According to data reported by the Ghana Interbank Payment and Settlement Systems (GhIPSS), transaction volume and value across the Mobile Money Interoperability (MMI) platform soared by 420 percent and 591 percent respectively.
The explosive growth of digital payment platforms following COVID-19 notwithstanding, one cannot lose sight of the fact that cheque-based transactions still command the lion’s share across board.
In value terms the percentage of transactions processed via the clearing house platform in 2019 formed 96.2 percent of transactions across all GhIPSS payment platforms. Though 2020 saw a decline to 92.4 percent due to a range of factors (including COVID), GH¢0.92 pesewas (out of every GH¢1) being processed using cheques is still no mean feat.
It’s not surprising therefore that the market regulator will find it befitting to re-echo the sanctions associated with dud cheques. Every day, hundreds, if not thousands, of negotiable instruments issued by economic actors are routed through the Automated Clearing House (ACH) Direct Credit system in a bid to settle economic transactions. The practice of issuing dud cheques undermines the confidence in negotiable instruments as a credible means of transaction settlement.
The implications for monetary policy effectiveness may not be felt immediately, but what remains certain is its retarding effect on Ghana’s progress towards a cash-lite economy. The less confidence businesses have in cheques as a reliable payment alternative, the greater their liquidity preference.
The introduction of ACH Direct Credit Near Real Time (NRT) service by Bank of Ghana in September 2020 may perhaps help corporates and SMEs to increasingly adopt digital options. But let’s face it, paper is still paper, and cheques are not going away anytime soon. So, let me commend Bank of Ghana for at least recognizing this fact, and issuing directive No. BG/GOV/SEC/2021/03 to safeguard the integrity of financial system. This is one of the most consequential directives to emanate from the regulator in recent times. This directive effectively ups the ante on the one issued six year ago (BG/GOV/SEC/2005/05) by tightening the sanctions regime for issuance of a dud cheque.
Notwithstanding its significance, I fear that the directive does not go far enough. Secondly, it poses serious questions about how Bank of Ghana views other regulated financial institutions that are non-deposit taking, for instance Tier 3 and Tier 4 micro-credit.
In the ensuing paragraphs I will present arguments to support my claim. But first, allow me to reproduce an extract of the new dud cheque directive to enable me unpack it, text by text.
Notice No. BG/GOV/SEC/2021/03
The Directive reads, “Banks, Specialised Deposit-Taking Institutions (SDIs) and the Public are reminded that under section 313(A) of the Criminal Offences Act, 1960 (Act 29) as amended, it is an offence punishable by a fine and/or imprisonment of up to five (5) years for any person to issue a dud cheque. To further discourage the issuance of dud cheques, the Bank of Ghana (BoG) introduced additional measures through notice number BG/GOV/SEC/2005/5. In spite of the above, BoG has observed with grave concern, the high issuance of dud cheques by some customers of banks and SDIs. This development has consequential effects on the acceptance of cheques for transactions. To discourage this malpractice, and to sustain confidence in the payment system, BoG has revised the sanctioning regime in respect of issuance of dud cheques for strict compliance by banks and SDIs…”
The directive goes on to list the sanctions and administrative responsibilities placed on Banks and SDIs in the event that a customer issues a dud cheque for the first, second and third time within a three-year period. Let’s take it one at a time.
Issue Warning Notification
The directive requires the Bank or SDI to issue a warning notification to the dud cheque issuer by SMS, email or other documented forms, spelling out sanctions for subsequent violations.
I would argue, that as a useful as this may be as a first step, it is insufficient given that some Banks or SDIs may prioritize “customer service” over compliance especially when it comes to their favorite customers. And frankly, the top management in these institutions may not necessarily know this because decisions to return and levy penalty for a dud cheque may not always be taken by the central clearing desk at head office. Some cheques are presented by third-parties for encashment at the branch level. In situations like this, “return and charge” decisions may be taken by the operations manager.
On several occasions, I have presented cheques at a branch of the paying bank, and all the teller told me after viewing the screen was, “please call the customer”. The best I could do was to insist that the teller stamps the cheque and annotate on the face of it, reason for returning. On one such occasion the teller did the first but declined the second, still insisting that I call the customer. In situations like this, the payee or holder of the cheque in due course, has no assurance that the reason for return is insufficient funds and or whether the customer may be charged.
In fact, some drawers, knowing that their banks or financial institutions will definitely call back to verify cheques, deliberately switch off their phones after they issue cheques so as to prevent the banks from paying because “customer cannot be reached”. In that case, the reason for returning the cheque may not be as a result of “insufficient funds” per se, yet the effect on confidence is still the same. This is why I argue, that notification by the Bank or SDI alone is not sufficient. In order to establish accountability, Bank of Ghana must institute a parallel mechanism that allows complainants to notify the Banking Supervision Department or other independent oversight bodies, by providing particulars of cheques that were presented and returned. This data set could be used to triangulate the accuracy of reports presented by the Banks or SDIs as mandated by the directive.
Credit Report and Dud Cheques Returns
In addition to issuing a warning notification and placing the customer under surveillance for three years, the new directive on dud cheques mandates a Bank or SDI to file a report with a credit reference bureau pursuant to Section 25(c) of the Credit Report Act 2007, Act 726. According to Section 25(c) “a data provider which is a financial institution shall report to the licensed credit bureau […] without first obtaining consent from the customer, information on a person involved in the issuance of dishonored cheques owing to lack of funds or fraud.”
This is without prejudice to the existing reporting obligations in respect of dud cheques. On periodic basis Banks and SDIs are required to submit reports on dud cheques on an “as and when” basis using a prescribed template. There are two problems with this as aspect of the directive. And here, I will tie it in with why I claim the directive poses serious questions about Bank of Ghana’s approach to regulating the financial sector.
Anyone who paid careful attention to the language of Notice No. BG/GOV/SEC/2021/03 would notice the emphasis on “Banks and Specialized Deposit-taking Institutions”. Yet, the regulatory purview of Bank of Ghana covers other financial institutions as well, albeit be non-deposit taking, but no less significant in terms of their contribution financial stability and monetary policy transmission. Ideally, the emphasis should have been “Regulated Financial Institutions”. But let’s even discount the exclusivity of the language as a forgivable grammatical oversight. The question remains: Is there any particular reason why, say, Tier 4 micro-credit institutions are not also mandated to submit periodic returns on dud cheques (through their Association) to Other Financial Institutions Supervision Department (OFISD) for instance? I would counsel, that an all-encompassing approach” in terms of regulatory engagement will inure to the benefit of the financial sector from a public policy standpoint.
The second issue has to do with credit reporting. Over the years, compliance with the Credit Reporting Act has seen some marked improvement albeit more work needs to be done, particularly on the Microfinance front. Per the last sighted report (Credit Referencing Activity Annual Report 2019) a breakdown of total credit enquiries by Institution type showed that Banks recorded 32 percent, with Non-bank Financial Institutions (NBFIs) recording 56 percent. Microfinance Institutions bottomed out with 5%. Except for NBFIs, the 2019 data represents year-on-year growth over 2018 share of total credit enquiries made (NBFI: 60 percent; Banks: 28 percent; RCBs: 8 percent; MFIs: 3 percent). Notwithstanding the increasing usage of the credit report system, a cursory comparison with the nominal volume of cheques transactions year-on-year on GhIPSS platform, points to a certain disconnect, even if we assume returned cheques form less than 5% of all cheque transactions. What does this mean? Here is how I see it: In addition to issuing a warning notice and reporting the drawer for issuing dud cheques, Bank of Ghana is asking regulated financial institutions to comply with a statute that has struggled to become part of the industry’s compliance practices and culture, at least in the microfinance space. This elevates concerns that the current directive may not be the last we will hear of Bank of Ghana on dud cheques. I think it’s about time Bank of Ghana reviews its approach to enforcement to ensure that the dog doesn’t only bark, but it can bite.
Proposals for Better Enforcement
In order to really enforce this directive on dud cheques, Bank of Ghana may have to be very rigorous and proactive in sanctioning non-performance of administrative tasks that are required to ensure compliance. In this regard I wish to propose the following initiatives as part of the enforcement tool box:
- Institute a parallel reporting mechanism to allow complainants to report directly to Bank of Ghana, via email, on cheques that have been presented and returned, whether due to insufficient funds or because “drawer cannot be reached”. This will intensify accountability pressure on all parties to the negotiable instrument; drawer, drawee, and holder-in-due-course.
- Empower the sector associations, particularly the ones with oversight over non-deposit-taking institutions to mandate the submission of dud cheques return for onward submission to OFISD, on same terms as pertains in the Bank and SDI circles.
- Levy pecuniary charges on any regulated financial institution for failure to comply with Section 25 (c) of the Credit Reporting Act 2007, Act 726.
The author is a policy analyst and a Director of Metis Decisions Limited. He is also the founder of Rural Heights Foundation, a social impact organization in Ghana. He advises businesses spanning several industry verticals on corporate governance, strategy and risk management. Email: [email protected]