Loans companies can change the narratives around them now buy resolving to practice good corporate governance, avoid poorly priced related party transactions and work on their risk management. When all these is done with the help of the regulator and other policymakers, they could become the engine of growth for the SME sector and make a significant contribution to national and economic development like their counterparts in the United States of America.
>>>the writer has completed his Doctor of Philosophy (PhD) studies in Financial Management, Investment Option. A Finance and Telecom enthusiast, he managing local and global investors, intermediaries, banks and Non-Bank Financial Institution relationships with an international bank in Ghana. Contact: [email protected], Cell: +233-204-811-911