Ghana banking sector reforms: Parliament summons BoG, MoF

 …3-day probe into banking crisis begins Sept 5

The Finance Committee of Parliament has scheduled a three-day hearing with Bank of Ghana (BoG) and Ministry of Financial (MoF) officials to probe the banking crisis that has resulted in the collapse of seven local banks.

After a crunch-meeting in parliament, the committee scheduled the hearings for September 5-7, 2018.

On August 1st, 2018, the BoG announced the revocation of five banks’ licences – Unibank, Sovereign, Construction, Beige and Royal Banks – and subsequently transferred all deposits, selected assets and liabilities of those banks to a newly-created entity: Consolidated Bank Ghana Limited.

The action follows the withdrawal of banking licences of UT and Capital Banks a year ago; and their subsequent take-over under a purchase and assumption arrangement with GCB.

Speaking to B&FT after the meeting, Chairman of the Finance Committee Dr. Mark Assibey-Yeboah said: “We agreed on the mode of the hearings and who to invite and all other matters; so that is what we have been deliberating on.

“We are now going to write to the Bank of Ghana for the relevant documents. That is why we have given ourselves three weeks to ask for documentation, and we will meet again here on August 30 to peruse those documents; and if there are any gaps, we will ask for more.”

He also explained that the Committee will invite the Bank of Ghana, KPMG, PwC, Ministry of Finance, and the Consolidated Bank of Ghana.

On what the Committee hopes to achieve after these meetings, he added: “We are concerned with the economy generally and all matters dealing with the economy; if banks are collapsing and the Ministry of Finance is setting up a bank, and if they are doling-out GH₵8billion, don’t you think we should be concerned?

“Also, how are the existing banks and specialised deposit-taking laws being strengthened so these do not recur?” he asked.

The Ranking Member of the Committee, Cassiel Ato Forson, says due to the sensitivity of issues involved, the hearings will not be public but the media will be briefed before and after every session.

“We are going to look at what actually caused the collapse of the seven banks. We have also agreed that going forward we should look at the health of the entire financial sector and make some recommendations to Parliament, and where possible recommend something to government for necessary action.”

Banking sector crisis and reforms

The Bank of Ghana revoked the licences of the five banks and approved the Purchase and Assumption of two banks as part of measures to address legacy problems in the banking sector, and to restore stability and resilience to the financial system.

While some of the weaknesses in the sector were attributable to macroeconomic factors, a trend of poor corporate governance, poor risk management practices, related party transactions that were not above board, regulatory non-compliance, and poor supervision (questionable licencing processes and weak enforcement) had emerged over the years, leading to a significant build-up of vulnerabilities in the sector.

uniBank and Royal Bank were identified during the Asset Quality Review (AQR) update exercise in 2016 to be significantly undercapitalised. The two banks subsequently submitted capital restoration plans to the Bank of Ghana. Those plans however yielded no success in returning the banks to solvency and compliance with prudential requirements.

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The Official Administrator appointed for uniBank in March 2018 has found that the bank is beyond rehabilitation. Shareholders, related and connected parties had taken amounts totalling about GH¢3.7billion which were neither granted through the normal credit delivery process nor reported as part of the bank’s loan portfolio.

In addition, amounts totalling GH¢1.6billion had been granted to shareholders, related and connected parties in the form of loans and advances without due process and in breach of relevant provisions of Act 930. Altogether, shareholders, related and connected parties of uniBank had taken out an amount of GH¢5.3billion from the bank, constituting 75 percent of its total assets.

In the case of Royal Bank, an on-site examination conducted by the Bank of Ghana on 31st March, 2018 revealed a number of irregularities. Its non-performing loans constituted 78.9 percent of total loans granted, owing to poor credit risk and liquidity risk management controls. A number of the bank’s transactions totalling GH¢161.92million were entered into with shareholders, related and connected parties, structured to circumvent single obligor limits, conceal related party exposure limits, and overstate the capital position of the bank for the purpose of complying with the capital adequacy requirement.

In the case of Sovereign Bank Limited, it emerged that its licence was obtained through false pretences by the use of suspicious and non-existent capital. The bank is insolvent and unable to meet daily liquidity obligations falling due. Liquidity support granted so far to the bank amounts to GH¢21million as of 31st July 2018. The bank has not been able to publish its audited accounts for December 2017, in violation of section 90 (2) of Act 930.

As part of the Bank of Ghana’s investigations into the failure of Capital Bank Limited, it emerged that Sovereign Bank’s initial capital contributed by its shareholders was funded from transfers from Capital Bank which had been presented to the Bank of Ghana as investments on behalf of the bank. Subsequent to its licencing, a substantial amount of the bank’s capital was placed with another financial institution as an investment for the bank.

The bank has however not been able to retrieve this amount from the investment firm with which it was placed, and it has emerged that the investments were liquidated by the shareholders and parties related to them. Following enquiries by the Bank of Ghana, promoters of the bank admitted they did not pay for the shares they acquired in the bank.

The bank’s promoters have since surrendered their shares to the bank, while the directors representing those original shareholders have since resigned. In April 2018, the Bank of Ghana appointed an Advisor to advise management of the bank with a view to improving its affairs. Following further deterioration in the bank’s capital due to its inability to recover the investments placed with financial institutions, as well as impairments to its loan book, its capital adequacy ratio is currently negative 11.

The Bank of Ghana has concluded that Sovereign Bank is insolvent, and that there is no reasonable prospect of a return to viability. The bank is unable to meet daily obligations as they fall due. Liquidity support granted so far to the bank amounts to GH¢12million as of May 2018. The bank has not been able to publish its audited accounts for end-December, 2017 – breaching section 90 (2) of Act 930.

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The bank’s current situation has resulted in persistent breaches of key regulatory requirements and prudential limits.

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.

The Beige Bank commenced banking operations in December 2017 after operating as a savings and loans company. A special examination conducted by the Bank of Ghana into the bank’s affairs six months after commencement of its operations revealed that:

Funds purportedly used by the bank’s parent company to recapitalise were sourced from the bank through an affiliate company and in violation with regulatory requirements for bank capital. In particular, an amount of GH¢163.47million belonging to the bank was placed with one of its affiliate companies (an asset management company) and subsequently transferred to its parent company, which in turn purported to reinvest it in the bank as part of the bank’s capital.

The placement by the bank with its affiliate company amounted to 86.86% of its net own funds as at end June 2018, thereby breaching the regulatory limit of 10%. Furthermore, the purported use of the same funds by the bank’s parent company to reinvest in it was in contravention of the Bank of Ghana’s requirements for bank capital. Also, the bank has not been able to recover those funds for its operations.

The bank persistently breached the cash reserve requirement (CRR) of 10% (CRR at 23 July, 2018 was 1.97%) since the beginning of January 2018;

The quality of the bank’s loan portfolio had seriously deteriorated, resulting in a Non-Performing Loans Ratio (NPL) of 72.80%;

The bank’s Capital Adequacy Ratio (CAR) was assessed to be negative 17.18% as against the regulatory minimum of 10% – thus recording a capital deficit of GH¢159,162,558 and rendering the bank insolvent.

In the course of uniBank’s official administration, the Bank of Ghana discovered certain transactions involving Construction Bank. Further investigations revealed that:

The initial minimum paid-up capital of the bank provided by its promoter/shareholder was funded by loans obtained from NIB Bank Limited (GH¢34million) and uniBank (Ghana) Limited (GH¢61.00 million), contrary to section 9 (d) of Act 930;

An amount of GH¢80million out of the amounts reported as the bank’s paid-up capital and purportedly placed with NIB and uniBank, remains inaccessible to the bank;

The bank’s inability to inject additional capital to restore its capital adequacy to the minimum capital of GH¢120million required at the date of licencing threatens the safety of depositors’ funds and stability of the banking system.

Owing to the bank’s inability to access investments purportedly made in its name with other financial institutions, the Bank of Ghana has concluded that a total of GH¢80million of the bank’s GH¢120million initial paid-up capital is unavailable to the bank for its operations, leaving an amount of ONLY GH¢40million (one-third of the GH¢120million minimum capital).

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