I remember the adventures of our childhood days, when we used to visit a popular baobab tree some distance away from home in the countryside. My playmates and I used to go there after school when the fruits were ripe. You must be very skilful to be on target with the wooden-batons to pluck the fruits. The grown-up boys had age and strength advantage, and were able to climb the tree easily with the support of long pieces of twine.
On one fateful day we were greeted with wailing from the bush by some other friends who had gone for a harvest. Sadly, one of our friends who defied all odds had climbed the tree through the twine and fell onto a palm tree under the baobab tree, and then to the ground. He was then rushed to the hospital where he stayed for many months.
Even though he showed signs of recovery, he could not live to see this day. At his burial service, there was a roll-call. Our teacher marked a made-up class register – we observed a minute’s silence in his honour, and in tears we responded to his name with the painful chorus of “he is no more among us”.
Alas! Is it now a yearly ritual for a roll-call of financial institutions in the Bank of Ghana’s register to hear that one of theirs is unable to sustain its operations, or is no more in existence? This is the question I would like us to have a deeper conversation on. When we observe the banking scene of recent times, we would not be wrong to say that there are too many reported cases concerning savings and loans companies and microfinance institutions in the country not being able to pay their customers’ investments when they mature.
Before I proceed, I empathise with the management, staff and customers of Alpha Capital Savings and Loans Company for the current mishaps which put them in distress. We pray in the hope that the Bank of Ghana’s intervention helps resolve the issues.
I would also like to put on record that the focus of this article is not to presume primary information on the root cause(s) of the problems they are facing. Nonetheless, the trending reportage by media outlets on the company – to the effect that customers besieged its premises prior to the yuletide and were frustrated due to its inability to pay their investments at maturity – should prick the conscience of stakeholders in the banking sector to ask more cogent questions. Has licencing and regulatory supervision failed us in the banking sector? What is the management of these institutions doing wrongly which ends up inflicting pains on them?
Most often, when we hear such occurrences the recurrent cause has always been attributed to liquidity. With reference to the current one, it came to light that the challenge started when two branches of the company (Tarkwa and Madina) faced liquidity problems. If a liquidity problem at a branch or two of a financial institution could cause it to experience a bank-run, then there is more to it than meets the eye. Is it always about liquidity itself?
Indeed, liquidity remains the lifeblood of every financial institution; that is why it has always been necessary to have active and key structures in place to manage the relationship between deposits (liabilities) and assets (loans) to help avoid a mismatch. As blood is vital to the lives of animals (human beings), so is liquidity (cash) to the operations of financial institutions.
Can blood in the body move smoothly without the heart? The answer is a definite “NO”! We can then establish the fact that it is not necessarily the inadequacy of liquidity itself that is affecting operations of these financial institutions, but rather a poor rhythm of their “heart” – the Treasury function. What role does this heart play in the body of a financial institution?
Treasury – the heart function
As I have tried to establish, the Treasury unit must be considered as the heart that pumps blood (liquidity) at regular intervals to other branches (parts) of the bank (body). In that vein, its relevance in the set-up of any financial institution should not be relegated to the background. To note, one of the duties of the Treasury is to communicate regularly with branches regarding cash (including deposits and investments) that has been taken from customers, and the extent of loans and advances to be given. This function requires strategic planning and effective coordination between the Finance Unit and Credit Unit (Assets and Liability Committee, ALCO) for the efficient and smooth flow of operations.
At the same time, the Treasury department is responsible for ensuring that all branches, as well as ATMs (Automated Teller Machines), if any, are well-stocked with cash to meet withdrawal levels. Over the years, during festive seasons like Christmas the volume of buying and selling increases; therefore, it is prudent to forecast the level of withdrawals and plan sufficiently for it.
The year-on-year problems in the non-bank financial services sector convince me to assert strongly that many of them do not have a well-functioning Treasury unit; and where they have it, it is weak and characterised by poor planning and coordination between the Treasury function and the Assets and Liability Committee (ALCO) – resulting in a mismatched relationship between lending and investments(deposits), hence shortage of cash (liquidity problems).
My assertion is firmly anchored on the fact that even if a deposit-taking financial institution has all the cash reserves of this world in its vault, it would still run into liquidity problems when the Treasury function is neglected or not in place to plan the cash management and its flow.
Notably, more than sufficient cash (liquidity) could be a build-up to an unhealthy practice of engaging in a lending spree without second-guessing its implications when the Treasury function is on the back-burner.
Of course, ineffective loan recovery lurks in the shadows, and maintaining a stable balance between liabilities and loan disbursement and its recovery is necessary – but we should not lose sight of the fact that a proactive Treasury unit is the starting point of responsibilities to foresee mismatches and how they can be prevented on time.
In fact, it is visibly clear and should not be denied that when financial institutions run out of cash, it severely dents their reputation. This is the reason Treasury units come in handy, to ensure that enough cash is always available wherever required to avoid such a situation from raising its ugly head. At this stage of the conversation we need to take a breather, sip a glass of water to keep the blood moving smoothly through the heart and make it more energised for better coordination of our thoughts.
Do you know the internal customers (employees) can make or break a financial institution? Call it the ‘people risk’. In this respect, it is important to bring to the fore the fact that liquidity or cash shortage may not necessarily be severe enough to raise suspicion which could trigger panic-withdrawals or a bank-run – but informal communication between internal customers (staff) and their friends, relatives and external customers could escalate such issues which need not enter the public domain.
I remembered receiving a message via one of my WhatsApp platforms a few months ago, which was encouraging customers of a financial institution to go for their deposits because it was facing a liquidity problem. It punctuated by saying that staff of the company had not been paid their salaries for several months.
Even though I do not have the evidence to confirm the original source of the message, I am inclined to believe that it might have been generated by an aggrieved staff or a close pal to any of them, since non-payment of salaries to staff is an internal company matter. Those who feel it, know it and communicate it better. Lo and behold, the company was in the news thereafter.
Restoring Confidence in the sector
It would be foolhardy to think that the frequent instability in operations of some non-bank financial institutions is not carving a negative image for others in the sector, and the banking industry as a whole. The domino-effect is that it increases the cost of deposit mobilization, and by extension the cost of credit. The high cost of credit leads to high cost of doing business. As the businessman spreads the high cost of credit on his goods and services, it is the last consumer (the citizenry) who feels the pinch of it. In effect, the public’s confidence in the banking sector has been eroded.
To help address the nagging issues, many industry players have issued a clarion call for the Bank of Ghana to tighten regulation and supervision of the industry. While the call is worth supporting, it would be worthwhile if we did self-introspection as professionals and players in the industry by dotting our Is and crossing the Ts. The armchair and template-filling approaches appear not to be working; therefore, we must rise to the occasion and uproot the problem’s roots before it penetrates even deeper. We usually say that “wisdom is like a baobab tree; no one individual can embrace it all”.
On this note, there is an urgent need for further collaboration between all stakeholders in the industry to deliberate on other stringent measures which should be adopted to address the issues. We fervently look forward to a day when the Bank of Ghana conducts a roll-call for all the financial institutions in its register: they would all respond with a rising tone, “We are all here, like an old soldier who never dies”.
This is what I present to you, the reader. The verdict is in your hands! I am deeply grateful to you for your time. God bless!
The writer is a Chartered Banker