As you all know, the central bank on 1 August 2018, announced the revocation of banking licences from the Beige Bank, Construction Bank and Sovereign Bank in addition to the Royal Bank and uniBank. In his preamble to the exercise, Governor, Dr Ernest Addison said: “The Bank of Ghana is mandated by law to promote the safety, soundness, and stability of the financial system, and to protect the interests of depositors.
“In this context, the Bank has over the last year rolled out measures to strengthen the financial system to protect the interests of depositors; however, a number of legacy problems have plagued the banking sector including macroeconomic factors; poor corporate governance and risk management practices; related party transactions that were not above board; regulatory non-compliance; and poor supervision (questionable licencing processes and weak enforcement) leading to a significant build-up of vulnerabilities in the sector.”
Don’t you think the term ‘dubious’ would resonate better in this context than ‘questionable’?
Based on the “questionable licencing processes” as revealed by the Governor, this write-up will attempt to provide a summary of banking licencing processes and point out where the defects occurred regarding licences to the Beige Bank, Construction Bank and Sovereign Bank.
Obtaining a Banking Licence
This will focus on the steps from the prerequisite (section 9) through the provisional licence (section 10) to the final approval and issuance of banking licence (section 12) as stipulated in the Banks and Specialised Deposit-Taking Institutions Act (930) 2016.
The whole reading and understanding of the Prerequisites section (9) reveals that it is mandatory for an applicant to satisfy through and through all the requirements therein. This section is inscribed in these ingredients: feasibility report, fit and proper persons; suitability of the significant shareholders, adequacy of governance, risk framework and internal control systems. The section 9 (d) makes it binding on the Bank of Ghana that it “shall not issue a licence to an applicant unless the Bank is satisfied that the paid-up capital of the applicant is adequate, and the original sources of capital are acceptable and do not include borrowed funds”.
To be satisfied with the prerequisites provisions, to my mind, means that the central bank should conduct a rigorous due diligence to be doubly sure the capital source is beyond doubt and the process is above board. Premised on a satisfactory report at the prerequisites, the Act triggers the next step in the licencing process – which is issuance of the provisional licence. Nonetheless, the Act envisages any defects occasioned in the first step to be cured at the provisional licencing stage before the final approval and issuance of licence.
Reading Section 10 2 (b) and 28 together reveals that “the Bank of Ghana may issue a provisional approval for a specified licence to an applicant on the terms and conditions that the Bank considers appropriate, if the Bank is satisfied that the applicant has and [shall maintain at all times] a minimum paid-up capital, [unimpaired by losses]” as required under the prerequisites stage. By inference, detecting and curing the capital defects (deficits) before the provisional licence will be at a minimal cost in relation to the post-final licence cost (of revocation) to stakeholders when the bank is in full operation and incurs more liabilities.
In fact, a clear understanding of the processes shows that the final approval and issuance of banking licence is dependent upon the Bank of Ghana strongly convincing itself that the applicant satisfied all the preliminary requirements including the prerequisites stage and the provisional stage, without taking its supervisory eagle eyes off the paid-up capital – which is the fulcrum around which banking business revolves. Surprisingly, in delivering his verdict to revoke the licences of the Beige, Construction and Sovereign Banks, the Governor opened a Pandora-box containing the hydra-headed capital monster.
The Governor, Dr. Ernest Addison held that: “As part of Bank of Ghana’s investigations into the failure of Capital Bank Limited (currently in receivership), it emerged that Sovereign Bank’s licence was obtained by false pretences through the use of suspicious and non-existent capital”.
In addition, he said: “Beige Bank and Construction Bank were each granted provisional licences in 2016 and launched in 2017. Subsequent investigations conducted by the Bank of Ghana revealed that, similar to the case of Sovereign Bank, both banks obtained their banking licences under false pretences through the use of suspicious and non-existent capital – which has resulted in a situation where their reported capital is inaccessible to them for their operations”.
In effect, the section 9 (d) of pre-requisites provisions was circumvented and the defect (use of suspicious and non-existent capital) not cured at the provisional licence stage, but the banks went ahead to obtain the final banking licences.
The central bank’s inability to perfect the licencing processes regarding the three (3) banks therefore provided the avenue for them to hold themselves out as banks when in fact they were half-baked entities upon which many placed their hopes and aspirations until the can of worms was opened. As we have come to know, Construction Bank was a quicksand upon which no building could stand for customers’ deposits. In the case of the Beige Bank, the thick, black colour at its background was washed away by the August storms to the corridors of Consolidated Bank. After all, Sovereign Bank had no sovereign licence to engage in the banking business. “Na who cause am?”
The governor was fair and square in his submission on the questionable licencing processes, and relied on Section 16 (1) – which stipulates that “the Bank of Ghana may revoke a licence issued under section 12(a), where the Bank of Ghana is satisfied that an applicant provided false, misleading or inaccurate information in connection with the application for a licence or suppressed material information” – to liquidate them.
This brings to the fore my understanding of the legal precept of unilateral mistake – “one party relied on a statement of the other about a material fact that the second party knew or should have known was mistaken by the first party”. Unilateral mistake make a contract voidable or void when the mistake affects the root of the contract. Since banking licence is renewed yearly, its terms and conditions should be treated as a contract with the regulator.
In that legal precept, true information on the source of capital for the banking licence is a material fact. In fact, the competence of professionals at the Bank of Ghana and the resources to trace sources of funds for the paid-up capital cannot be underestimated. But curious minds will continue to ask: how were the three banks able to outwit the system and obtain the licences with suppressed information on capital?
Well! Every organisation has its own challenges to deal with. We acknowledge the new Office of Ethics and Internal Investigations at the central bank, with the expectation that it lives up to its billing.
I am once again grateful for the inspirational messages coming from you. God bless YOU!