“Lessons from the recent wide spread financial distresses, bank consolidation and bank failures in banking industry.”
- Introduction and Background
Financial institutions especially banks are more regulated than any other institution worldwide because of their role as financial intermediaries. As financial intermediaries, banks mobilize funds from the surplus spending units at a cost for on-lending to the deficit spending units at a price. Banks also provide an efficient payment mechanism in the economy; to settle the business, personal transactions, and international obligation of their customers. However, banks must operate within certain guidelines, either as defined by law, public policy, practice, or convention. In today’s banking industry, the code of ethics and professionalism serves as the foundation upon which banks must make decisions based on honesty, integrity, confidence and trust. A formalized code of ethics provides banks with an understanding and knowledge of what is expected from them in terms of responsibilities and behavior.
A code of ethics reflects the standards and establishes a realistic mode of behaviour that applies to everyone in the bank, from the board of directors to the lowest level of workers in the bank. The reputation of a bank and its actions reflect the ethical conduct and professionalism that affects its potential for profit and growth. All levels of bank employees need to be aware of company policies regarding ethics in order to make the right decisions in challenging business situations, to know how and when to seek help when faced with ethical dilemmas, and to know where to report possible unethical conduct. Sufficient legislation has been enacted to regulate banking operations and to ensure a fair competitive environment. But regulations and penalties alone are not sufficient to ensure discipline in operations. Therefore, high ethical standards are expected to guide operations in the banking industry (Ali Yidawi, 2005).
Banks play multifarious roles which include acting as financial intermediary between the surplus generating units and the deficit spending ones. As Oghojafor et al. (2010) explained, “The banking industry plays a major intermediation role in an economy by mobilizing savings from surplus units and channeling these funds to the deficit units, in particular private enterprises, for the purpose of expanding their production capacities”. It is important to note that through the intermediation function that banks not only earn the volume of their income by way of interest margin but also pay out returns to savers, compensating them for the opportunity cost of their money. Therefore, if any bank is unable to recover the funds it lends out, its own existence as a going concern would be undermined. This will also impair a bank’s ability to meet the withdrawal needs of depositors. The banking industry plays an essential role in the economy in terms of resource mobilization and allocation and, is by far, the most important part of the financial system in developing economies, accounting for the bulk of the financial transactions and assets. In addition, banks have recently expanded in other activities such as securities markets, fund management, insurance, among others, blurring the distinction between banks and other financial markets. Consequently, for any bank to perform very in its operation, some issues need to be addressed especially in the areas of ethics and professionalism
According to Haslinda et al (2009) “Business ethics is a study of business activities, decisions and situations where the rights and wrongs are addressed; it is a form of applied ethics that studies rules and principles within a commercial context and any obligations that apply to persons who are involved in commerce”. Professionalism is an important part of managing any business. Professional employees enhance the image of the business, help employees deal well with customers, and will help the business grow and succeed. In the banking industry, professionalism becomes even more important due to the complex aspects of the business. Promoting professionalism in banking involves training and coaching employees on the various areas important to the industry. The Bank of Ghana, Chartered Institute of Bankers of Ghana and National Banking College should play important roles in ethical and professional conduct training and re-training for board members, senior management team and other employees in the banking industry. The question often asked is whether training of employees has led to the desired impact on the banking industry. However, the phenomenal increase in the number of banks heightened competition amongst the banks had brought about some unethical practices in the Ghanaian banking industry.
“Unethical and unprofessional practices seemed to be part of an „enterprise culture” that persuades many to believe that “bending the rules‟ for personal gain is evidence of business acumen”. This attitude has led to the distress and failure of banks in, which should bring about the desire to introduce a Code of Ethics and Professionalism in the industry to stop the detracting menace and also to sanitize the Ghanaian banking industry. Ghanaian banks are not only expected to operate professionally but ethically so that the general public would have confidence in the system It is generally acceptable that any organization either charitable or non- charitable must have set down rules and regulations guiding her operations otherwise anarchy will be the order of the organization’s operations. The problem is that banking business is becoming more complex and the borderline between what is legitimate and illegitimate becomes more blurred. This adds to the need for banks to adhere to a strong set of values to guide them when they are faced with decisions regarding ethical issues. Hortacsu and Ozkan-Gunay (2004) however argued that “ethical and professional values are still not firmly entrenched and followed in the banking system in Africa. Many banks in Africa are associated with kickbacks in return for loans, lending to connected parties and cheating customers”. More so, an ordinary bank customer does not have the opportunity and adequate knowledge to understand banking transactions, which is a requirement of the ethics of disclosure in banking business (Freckle and Lurie, 2003). According to Atuahene (2017), “The mad rush by banks to meet the capital base requirements in Ghana in December,2018 may create a series of unethical and sharp practices in the industry. With the minimum capital requirement of being raised from GHC 120 million to GHC 400 million, banks could flood the capital market to raise additional capital funds either to meet up with the minimum requirement or position themselves for mergers, acquisitions and takeovers. To date, most banks are scrambling for funds, but a major regulatory challenge will be to prevent massive money laundering in the banking sector during recapitalization period, especially when the instruments for payment for investments that might be colored beyond recognition of the Bank of Ghana. The on-going process of recapitalization may also create ownership structures may make management of emerging banks will be complex as it may be difficult to identify “fit and proper persons” under Basle Core Principles 3&5 (2006;2012) and compatible partners during the process of recapitalization of bank in December 2018. Hence, all banks should adopt stringent “know your co-investors” and also Bank of Ghana should adopt proactive measures to address the potential unethical practices in the sourcing of additional capital. Banks are engaged in the unethical and unprofessional behavior of de-marketing other banks through false information and unfounded rumours.
The banking industry in Ghana has witnessed a lot of changes following the deregulation of financial sector as part of financial sector reforms (FINSAP 1&11) in 1988 to revamp the sector. However, the phenomenal increase in the number of banks and non-bank financial institutions had heighten competition amongst these institutions. The stiff competition for deposits and customers have led to some unethical practices leading to the wide spread financial distress and bank failures in Ghana over the past decade. According to Sikka (2008), “unethical practices in the banking sector in Nigeria seemed to be part of an “enterprise culture” that persuades many to believe that “bending the rules” for personal gain is evidenced of business acumen”. This phenomenon has found itself in the Ghanaian banking industry and also this attitude has also led to the financial distress and bank failures, which has necessitated the need to introduce code of ethics and professionalism in the banking industry to prevent these unethical and professional practices and also sanitize the industry. Ghanaian banks are expected to operate professionally but ethically so that confidence in the banking system would be improved. According to IMF reports (2013; 2014; 2015) noted that a number of banks had been distressed and consequently two banks (UT Bank and Capital Bank) were liquidated in September, 2017and later in 2018 five other banks were consolidated into Consolidated Bank Ghana ltd. It must be stated that these banks got to where they were due to various forms of unethical practices such as corporate tunneling, insider lending, connected or related lending and excessive risk taking. In 2017 and 2018, the Governor of Bank of Ghana Dr. Addison exercised his powers as contained in Section (16) (1) of Banks and Specialized Deposit Taking Institution Act 2016 Act 930 in the revocation of the licenses of Unbank, Sovereign Bank, Royal Bank, Construction Bank, Biege Bank. UT Bank and Capital Bank as result of capital deficiency and illiquidity. The focus of this article is to assess the level of awareness of ethics and professional practices in the banking system in the face of wide spread financial distresses and bank failures over the past decade.
- What are Ethics?
Ethics are guidelines for individuals, which clearly state the dos and don’ts. Ethics exists in many contexts. Especially in the industrial setting, ethics are considered as vital. In this context, a work ethic is imposed on all employees. This guides the employees to be ethically correct in all their actions. Ethics include a number of features such as confidentiality, respect, honesty, transparency, competency, etc. This can be understood through an example. Counseling is a profession where the significance of the ethical code is very high. A counselor is expected to be ethical throughout his or her practice so that it is beneficial for the counselor and counselee, the society at large and also the counseling profession. Let us take the case of competency. It is expected that all counselors should be competent in practicing counseling. If the counselor is not competent, he will not be able to assist the client and can even cause damage to the client. This is why in any profession ethics is established.
Ethics is a philosophical term derived from Greek word “ethos” meaning character or custom. This definition is germane to effective leadership is organization in that an organization code conveying moral integrity and consistent values in service to the public. The ethics golden rule is “Do unto other as you would have them do unto you”. Ethics is not a simple term to define. Various Authors have done different definitions. One of the simplest is,” Ethics is a set of rules that defines right and wrong (Bonevac, 1999), dealing with moral duty and obligation” (Toffler, 1986). De George (1990) defines ethics as a systematic attempt to make sense of individual and social moral experience in such a way as to determine the rule that ought to govern human conduct, the values worth pursuance and the character traits deserving development in life. The Columbia Encyclopedia (2000) defines as ethics in philosophy, is the study and evaluation of human conduct in the light of moral principles. Moral principles may be reviewed either as the standard of conduct that individuals have constructed for themselves or as a body of obligation and duties that a society requires of its numbers.
Ethics according to Webster’s dictionary are moral principles which determine the rightness or wrongness of particular acts or activities, while ethics standards involve conforming with accepted standards of good behaviour. Therefore, ethical behaviour occurs when one acts with equity fairness and impartiality and respects the right of individuals or put simply, when one does what is morally right. On the other hand, unethical behaviour occurs when decisions enable an individual or organisation to derive some benefits at the expense of the society. Essentially, a profession is an occupation or vocation involving special learning and usually carries some social prestige. Professionalism therefore entails the adherence to the ethics of one’s profession. Ethics, also known as moral philosophy, is a branch of philosophy that involves systematizing, defending, and recommending concepts of right and wrong conduct. The term comes from the Greek word ethos, which means “character”. Ethics is a complement to Aesthetics in the philosophy field of Axiology.
In philosophy, ethics studies the moral behaviour in humans, and how one should act. According to Yidawi (2005), the management of a company is concerned with making decisions within, the ethics of the individual or group making these decisions have significant implications for the company’s stakeholders: employees, customers, shareholders, suppliers, the government, and the public at large. Thus, Gup (1990) said “ethics refers to standards by which individuals evaluate their own conduct and the conduct of others”. Schminke (1998) opined that ethics can be defined “as the systematic, descriptive and normative study of moral awareness, judgment, character, and conduct at all levels of individual and collective activity”.
Gup (1990) on the other hand explained that, “Values are beliefs about what is fundamentally desirable. They underlie the choices made in work decisions just as the choices made in one’s private life. They give rise to ideals called ethics or morals. Ethics and morals are synonymous. Ethics is derived from Greek while morals are derived from Latin. They are identical terms referring to ideals of character and conduct. These ideals, in the form of codes of conduct, furnish criteria for distinguishing between right and wrong”. Ethics is therefore the same thing as morality and they shape our conduct and behaviour right from childhood through adolescence and adulthood. Thus, Heermance (1924) stated that ‘practices are ethical if, on the long run, they make for the wellbeing of the human species and for normal human relations. If there is friction, and social loss, it is a sign of unethical conditions. Each profession or trade has its own problem of ethics. The conduct of members must be judged by its consequences, to the group itself and to the community. In the course of time there is likely to develop a certain standard of practice’. Based on the definitions above, it is clear that banks must operate ethically; this is because duty demands that high ethical standards are required for banks to earn the confidence of depositors and the general public due to the fiduciary function, which banks perform. On the other hand, Professionalism is the skill, good judgment, and polite behaviour that are expected from a person who is trained to do a job well.
- What is Professionalism?
Professionalism can be defined as the skills, competence and the conduct displayed by an individual of a certain profession. Professional conduct refers to guiding values, attributes and expectations of what is wrong or right. This means that there is a correct way of behavior. It is also expected that such a person cultivates a polite demeanor when dealing with clients and fellow professionals. Professionalism encompasses a variety of dimensions. It is not only polite behavior or else academic competence; on the contrary, it is a mixture of a number of qualities that contribute to professionalism. A professional need to have specialized knowledge in his particular field. This is one of the main characteristics of a true professional. If the individual has gaps in his knowledge, the contribution, that he can make, is minimal. Being competent is also important. If an individual has all the academic certificates but, still fails to work competently, then it is also disruptive to the individual as well as organizational performance. Other traits such as honesty, integrity, politeness are also important for a professional. This can be considered as one of the great assets of the corporate sector as it allows the individual to perform well.
- Professionalism in Ethics
According to Yidawi (2005), Professional ethics are the moral standards, principles and regulations that guide the course of professional behaviour. Some examples of professions with established professional ethics include law, medicine, banking, teaching, and advertisers. Professional ethics are both individual and institutional in nature. Professional ethics can be learned during the course of study of the profession. Professional ethics also rely upon one’s own personal sense of moral behaviour, applying their skills and making judgment. It is essential that professionals continue to evaluate and learn about ethical issues in their respective fields consistently, as professional ethics change in light of new technologies. Professional ethics is the norms required by the moral point of view for the kind of work that professionals do, that is, an ideal rational ethic. It means the second common norms actually followed by most professionals. An ethic exists to the extent that professions regard such practices as morally obligatory. It is also a common element of codes of professional associations. Many such codes exist, but they do not always conform either to rational norms or actual practices. McDowell (1991) pointed out that one can aspire to professional status, but achieving it depends on acceptance and admittance by others. He further indicated that to qualify as a professional, there must be an internal dimension of acquiring the character of a professional, as a matter of individual choice and commitment. In other words, professional ethics isn’t just about the acquisition of certificates but also about practicing the moral aspect of professionalism.
- Business ethics
To Ahmed (2003), business ethics is a form of applied ethics that examines rules and principles within a commercial context; the various moral or ethical problems that can arise in a business setting; and any special duties or obligations that apply to persons who are engaged in commerce. Technically, philosophers would divide ethics into branches: meta-ethics, normative ethics and applied ethics. Normative ethics is the branch concerned with the issues which largely have to do with the notion of moral obligation. Meta-ethics is the most amorphous of the areas of ethics. Meta-ethics is a branch of analytic philosophy that explores the status, foundations, and scope of moral values, properties, and words. Meta-ethics focuses on what morality itself is, meta-ethical positions may be divided according to the way we respond to questions such as, what exactly are people doing when they use moral words such as “good” and “right”?. This branch of ethics tries to apply ethical theories to “real situations‟ it is sub categorized into -Professional Ethics which is generally a branch of applied ethics that focuses on the actions of people within a certain profession.
- Forms OF Ethical Theories
For individuals, the ethical theory they employ for decision making guidance emphasizes aspects of an ethical dilemma important to them and leads them to the most ethically correct resolution according to the guidelines within the ethical theory itself. Four broad categories of ethical theory include deontology, utilitarianism, rights, and virtues.
- The deontological class of ethical theories states that people should adhere to their obligations and duties when engaged in decision making when ethics are in play. This means that a person will follow his or her obligations to another individual or society because upholding one’s duty is what is considered ethically correct. For instance, a deontologist will always keep his promises to a friend and will follow the law. A person who adheres to deontological theory will produce very consistent decisions since they will be based on the individual’s set duties. Deontology contains many positive attributes, but it also contains flaws. One flaw is that there is no rationale or logical basis for deciding an individual’s duties. For instance, a businessperson may decide that it is his/her duty to always be on time to meetings. Although this appears to be something good, we do not know why the person chose to make this his duty. Ask students what reasons they might provide for this behavior. Sometimes, a person’s duties are in conflict. For instance, if the business person who must be on time to meetings is running late, how is he/she supposed to drive? Is speeding, breaking his/her duty to society to uphold the law, or is the businessperson supposed to arrive at the meeting late, not fulfilling the duty to be on time? Ask students how they would rectify the conflicting obligations to arrive at an a clear ethically-correct resolution. Also ask students to bring into play the consideration of the welfare of others as a result of the business person’s decision.
- Utilitarian ethical theories are based on one’s ability to predict the consequences of an action. To a utilitarian, the choice that yields the greatest benefit to the most people is the one that is ethically correct. There are two types of utilitarianism, act utilitarianism and rule utilitarianism. Act utilitarianism subscribes precisely to the definition of utilitarianism—a person performs the acts that benefit the most people, regardless of personal feelings or the societal constraints such as laws. Rule utilitarianism takes into account the law and is concerned with fairness. A rule utilitarian seeks to benefit the most people but through the fairest and most just means available. Therefore, added benefits of rule utilitarianism are that it values justice and includes beneficence at the same time. Both act and rule utilitarianism have disadvantages. Although people can use their life experiences to attempt to predict outcomes, no one can be certain that his/her predictions will be accurate. Uncertainty can lead to unexpected results making the utilitarian decision maker appear unethical as time passes, as the choice made did not benefit the most people as predicted. Another assumption that a utilitarian decision maker must make concerns his/her ability to compare the various types of consequences against each other on a similar scale. But, comparing material gains, such as money, against intangible gains, such as happiness, is very difficult since their qualities differ to such a large extent. An act utilitarian decision maker is concerned with achieving the maximum good. Thus, one individual’s rights may be infringed upon in order to benefit a greater number of people. In other words, act utilitarianism is not always concerned with justice, beneficence or autonomy for an individual if oppressing the individual leads to the solution that benefits a majority of people. Still another source of challenge with act utilitarian decision makers occurs when an individual faces one set of variable conditions and then suddenly experiences changes in those conditions. The change in conditions may lead to a change in the original decision—being be nice to someone one moment and then dislike them the next moment because the situation has changed, and liking the person is no longer beneficial to the most people. In rule utilitarianism, there is the possibility of conflicting rules. Recall the example of the business person running late for a meeting. Suppose the business person happens to be the CEO, who may believe that it is ethically correct to arrive at important meetings on time as the members of the company will benefit from this decision. The CEO may encounter conflicting ideas about what is ethically correct if he/she is running late. Yet, the CEO believes that he/she should follow the law because this benefits society. Simultaneously, he/she believes that it is ethically correct to be on time for his meeting because it is a meeting that also benefits the society. There appears to be no ethically correct answer for this scenario.
- In ethical theories based on rights, the rights established by a society are protected and given the highest priority. Rights are considered to be ethically correct and valid since a large population endorses them. Individuals may also bestow rights upon others if they have the ability and resources to do so. For example, a person may say that her friend may borrow her laptop for the afternoon. The friend who was given the ability to borrow the laptop now has a right to the laptop in the afternoon. A major complication of this theory on a larger scale is that one must decipher what the characteristics of a right are in a society. The society has to determine what rights it wants to uphold and give to its citizens. In order for a society to determine what rights it wants to enact, it must decide what the society’s goals and ethical priorities are. Therefore, in order for the rights theory to be useful, it must be used in conjunction with another ethical theory that will consistently explain the goals of the society. For example, in America people have the right to choose their religion because this right is upheld in the Constitution. One of the goals of the Founding Fathers’ of America was to uphold this right to freedom of religion.
- The virtue ethical theory judges a person by his/her character rather than by an action that may deviate from his/her normal behavior. It takes the person’s morals, reputation, and motivation into account when rating an unusual and irregular behavior that is considered unethical. For instance, if a person plagiarized a passage that was later detected by a peer, the peer who knows the person well will understand the person’s character and will judge the friend accordingly. If the plagiarizer normally follows the rules and has good standing amongst his colleagues, the peer who encounters the plagiarized passage may be able to judge his friend more leniently. Perhaps the researcher had a late night and simply forgot to credit his or her source appropriately. Conversely, a person who has a reputation for academic misconduct is more likely to be judged harshly for plagiarizing because of his/her consistent past of unethical behavior. One weakness of virtue ethical theory is that it does not take into consideration a person’s change in moral character. For example, a scientist who may have made mistakes in the past may honestly have the same late-night story as the scientist in good standing. Neither of these scientists intentionally plagiarized, but the act was still committed. On the other hand, a researcher may have a sudden change from moral to immoral character may go unnoticed until a significant amount of evidence mounts up against him/her.
- Theoretical Framework
For this article three important theories that underpin this study will now be used. These are shareholder theory, stakeholder theory Model and systems theory model.
- Shareholder theory
This states that a person is acting ethically if they act in a way to maximize profit for their shareholders. The shareholders are simply anyone that owns a piece of the company and therefore profits on the company gaining revenue. Nilsson and Westerberg (1997) postulates that there are some benefits to belief in shareholder theory. A good result of shareholder theory is that it tends to maximize productivity. When the only thing that is worried about is generating revenue, then the business tends to find the most efficient way to utilize resources to generate the greatest level of revenue possible. This efficiency can be deemed important because it means that there is little wasteful spending and wasted resources which are important as they are limited on this earth. One major problem is that it doesn’t take people like customers, the environment, or employees into account, so it could potentially hurt them. If a business decides to maximize profits, randomly fire employees, sell defective products to customers, and pollute the environment, they might still be considered ethically good if resources are being used efficiently. If they are committing “off- balance-sheet” transactions that are considered within the realms of the law to maximize profit, then they might seem ethical under shareholder theory.
- Stakeholder Theory Model
Ethical Behaviors in business practices lead to business success, and a stable financial system. Stakeholder theory attempts to address the question “what is the purpose of the corporation and in whose interest, should it be run?” From a theoretical standpoint, it is generally held in business ethics circles that the Stakeholder Theory, by Ed Freeman, arose as an alternative theory to the traditional notion of the function of business that emphasized shareholders only Freeman, however, points out that the general ideas of the stakeholder theory predate his postulation (Jones, Wicks and Freeman, 2001). Pondar et al (2006) also allude to Freeman’s position when they opined that, within the stakeholder theory framework, companies are involved in the social system and forced to enter into a „new social contract‟. This „new social contract‟ presents a mix of reciprocal expectations of the role and responsibilities of each of the involved parties in a corporate and social environment This contract also demands that companies perform social, ethical and environmental responsibilities. Jones, Wicks and Freeman (2001) criticize the traditional notion of the firm put forward by the Nobel Prize winner Milton Friedman that the ethical obligation of business managers is to seek profits for the stockholders only, a single set of stakeholders. For Jones, Wicks and Freeman, this traditional notion (seeking profits for stockholders only) of the firm or business organization is myopic as it places too much emphasis on shareholders to the exclusion of other stakeholders. As such, they hold the position that, business managers must go beyond a simplistic and narrow perspective of the objectives of the firm to include other stakeholders other than the shareholders. Acting ethically here would thus entail business managers fulfilling responsibilities to the firm and its wide array of stakeholders. For Donaldson and Preston (1995) the stakeholder theory requires of anyone managing or affecting corporate policies to possess, as a key management attribute, the simultaneous attention to the legitimate interests of all appropriate stakeholders, both in the establishment of organizational structures and general policies and in case-by-case decision making. As seen in Jones, Wicks and Freeman (2001) or in Pondar et al (2006), or yet still Donaldson and Preston (1995), the central argument of the Stakeholder Theory is based on two premises: first, that to perform well, business organizations and their managers need to pay attention to a wide array of stakeholders and secondly, managers have obligations to stakeholders which include but extend beyond shareholders (Jones et al, 2001). In other words, the stakeholder theory holds that making profits for the firm and its shareholders, as well as fulfilling other duties to other groups associated with the firm are the essence for which a firm exists.
- Systems Theory Model
The regulator in a financial system must first be ethical in character and action to exercise its mandate as a banking ombudsman. Closely related to the stakeholder theory of business ethics is the systems theory approach. As an ethical theory, systems theory also attempts to connect business and ethics (Nilsson and Westerberg, 1997). According to the systems theory ethicists, social phenomena cannot be fully understood in isolation. Rather they must be viewed as parts of the larger system within which they interact with other elements of the system that is, within the systems theory framework, the optimization of the goals of individual components (subsystem goals) is to be pursued only to the extent compatible with the pursuit of overall system goals. For Ackoff (1987), ethical judgment should be based not on rules that are to be applied to the outcomes of decisions or product, but to the decision-making process involving stakeholders‟. The actions of a part of the system could have consequences on the rest of the system, as such the system in its essence or in search of its goal will constantly seek to balance itself or maintain equilibrium. As such, it can be said that the system theory places emphasis on maintaining balance of the overall system and that subsystem interests are subordinate to the overall system interests.
- The Concept of Bank Ethics and Professionalism
Ethics can be referred to well-founded standards of right and wrong that prescribe what humans ought to do, usually in terms of rights, obligations, benefits to society, fairness, or specific virtues. Ethics, for example, refers to those standards that impose the reasonable obligations to refrain from rape, stealing, murder, assault, slander, and fraud. Ethical standards also include those that enjoin virtues of honesty, compassion, and loyalty, as well as, standards relating to rights, such as the right to life, the right to freedom from injury, and the right to privacy (Aron, 2005). Ethics can also refer to the study and development of one’s ethical standards. As mentioned above, feelings, laws, and social norms can deviate from what is ethical. So, it is necessary to constantly examine one’s standards to ensure that they are reasonable and well-founded. Ethics also means the continuous effort of studying our own moral beliefs and our moral conduct, and striving to ensure that we, and the institutions we help to shape, live up to standards that are reasonable and solidly-based (Aron, 2005). According to Aron (2006), ethical code is adopted by an organization or company like a bank to set out general principles about the organization’s belief on matters such as quality, privacy, mission or the environment. The ethical issue involved here is concerned with principles and values that are imbedded, either implicitly or explicitly to guide behaviour of bankers. The issue of code of ethics and professionalism is of great importance to bankers and the general public. Considering the requirements of banks for protection of the rights and interests of innumerable depositors, establishment of stability and confidence in financial markets and economic development, it is very paramount for banks to also ethically pursue their operations in compliance with the principles of integrity, impartiality, reliability, transparency, social responsibility and controlling of money laundering (Carse, 1999). These concepts have been variously defined to fit the situations of various professions under consideration. However, efforts are made in this study to narrow down the various definitions to banking sector. “Ethics is often referred to standards of conduct, standards that indicate how one should behave on moral duties and virtues, which themselves are derived from principles of right and wrong. According to Baker (1999), Codes of Ethics in the banking industry worldwide cover important and fundamental aspects of principles and professionalism for their member. A formal code of ethics is the hallmark of professionalism everywhere. Also, Professionalism from professional ethics is the moral standards, principles and regulations that guide the course of professional behaviour.
It is a well- known fact that the distress and failures which ravaged the financial services industry particularly the banking sector, in the recent past had brought to the fore the need for professionalism and adherence to high ethical standards in the management of banking institutions in Ghana. Imprudent management contributed significantly to the distress which engulfed our banking system sequel to the adoption of liberalisation and deregulation as the cornerstone of the Financial Sector Reforms (FINSAP 1&11) in 1987. In this regard, references had to be made to the World Bank Study (1987) on the Distress in the Ghanaian Financial Sector carried out in 1986. One of the major findings of that study was that, even though both exogenous and endogenous factors accounted for the distress, endogenous factors were more profound. The endogenous factors included management ineptitude, insider abuses and malpractices, meddlesome interference by principal shareholders, weak internal controls, under-capitalisation and so on.
Contrary to the empirical findings of the World Bank (1987), the managers of some distressed banks had sought to attribute the failure of their banks to exogenous factors such as macro-economic instability and policy-induced shocks. However, it is pertinent to note that the key factor to business success is the quality of management as well as adequacy of capital alone cannot guarantee success. Consequently, banking as a serious professional occupation should be run by credible professionals with proven track record, who should be guided by the established ethical standards, if we must learn from the lessons of the recent distress. There should be no room for charlatans in the management of our banks.
- Why Ethics and Professionalism in Banking?
According to The Chartered Institute of Bankers- Ghana (CIBG, 2006;2013), the collapse of banks and the grinding to a halt of economic systems had been attributed partly to the deterioration of human basic values, notably integrity, honesty and loyalty. The need for ethics in banking stems from the critical importance of banking to the economy. Banking is essentially a service business of intermediation. Of necessity banks mobilise funds from the public at large to perform this role. Consequently, banking is built on trust and confidence which can be easily eroded by unethical practices and it is for this reason that banking is the most regulated industry in the economy, be it market or command economy. Every bank derives its ethical values from a combination of corporate and professional ethics. While corporate ethics are derived from organisation’s own values and culture (i.e. standard banking industry practice), professional or occupational ethics are for members (individual or corporate). Bankers are expected to exhibit integrity, accountability and transparency in conducting banking business. The consequence of non-compliance would only bring the profession into disrepute.
The Chartered Institute of Bankers of Ghana (2006; 2013) Code of Banking Practice had long recognised the need to uphold integrity of the Banking Profession. Ethical behaviour is concerned with the respect and promotion of the interests of all involved in any interpersonal interaction and ethical behaviour revolves round three elements ( (i)The good, (ii) The persons (self) and (iii) The others). The objectives of the code are to: i) prevent the development of unethical practices within the banking profession (ii) harmonize the concepts of social responsibility and (iii) promote honour and integrity in banking professional practice (CIBG, 2006; 2013) The Institute of Bankers code of business conduct covers the areas of conflict of interest, insider trading, money laundering, soliciting gifts, and corruption. A conflict of interest has been explained whenever members place themselves in a position where their personal interests or duties to other persons are liable to conflict with their duties to the bank. Insider information has also been referred to as material non-public information that mat have either negative or positive impact on business or personal decisions. Money laundering is concealing the transformation of profits from illegal activities and corruption into ostensibly “legitimate asset”. Corruption is the abuse of office for private gains. It encompasses; patronage, nepotism, theft of corporate assets including the stealing of corporate revenue. Corruption is also seen as wrong doing by those in special position of trust. It also applies to self-benefitting conduct by board of directors, bank executive teams and other staff who render services to clients or customers (CIBG, 2006;2013).
In pursuance of its mandate, the CIBG (2006; 2013) issued a code of Banking Practice which sought to promote professionalism and high ethical standards in the conduct of banking business. The highlights of the Code include:
Banks and bankers will operate within the legal framework.
Banks and bankers will follow the best professional practice in the global industry. Banks will always place their depositors’ interest before all others.
Banks will always meet their commitments. Such commitments will not be lightly given and should never be broken.
Banks will repay depositors at maturity on the agreed terms.
Banks will meet their trade engagements.
Banks will meet delivery on their trading contracts at maturity at agreed rates.
Banks will always lend on agreed terms.
Banks will deal only with respectable parties. They will take all reasonable steps to establish that all parties they deal with are bona-fide. Individual bankers should not ask for, nor even accept, any form of gratification, either in cash or in kind, for performing their normal services.
Banks should not pay brokerage to members of their staff.
Banks and employees will follow only the best professional practice in their recruitment and employment policies.
Banks should not undermine other banks’ stability in the process of marketing so that competition is healthy.
Undoubtedly, the above Code emphasises compliance with applicable banking laws, professionalism, honouring of commitments, fairness to customers and healthy competition. If one may ask. How many bankers are aware of the existence of the CIBG Code of Banking Practice? Did practitioners adhere to the requirements of the Code? If the standards set by the CIBG had been upheld, would the distress and bank failures syndromes not have been avoided?
- Overview of the Ghanaian Banking System
Ghana’s banking industry contributes significantly to the country’s economic growth. It is one of the most competitive sectors of the economy. There were 34 universal banks in Ghana as at 31st December, 2017. According to the Bank of Ghana, the total assets of the banking sector stood at GHC 93.22 billion as at the end of December, 2017, representing a growth of 14.8% over the 2016 position. The growth in assets during the review period was on the account of increases in banks’ investment portfolio and foreign assets. Banks’ foreign assets stood at GHC 7.85 billion, up by 37% year on year as of December 2016 compared to a 12.1% growth in 2015. Domestic assets amounted to GHC 85.36 billion, accounting for 91.6% of the banking industry assets. Credit stance in the banking sector remained tight for most part of 2017, there was a marginal pick up in the growth of gross credit in nominal terms. According to the Bank of Ghana gross advances stood at GHC 37.66 billion at the end of December 2017 representing a growth of 6.1% compared with 17.6% in 2016. At the end of December 2017, net loans and advances stood at GHC 31. 05 billion, from GHC 30.96 billion in December 2016. On other hand, banks investment portfolio (bills and government securities) recorded a year on year growth of 29.6% to GHC 28. 42 billion at the end of December 2017, slower than the 53.3% annual growth recorded in the year 2016.
- Assets Quality.
The indicators of asset quality as at the end of December 2017 pointed to a deterioration in the loan books of banks relative to the same period in 2016. The stock of Non-performing loans increased from GHC 6.2 billion in 2016 to GHC 8.2 billion in 2017. The Non-performing loan ratio for the banking sector increased from 14.7% in 2015 to 17.3% to 17.3% in 2016 and further to 22.7% in December 2017. The high non-performing loans in the banking sector was largely due to the general slowdown in the economy and high cost of production due to high utility prices
- Liquidity Indicators
Liquidity in the banking sector eased with both Core and Broad liquidity indicators reflecting some improvements broad liquidity measures (broad liquid assets to total deposits and broad liquid assets to total assets) in the year 2017 compared with 2016 position. The banking sector’s operational liquidity measures were above thresholds during the period under review and the banking industry was in position to meet its short term obligations
iii) Capital Adequacy Ratio
The banking industry’s capital adequacy ratio (CAR) stood at 17.9% as at end December 2017 as against the 17.8 % in 2016 above the regulatory limit of 10%. This indicated that banking industry remained well capitalised. The banking industry’s risk –weighted assets (RWA) to total assets, however, declined from 63.3% in December 2016 to 61.3% in December 2017 partly due to the tight credit stance adopted by banks during the year.
- iv) Profitability
The banking industry’s profit before tax registered an annual growth of 13.3% in the year 2017 compared with 3.4% in year 2016. Similarly, the banking industry’s net profit after tax grew by 10% in the year 2017, an improvement from a negative growth of1% in the year 2016. The industry’s profitability indicators, return on assets (ROA) declined from 3.8% in 2016 to 3.3% in 2017, while the return on equity (ROE) also declined from 18% in 2016 to 16.7% in 2017.
- v) Operational Efficiency
The banking sector’s operational cost to total assets ratio improved marginally from 8,9% in 2016 to 8.8% in 2017. The industry’s operational cost to gross income ratio also improved marginally from 50.9% in 2016 to 49.6% in 2017. The cost to income ratio of 49.6% is relatively higher than in the Sub-Sahara Africa (Mayo-et –al, 2013).
- Overview of Financial distress, bank consolidation, bank failures in the Ghanaian Banking System
- Ordinarily, the word “distress” symbolizes “unhealthy situation” or a state of inability or weakness, which prevents the achievement of set goals and aspirations (Ologun, 1994). According to Alashi (1993), distress is “a cessation of independent operation or continuance without the assistance of relevant authorities such as a deposit insurance institution”. Thus, the traditional quantifiable measures of failure (loss figures presented in standard financial statement) are not very helpful in assessing the degree or severity of distress of such a financial institution (Alashi, 1993). A financial institution is described as unhealthy, if it is unable to meet its obligation to customers, owners and the economy occasioned by severe financial, operational and managerial weaknesses. According to Atuahene (BFT, 04/2018), distress in banking is a situation when a fairly reasonable proportion of banks in the banking sector are unable to meet their obligation to customers, owners and the economy, as a result of weakness in the financial, operational and managerial capabilities which renders them either illiquid or insolvent. This may be due to mismatch of resources or excessive mis-management. In fact, the classical failure model assumes three main elements for failure namely: low profitability, high gearing and low liquidity. All these create distress for banks.
- Anorld Zurcher Dictionary of Economics (1970) defined consolidation as a fusion of assets and liabilities in whole, or part, of two or more business establishment to form an entirely new establishment. According to Adam (2005) bank consolidation could be achieved by way of mergers, takeovers, acquisitions, recapitalization and proactive regulation. Bank consolidation is more than shrinking of the number of banks in the banking industry. It is expected that bank consolidation would enhance synergy, improve efficiency and also induce investor focus and trigger productivity and welfare gains (Nnanna, 2004). The main motivations behind consolidation are to protect stakeholders such as depositors, customers as well as maximization of the shareholders’ value. According to Alashi (2002) a bank is said to be failing, when a bank shows the following symptoms: i) gross under-capitalisation in relation to the business model; ii) persistent high level of non-performing loans to the total loans; iii) weak liquidity management that results in constant borrowing from the over-night inter-bank market; iv) persistent use of the central bank’s emergency liquidity facilities; v) high operational costs, vi) late submission of central bank’s statutory returns and vii) weak risk management practices. According to Laeven and Valencia (2008; 2012) a country experiences banking failures and crisis if the two following conditions are precedent: i) significant signs of financial distress in the high non-performing assets in the banking industry as well as significant banking policy intervention measures in response to significant losses and liquidity crisis. The Ghanaian banking industry over the past decade had recorded a persistent high non-performing asset to the total loans ranging between 17.6% in 2009 to 22.7% in 2017 (IMF, 2009-2017). Bank of Ghana’s policy intervention measures had included recapitalization and wide spread emergency liquidity support (IMF, 2016; 2017). This assertion confirmed the empirical literature by Laeven & Valencia (2008) and Dermirguc-Kunt & Huizinga (1999). Laeven & Valencia (2008; 2012) also define systemic banking crisis as a country whose corporate and banking sectors experienced a large number of defaults and banking institutions and corporations face greater difficulties repaying contractors on time is said to be crisis. According to the IMF country assessment reports (2013; 2014; 2015), the failure on the part of the Ghana government to pay the contractors and Bulk Oil Distribution companies stood at GHC 5.2 billion in 2011 to GHC 6.2 billion in 2015. The failure to contractors and BDCs on time had contributed to loan loss provisions and bad debts.
Cited by Owualah (1996), “a failed bank is one closed temporarily or permanently on account of financial difficulties”. One major cause of distress is the banks’ exposures to the real estate sector of the economy and indeed all other sectors; professional and prudent appraisals of such exposures would reveal the necessary limits and the level of safety needed for a “safe and sound” banking practice. Loans that are not appraised ethically would certainly fail. Such failures have serious implications for the capital adequacy of banks, which are constantly being eroded signaling eminent collapse of the banks. Atuahene (BFt, 09/27/2018) also observed that, under-capitalization, poor management and excessive competition are among many reasons cited for bank failures. Excessive competition for instance, forces banks to raise sharply their interest rates on deposits. As their cost of funds rise and profit margins shrink, higher yielding but risky assets are sought in order to sustain earnings. In the process, they become more susceptible to failures as the economy weakens. This popular view of one of the major causes of bank failures also accords with recent experiences in Nigeria in the wake of the surge in the number of financial institutions and the keen competition generated by their activities, including the distress borrowing by the weak ones in order to remain afloat. There were serious macro-economic challenges that contributed to financial distress, bank consolidation as well as bank failures over the past decade.
Between 2009 and 2017, the Ghanaian economy had between characterized by large fiscal and current account deficits, high and volatile exchange rate developments and high inflation rate but low real Gross Domestic Product (GDP), all of which exerted significant pressures on the banking system. These macro-economic challenges have contributed the financial distress and high non-performing assets which have bedevilled the banking sector. At the same time, the governance challenges in the banking system spilled over and significantly weakened financial sector supervision and regulation, while corporate governance structures were completely disregarded- a situation which exerted undue influence on risk system and credit delivery in some banks. In the 2015, IMF assessment review of the banking sector asset quality advised the Bank of Ghana to conduct a comprehensive asset quality review (AQR). The Bank of Ghana’s asset quality review showed that severe deterioration in the banking sector asset quality. The asset quality review showed substantial under-provisioning and substantial provisioning short falls in a subset of banks (with a combined capital need of around 1.6% of GDP) Addison (2017). These toxic balance sheets of some banks had contributed to a decline in credit to the private sector and high lending rate and spread, undermined the transmission of monetary policy rate to the economy through market rates.
Addison (2017) and IMF (2017) posited that there was unusual forbearance by the Bank of Ghana, which resulted in the extension of significant amounts of Emergency Liquidity Assistance (ELA) to the ailing banks such as Capital Bank, UT Bank, Unibank, and Biege Bank of which some of the facilities were not uncollateralized. According to Addison (2017) some banks and deposit taking institutions lacked good corporate governance structures and more worrying, was the co-mingling of board and management responsibilities which significantly undermined credit and risk management policies.
According to Governor, Dr. Addison ((2017;2018) there were several owners and management conflicts in a number of banks and in addition to connected or related lending practices without due processes laid down to guide such practices. The Bank of Ghana’s report also cited owners as well as Chief Executive Officers and directors including non-executive and executive directors were largely responsible for credit extension and consistently breached related transaction limits by extending credits to themselves and their relatives and some cases approved fictious placements with related and connected companies (Addison, 2017;2018). These practices were all unethical and unprofessional practices which undermined the confidence in the banking sector. These practices have also contributed to the high non-performing assets which affected both the solvency and liquidity of some of the local banks.
The Bank of Ghana report (2018) opined that the problems in the banking sector were also reflected in the financial sub-sectors such as Micro finance companies, Savings and Loan Companies, and rural and community banks and the extent of financial distress in this sub-sector was characterized by severely impaired capital, inability to meet regulatory capital adequacy requirements, generally low asset quality and liquidity crises. These have contributed to the threat to depositors’ funds thus eroding public confidence and undermined effort to promote financial inclusion. The financial sub-sector had also been bedevilled with the same unethical practice and unprofessional conduct which had affected the banking sector.
One major cause of distresses and bank failure in the banking industry over the past decade was due to the banks’ exposures to the real estates and oil and gas sectors of the economy and indeed all other sectors; professional and prudent appraisals of such exposures would reveal the necessary limits and the level of safety needed for a “safe and sound” banking practice. Loans that are not appraised ethically would certainly fail. Such failures have serious implications for the capital adequacy of banks, which are constantly being eroded signalling eminent collapse of the banks. The board of directors of some of the failed banks knowingly allowed these banks to engage in excessive risk taking and speculative businesses. These practices were considered to be unprofessional and unethical as far the banking sector is concerned.
IMF country reports (2011, 2012; 2013; 2016) also observed that, under-capitalization, poor management and excessive competition are among many reasons cited for distress and bank failures. Excessive competition for instance, forces banks and NBFIs to raise sharply their interest rates on deposits. As their cost of funds rise and profit margins shrink, higher yielding but risky assets are sought in order to sustain earnings. In the process, they become more susceptible to failures as the economy weakens. This popular view of one of the major causes of bank failures also accords with recent experiences in Ghana in the wake of the surge in the number of financial institutions and the keen competition generated by their activities, including the distress borrowing by the weak ones in order to remain afloat.
According to Section 16(1) of the Bank and Specialised Deposit Taking Institution Act 2016 Act 930, a bank is deemed to fall into the category of a failing bank if any of these situations arise. The bank is likely to become unable to meet its obligations under Act 930; it is about to suspend payment to any extent (the inability to fulfil its role as a bank); is in a situation of insolvency (accordingly, the test of liquidity rests on the volatility of deposits, the reliance on interest sensitive funds and level of borrowings. It is about the availability of assets, readily convertible to cash and the access to money markets and other ready source of cash, banks’ liquidity is ultimately evaluated on the basis of its capacity to promptly meet the demands for payment obligations and ability to meet sound credit needs of customers); and if it is considered to be in a grave situation (a situation of inability to meet its responsibilities and satisfy the needs of the customers, capital inadequacy or consistent negative earnings). Some two banks (UT Bank and Capital Bank) were liquidated in 2017 (Bank of Ghana report, 2017), while five other banks were consolidated into the Consolidated Bank Ghana ltd in August 2018.
- Executive Summary of Bank consolidation and failures in Ghana
Over the last 12 months, the Bank of Ghana has cracked the whip at the banking industry in a bid to restore sanity in the industry. In August 2017, the UT and Capital Banks were liquidated for failing to meet the Bank of Ghana’s minimum capital ratio. On the 4th August 2018, the operations of UniBank, Royal Bank, Beige Bank, Sovereign Bank, and Construction Bank ended. In their place the Governor of Bank of Ghana, Dr. Addison announced a new bank called the Consolidated Bank, as part of measures to ensure the banking sector maintains a strong indigenous presence.The Bank of Ghana’s statement on closure of the banks said an Asset Quality Review (AQR) of banks conducted in 2015 and 2016 found that some indigenous banks had inadequate capital, high levels of non-performing loans, and weak corporate governance. Below is a synopsis of the state of financial irregularities in the five banks which compelled Bank of Ghana to crack the whip.
- UniBank Ghana Ltd
The statement said in all UniBank had given amounts totalling GH¢1.6billion to shareholders in the form of loans and advances, without due process and in breach of relevant provisions of BSDI Act 2016 Act 930). In addition, these shareholders and related parties illegally received GH¢3.7billion in breach of the normal credit delivery process, and were not reported as part of the bank’s loan portfolio. The loans were also without collateral, and attracted no interest income for UniBank. In all, the Bank of Ghana detected that shareholders and related parties of UniBank had drawn an amount of GH¢5.3billion, constituting 75 percent of the bank’s total assets. Besides, out of total customer deposits of GH¢4.3billion, GH¢2.3billion was not disclosed to the Bank of Ghana. Loans and advances to customers were also overstated by GH¢1.3billion in prudential returns to the Bank of Ghana. As a result, by 31 May 2018 over 89% of uniBank’s loans and advances of GH¢3.74billion was classified as non-performing (BOG report,04/08/2018).
- Royal Bank
Since commencing business in 2012 Royal Bank had experienced solvency and acute liquidity challenges, arising from irregularities. A subsequent assessment of the bank’s books revealed that it had suffered severe capital impairment due to under-provisioning for loans. It also had an overstated capital on account of fixed assets. This resulted in an adjusted capital of negative GH¢484million; yielding a capital adequacy ratio (CAR) of negative 80.53 percent, a capital deficiency of GH¢567.78million and a net-worth of negative GH¢498.63million as at 31st May, 2018. Since September 2017, the bank has persistently faced serious liquidity challenges – resulting in the continuous breach of the cash reserve ratio required by section 36 of Act BSDI Act 2016 Act 930, besides poor liquidity risk management controls (BOG report, 04/08/2018).
- Sovereign Bank
Bank of Ghana’s investigations found that Sovereign Bank’s licence was obtained by false pretences, through the use of suspicious and non-existent capital. As a result, the bank became insolvent from day one and was unable to meet daily liquidity obligations. The Bank of Ghana says liquidity support it granted the bank prior to its collapse amounted to GH¢21million as of 31st July 2018. That notwithstanding, the bank was unable to publish its audited accounts for December 2017 – in violation of section 90 (2) of BSDI Act 2016 Act 930 (Bank of Ghana report,04/08/2018).
- Beige Bank
Beige Bank commenced banking operations in December 2017, after operating as a savings and loans company. Subsequent investigations however revealed that the bank obtained its licence under false pretences. The investigation further revealed that funds purportedly used by the bank’s parent company to recapitalise were sourced from the bank through an affiliate company, which was in violation of 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. The parent company in turn reinvested the amount in the bank as part of its capital.
The placement by the bank with its affiliate company amounted to 86.86% of its own net funds as at end June 2018, thereby breaching the regulatory limit of 10%. Overall, 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% against the regulatory minimum of 10%; thus recording a capital deficit of GH¢159billion and rendering the bank insolvent (BOG report,04/08/2018).
- Construction Bank Limited
On its part, Construction Bank was licenced in May 2017 and commenced operations in December 2017. In the course of uniBank’s official administration, the Bank of Ghana discovered that the initial minimum paid-up capital of the bank was funded by loans obtained from NIB Bank Limited (GH¢34million) and UniBank (Ghana) Limited (GH¢61million), contrary to section 9 (d) of BSDI Act 2016 Act 930. At the time of its closure, Bank of Ghana found that an amount of GH¢80million out of the bank’s paid up capital remained inaccessible to the bank. Thus, the bank’s inability to inject additional capital to restore its Capital Adequacy Ratio to the minimum capital of GH¢120million threatened the safety of depositors’ funds and stability of the banking system (BOG report, 04/08/2018).
Dr. Addison (04/08/2018) posited that in arriving at the decision to liquidate the five banks, the Bank of Ghana said it noticed a trend of poor corporate governance, poor risk management practices, regulatory non-compliance, unethical practices, and poor banking supervision. These poor corporate governance practices had emerged over the years, leading to a significant build-up of vulnerabilities in the banking sector.
- Nigerian equivalent
In 2010 the Nigerian banking sector faced a similar financial crisis, which compelled the central bank of Nigeria to crack down on the failed banks. In a lecture, as a prelude to sanitising the situation in Nigeria, Sanusi Lamido Sanusi – then Governor of CBN – identified governance malpractice within banks as the cause of a huge surge in capital availability. According to him, failure in corporate governance at banks was a principal factor contributing to the banking crises.
Sanusi (2010) indicated that poor corporate governance became the norm because boards ignored these practices for reasons which included being misled by executive management, besides the boards themselves participating in obtaining unsecured loans at the expense of depositors.
In addition, banks made public information on their operations available on a highly selective basis and investors were thus unable to make informed decisions on the quality of bank earnings, the strength of their balance sheets or the risks in their businesses.
Some banks even engaged in manipulating their books by colluding with other banks to artificially enhance financial positions and therefore stock prices. Also, CEOs and boards set up Special Purpose Vehicles to lend money to themselves. One bank in Nigeria is reported to have borrowed money and purchased private jets, which were later discovered to be registered in the name of the CEO’s son. Without doubt, these are the same irregularities the Bank of Ghana cited for closing the banks. In Ghana, weak enforcement and inadequate supervision, ineffective board oversight, weak risk management practices, lack of capital management planning and business model were cited in the Bank of Ghana’s reports.
- Weak Supervision and poor enforcement had been major contributory factors in the current banking crisis in Ghana
Like Ghana, the central bank of Nigeria found that weak supervision and inadequate enforcement played a significant role in exacerbating the banking crisis in Nigeria. In Nigeria, regulators were ineffective in foreseeing and supervising massive changes in the industry. The situation in Nigeria in 2010 is a true reflection of the crisis in Ghana’s banking sector in 2017 and 2018. Many, if not all of the failures in the banking sector should be laid at the doorsteps of the immediate past-Governors of the Bank of Ghana. Ghanaians had complained and continue to complain about poor supervision and enforcement of banking and financial regulations. One question begging for answers is: how could the Bank of Ghana issue licences to banks based on false and unverified financial claims (Safo, 13/08/2018)?
- Weak and ineffective board oversight had also contributed the high non-performing loans over the past decade.
While blaming Bank of Ghana for weak supervision, the culture of poor corporate governance practice permeates indigenous business culture. Sanusi notes that in Nigeria boards and executive management in some major banks were not well-equipped to run their institutions. Perhaps the same can be said of the boards of the seven banks that have collapsed so far? In Ghana, the issue of lack of capacity or ‘incompetence’ of boards to enforce good governance practice cuts across public and private sector enterprises. In fact, since independence, local banks have been grappling with sound corporate governance practices; largely because a chunk of businesses are owned by family, friends or political cronies. The common refrain in Ghana is that “the business belongs to my uncle, my auntie, my father, mother etc., so I can do what I want with the money”.
The buying of real estates and houses, rather than reinvesting into operations, characterises management decisions in many local industries, including banks. Also, failure to diversify ownership and bring on board experts and new investments also stifles local businesses. Small wonder that local banks were unable to survive, let alone becoming competitive (Safo, BFT,13/08/2018).
- Weak and poor Corporate culture has been one of the major contributory factors in the current banking crisis.
Culture in a corporate context can be defined as a combination of the values, attitudes and behaviours manifested by a company in its operations and relations with its stakeholders. These stakeholders include shareholders, employees, customers, suppliers and the wider community and environment which are affected by a company’s conduct. This underlies the fact that companies do not exist in isolation. They need to build and maintain successful relationships with a wide range of stakeholders in order to prosper. These relationships will be successful if they are based on respect, trust and mutual benefit. One of the key roles for the board includes establishing the culture, values and ethics of a bank. It is important that the board sets the correct ‘tone from the top’. The directors should lead by example and ensure that good standards of behaviour permeate all levels of an organisation. This will help prevent misconduct, unethical practices as we are witnessing in the banking sector of Ghana. Owners of local banks need to understand that high-quality corporate governance helps to underpin long-term company performance. In short, cultural failures damage reputations and have a substantial impact on shareholder value. Elsewhere, customer base and brand identity now account for over 80 percent of total corporate value, compared to under 20 percent 40 years ago (Safo, BFt. 13/08/2018).
- The poor link between business model, strategy and capital management had been a major cause of the financial distress, bank consolidation and bank failures over the past decade. One other area that local banks need to focus on is that of defining their purpose, strategy, business model and capital management planning. Moving forward, local industries (including banks) should recognise the value in defining and communicating a broader purpose beyond profit, which generates wealth and delivers benefits to society as a whole. This can help create shared goals, motivate employees and build trust with customers. Thus, aligning business decisions with purpose and values – and focusing on how financial targets will be achieved, can lead to more sustainable value creation. The key lesson for sound business management is that a strong governance system is essential for a healthy culture. While the processes and practices in the boardroom are equally important, governance needs to focus on the substance of what boards do: who they engage with; what information they are given; and what questions they ask.
Shareholders rely on the board to oversee a healthy culture that is compatible with the business model, steers the executive and delivers the strategy. Therefore, boards must be actively engaged in the business of shaping, overseeing and monitoring culture, and holding the executive to account where they find misalignment with company purpose and values. Unfortunately, corporate governance practice in Ghana is at its worst judging from the banking crisis. If Ghana adhered to international best practices of corporate governance, competent people with relevant industry knowledge would be appointed to boards of both private and public enterprises. The appointment of political cronies and family and friends to boards should be minimised, or stopped if possible.
In conclusion, consolidation of the five banks will not solve the financial crisis overnight without strengthening corporate governance and banking supervision. As Sanusi noted, the Nigerian case proved that the ‘Consolidation’ failed to overcome the fundamental weaknesses in corporate governance in the new bank(s). After consolidation, some banks continually engaged in unethical and potentially fraudulent business practices. “As a result, we have now discovered that in many cases consolidation was a sham and the banks never raised the capital they claimed they did.” he concluded. The question that everyone is posing will bank consolidation succeed while some of the exogenous and endogenous factors have not been properly addressed. The Ministry of Finance and Economic Planning and the four financial regulators ensure that there is regulatory integration.
- Unethical and Unprofessional Practices in the Ghanaian Banking Industry
Globally, there are a lot of immoral and unethical practices in the banking industry, which is not peculiar to Ghanaian banking industry alone, and as such conducts are classified unprofessional and unethical including, but not limited to the following issues. The issue of conflicts of Interests, involving engaging in extraneous activities which compete with or constrain a bank’s primary responsibility; abuse of trust/office, involving abuse of position and taking advantage of the institution to enrich oneself, and the like.
Also, lack of full disclosure such as, non-disclosure to relevant authorities in dealing with other players and customers in the market place; underestimating the volume of deposits in order to evade insurance premium, and the sidelining of vital prudential guidelines. There is also the issue of misuse of Information, (manipulation or non-disclosure of material information on reports supplied to Bank of Ghana and some extent to the Securities and Exchange Commission, in order to derive some benefit or avoid liability, etc). According to Ogunleye (2010), it has been reported that two-third of member countries of the International Monetary Fund (IMF) both developed and developing country members, had significant banking problems. There has always been a debate about the major causes of bank failures. While bankers usually blamed this on external factors such as inappropriate government policies; supervisors attribute it to poor management and depositors invariably blame inadequate supervision and weak management. However, the principal source of bank failures can be said to be from unethical practices. For the purpose of this study, other causes of bank failures have been grouped into institutional factors; economic and political factors; and regulatory and supervisory measures as part of the unethical and unprofessional practices in the Ghanaian banking industry.
- Institutional corruption has been one of long cankers in the Ghanaian economy. According to Wilson (2006); Liu and Lin (2009) that corporations cannot be divorced from the endemic corruption that exist in the society in which they are operating in a weakened corporate governance environment in Ghana. As the case of Ghana has shown that since gaining independence in 1957 from the British. It has been ruled by unelected military rule for nearly 30 years and the rest years had been rule by elected civilian governments. Both the military governments and elected political governments had not dealt decisively with the endemic corruption in Ghana. The similarity of both government had seen the culture of impunity from arrest and legal prosecution and those found culpable are shielded from investigation and prosecutions.
- Unethical leadership has been a major achilles heel in curbing the tide of the endemic corruption and poor corporate governance in Ghana. The common theme that runs through modern leadership theories are of the view that leadership as something that connotes positive and ethical phenomenon. More recently, there have been widespread instances of mistrust, lack of morals, unethical behaviour and in general financial scandals that has rocked the banking sector. This has in fact been an issue with the leaders or leadership within these banks. This has therefore brought to light the negative side of leadership. Therefore, destructive and egotistic leaders have crippled positive leadership and now causing damage and harm in organisations (Takala,2010). A fix of ethical leadership would stem the tide of poor corporate governance in the Ghanaian banking sector.
- The problem of appointing incompetent management is aptly described by Olufon (1992) as follows: “Since the owner-managers regarded banking as an extension of their business empires, they invariably try to dominate their operations by appointing their relatives or friends to key positions instead of relying solely on professional managers; which led to series of shareholders quarrels and boardroom squabbles. These have some of the unethical practices in the banking industry. This may be as a result of the fact that, some shareholders were mere strange bed-fellows who came together to meet the requirement of geographical spread for ownership of banks and the ceiling on individual shareholding. There was also the problem associated with the raising of initial capital of some of the banks which as a result of the crisis, it was discovered that the share capital was contributed by a few “well to do” individuals. As soon as the banks commenced operations, the minority or nominee shareholders felt marginalized. In some cases, it was discovered that the major promoters raised commercial papers for statutory paid-up capital and used depositors’ funds to liquidate such facilities. The consequences of the crises included irregular board meetings; lack of management cohesion as members and officers represented different and opposing interest group; confusion and chaos in the bank; high labour turnover; and loss of public confidence, all the unethical practices adversely affected the banks.
- Another major factor is insider lending, excessive risk-taking, excessive executive compensation schemes, and connected lending are some of the unethical practices that have been bedevilled all the seven failed banks over the past two years. According to Brownbridge (1998), some local banks in Africa were set up with unethical motives in mind. The extent of connected lending, related lending and insider lending had been considerable, suggesting that local banks were set up to enable their owners or shareholders to mobilise funds to support their other business ventures. This assertion confirmed some of the domestic private banks set up in the 2000s. Moral hazard become more acute when the bank lends to projects connected to it own directors or managers (Brownbridge 1998). In such cases the incentives for imprudent (and fraudulently) bank management are greatly increased in that all profits arising from the projects are internalized (in the case of loan connected borrowers’ returns are split between lender and borrower), whereas that part of the losses borne by depositors or tax payers are externalized. Not surprisingly, connected or related lending is a major cause of the recent bank failures in Ghana. Some board of the failed banks approved excessive executive compensation packages and other perks for the banks’ executives and some board members but failed to monitor the cumulative cash drain on the already dismal financial performance of these distressed banks.
- Abusive ownership and weak board of directors in the Ghanaian banking system, the extent of abusive tendencies varies with the nature of the ownership of distressed banks and they include the following:
- The domestic private banks such as UT Bank, Capital Bank and Unibank were afflicted by undue interference and pervasive influence of the dominant shareholder(s). Such shareholders were unable to recruit and or retain competent management teams. The problem of appointing incompetent management is aptly described by Atuahene (2016) quote “Since the owner-managers regard banking as an extension of their business empires, they invariably try to dominate their operations by appointing their relatives or friends to key positions instead of relying solely on professional managers. In some banks, major shareholders appointed their children or friends to key positions without due regard to their level of experience and competence. Ineffective board practices have contributed to the financial distresses and failures over the period 2009-2017 among the state own banks and domestic private banks. Most of the board members do not bring independence and objectivity to bear upon board decision-making. They also lacked the necessary experience, skills and expertise to understand the technical issues in the banking business. Boards of directors suffer from poor capacity and passiveness of directors (FINSSP 11/04/2012).
- Most board members are appointed on the basis of family, political or social and religious connections to the banks’ boards without regards to competencies, experiences, skills, expertise and without due to relevant qualifications as set out in the Basle Core Principles 3 &5 of BIS (2006;2012). Appointment of family, political and social connections have resulted in so many unethical practices as well as unprofessional conduct in the banking sector. Failure on the part of Bank of Ghana to strictly apply the proper and fit test under the Core principle 3 of BIS (2006) might have contributed to distresses and bank failures. The question that is worrying is “who did approve a “Man of God” without the proper experiences, skills and competencies to chair the board of failed bank without due regards to the Basle Core principles 3& 6 of BIS (2006;2012) and Section 44 (Sub-section 4) of the Banks and Specialized Deposit Taking Institution Act 2016 Act 930.The unethical practices of appointing unqualified and inexperienced board chairpersons, board members and senior management team to the various banks especially with the domestic private banks had contributed to the wide spread financial distresses and bank failures in Ghana over the past decade. The approval of inexperienced “Man of God” to chair board of one of the failed bank was a clear case of regulatory failure on the part of Bank of Ghana. Regulatory Authorities have not declined approval of such board and managerial appointments, where these people are known to have caused financial malpractices such as insider lending, related or connected lending and tunnelling in their previous appointments with some banks. Glorifying mediocrity in the banking sector is normal phenomenon in the Ghanaian banking system. Failure to apply the proper and fit test on owners, boards and managers are some of the unethical practices that contributed to the dissolution of UT Bank and Capital Bank and financial distress in the banking sector between 2009-2017.
- Some of the domestic private banks were characterised by undue influence and pervasive influence of dominant or majority shareholders which contributed to financial distresses and bank failures in Ghana. Some shareholders were mere strange bed-fellows who came together to meet the regulatory requirement of the spread for ownership of banks and the ceiling on individual shareholding. There was also the problem associated with the raising of initial capital of some of the banks which as a result of the crisis, it was discovered that the share capital was contributed by a few “well – to – do” individuals. As soon as the banks commenced operations, the minority or nominee shareholders felt marginalised. In some cases, it was discovered that the major promoters raised commercial papers for statutory paid-up capital and used depositors’ funds to liquidate such facilities. iv) The consequences of the crises included irregular board meetings; lack of management cohesion as members and officers represented different and opposing interest group; confusion and chaos in the bank; high labour turnover; and loss of public confidence, all of which adversely affected the banks. Addision (2017;2018) cited that the dominant shareholders in Unibank, Royal Bank, UT Bank and Capital Bank exerted undue influence on the management that led to poor lending practices that resulted in huge non-performing loans which led to the dissolution of the four banks. These unethical practices contributed to bank distress and failures in Ghana between the period 2009-2017.
- Some of the failed banks’ boards looked very dignified on paper, and even included renowned Ghanaians but were equally impotent. The stewards had no clue to what was happening within the two banks and trusted the outside advisers without question. The collapsed banks undermined the belief that boards are able to represent the interests of shareholders, or other stakeholders. Most of the directors remained ill-informed about the banks they oversighted. Even where some of them were willing and interested in the affairs of their banks, they were not provided with useful and relevant information by the management. Addison (2017) cited some examples of recklessness on the part of the boards which led to the failure of UT Bank, Unibank and Capital Bank include-; (i) comingling of banks’ activities with their related holding companies (business conglomerates). For instance, one bank paid royalties for the brand name, even when the bank’s financial performance was so poor and abysmal the bank could comply with primary reserve requirement, liquidity ratio requirement and minimum capital requirement. On the royalty payment for brand name, four (4) “capture or passive” non-executive directors out of the seven (7) board members approved this transaction without the full knowledge of the three non-executive directors and significant minority shareholders (Addision,2017). As part of their “tunnelling” practices at these banks, they were high executive compensation schemes operated by these distressed banks which were not commensurate with their operations. This risk and earning profile of these banks could not support the executive compensation schemes. These unethical practices and unprofessional conduct have contributed to the revocation of their banking licenses by Bank of Ghana. Fiduciary failure on the part of some of directors had caused the distress and bank failures in Ghana.
- Those boards failed to safeguard depositors and other stakeholders by allowing these banks to engage in excessive risk taking, inappropriate conflict of interest transactions, extensive off-the balance sheet activities and excessive executive compensation, creative accounting and other perks. One of the failed bank board approved excessive compensation for bank executives, but board failed to monitor the cumulative cash drain caused by bank’s annual bonus and performance unit pans and failed to monitor properly the cash flows. Excessive executive compensation schemes in the banking industry in the past had often not been due to achieving results but had amounted to rewards for failure. In the industry, executives are taking an increasingly share of the earnings of banks and are becoming significant shareholders in their own right. The problem of high levels of compensation for the executives had resulted in the neglecting to build organizational capabilities they were supposed to lead (Lazonick, 1992). Excessive executive compensations in Ghanaian banks is not an isolated problem, it is endemic and it has occurred because executives seized control of their own rewards structures (Bebchuk and Fried, 2005). Managerial influence over the design of pay arrangements, resulting in costs to investors and the economy. The influence has led to compensation schemes that weaken managers’ incentives to increase bank value and even create incentives to take actions that reduce long-term value. Flawed compensation arrangement had not been limited to small number of “bad oranges”; they have been widespread, persistent and systemic in the banking industry. The absence of effective arm’s-length dealing under current system of corporate governance has been the primary source of problematic compensation arrangements.
- Weak corporate governance practices, particularly connected lending and contravention of supervisory provisions, overbearing directors’ interests in loans and advances or any credit facilities are some causes of bank distresses and failures (Kama, 2009). The failure of the seven banks suggests a positive relationship between weak corporate governance practices and bank failure is compatible with the literature. Corporate governance in the local banks failed because boards ignored these practices for reasons including being misled by executive management, participating themselves in obtaining unsecured loans and advances at the expense of depositors and not having qualification to enforce good corporate governance on bank management. In addition, the internal control systems, audit committees and risk management committees of these banks appeared not to have taken fully into account of deterioration of the banks’ risk assets and failed to make adequate loan loss provisions against risk assets. In hindsight, boards and senior management in some banks engaged in building business empires through financial conglomerates (insurance companies, savings and loan companies, supply and logistic firms, stock brokerage firms and investment fund firms). For the domestic private banks, the board chairpersons and CEOs often had overbearing influence on the boards, and some boards lacked independence and objectivity and as a result, directors often failed to make meaningful contribution to safeguard the growth, sustainability and development of the banks, and had weak ethical standards; the board committees were also often ineffective or dormant.
- Addison (2017) cited that that the failure of the seven banks were due to significant capital deficiencies with the underlying reason being poor corporate governance practices within most of the banks. In some instances, dominant or majority shareholder exerted undue influence on the management of the banks, causing poor credit practices and weak credit administration procedures. This was also reinforced by weak risk management practices and poor oversight responsibility by the “passive” board of directors. UT Bank, Unibank, Biege Bank and Capital Bank were set up with less ethical motives in mind, because of the extent of related lending and connected lending had been considerable suggesting that the affected banks were set up to enable owners to divest funds for their other business ventures. Most of the failed banks had poor lending practices such as poor underwriting skills or overly aggressive loan expansion programme, coupled with absence of incentives to identify problem loans at an early stage and to take corrective action. These were some of the unethical practices that have contributed the financial distress and bank failures over the period under review.
- Mismanagement played a major role in bank failure in Ghana. Other factors which contributed to mismanagement included the following. (i) inexperienced and incompetent personnel were recruited to hold key positions in banks. As a result, most of them lacked the ability to respond to the rapidly changing economic conditions and regulatory framework. ii) Significant deterioration in management culture, as the distressed condition of the banks got worse, manifested in most banks. Deterioration involved several stages. Initially, it involved inadequate policies, procedures and practices which resulted in over extension of credit, disregard of single obligor limits and poor lending procedures. As the losses increased, the management of UT Bank and Capital Bank tried to hide losses so as to buy time and remain in control. This led to manipulation of profits; under provisioning for losses through ever greening procedures or revaluation of fixed assets. Diversion of funds to holding companies and other subsidiaries were wide spread (Addison, 2017). There were some governance failures in both UT Bank and Capital Bank. Some instances of weaknesses in carrying out the responsibilities of governance were found. The records indicated that some members of the board of directors showed lax attitude towards governance. Some members appointed to board did not have requisite experience, skills and not enough motivation for their job. While some board members had conflict of interest owing to their dual role as board members as well as external consultants. These were some of the noted unethical practices in that prevailed in the two failed banks. When the banks became severely insolvent, management resorted to desperate strategies to boost liquidity or income levels. The practices included the purchasing high cost funds at rates above the market levels, lending to marginal or fringe borrowers at excessive rates or engaging in speculative transactions. Furthermore, where the UT bank and Capital Bank became insolvent and illiquid, the management engaged in massive excessive risk -taking practices. The culture of phantom business was elevated to corporate level and permeated all layers in the organisations. Non- adherence to credit management procedures and practices as the UT Bank and Capital Bank were heavily exposed to insider lending and connected lending. These were noted unethical practices or unprofessional business practices in the banking industry that had contributed to financial distress and bank failure over the period 2009-2017.
- According to Addison (2017;2018), citied that some non-executive directors of some of the banks compromised their independence, objectivity and fiduciary duties to check on the executive directors. For instance, interference by non-executive directors in the day to day operations of the banks weakened the board oversight function of executive directors. In some cases. Non-executive directors also acted as consultants to some banks with no clear mandate, which gave rise to conflict of interest. The independence of the failed banks was compromised by financial ties between the banks and some board members. The boards failed to provide the prudent oversight and checks and balances that its fiduciary obligation required and that banks like Unibank ltd, UT Bank and Capital Bank needed. By failing to provide sufficient oversight and restraint to stop management excesses, the boards contributed to the two banks’ collapse and bear a share of the responsibility for them.
- Weak internal control systems characterised the operations of many distressed banks. Even where the controls were in place, they were not being complied with. Internal Audit or Inspection functions were found to be weak and sanctions were not imposed on erring officers. The consequences of weak internal controls were clearly reflected in the volume of insider lending, connected lending and excessive risk taking and poor credit administration procedures. The lack of independence of management in acting on recommended corrections by internal auditor clearly manifested itself in weak internal control systems of some of distressed and failed banks. The Unibank ltd, UT Bank and Capital Bank collapse occurred without any warning from the internal control systems or external audit, even though the Bank of Ghana had introduced the strenuous imposition of CEO and Director sign off on the Bank of Ghana’s Banking supervision department reports (BSDs).
- Non-compliance with laws and prudential standards. Management of those failed banks did not have prescribed code of conduct and ethics, and also failed to keep proper books and accounts in contravention of applicable banking laws, rules and regulations. Non-compliance with the Bank of Ghana’s Capital Adequacy ratio of 10% of Section 23 (1) of the Banking Act 2004 Act 673 and the Primary Reserve Requirement of 8% under the Bank of Ghana’s notice no BG/GOV/SEC/2009/5 were some of the lapses. Failure to comply with Section 42 (1) of the Banking Act 2004 Act 673 which stipulates that no financial institution shall expose itself to one person or group of persons which constitute in the aggregate more than 25% of its net own funds where the facility is secured. Bank of Ghana’s examinations revealed that most of the failed banks were over- exposed to some of their loan customers as a result of its negative net-worth.
- Weak Risk Assets Management Practices have contributed the financial distress and failures in the Ghanaian banking system. A number of banks had poor credit policies and in cases where good policies were in place, they were not faithfully implemented. Loans were granted without due regard to ability of borrowers to repay. Several loans were granted without collateral and even where secured, the collaterals were found to be inadequate or non-existent. For instance, one of the failed banks imported refined petroleum product worth of US $ 14 million without adequate security over the facility. Poor credit appraisals had been one of major weaknesses identified in the two failed banks in 2017. Credit administration was also found to be weak as credits were not being properly appraised and monitored. As can be seen from above, the proportion of non-performing loans in the distressed banks had during the period 2008 – 2016, been consistently high, reaching about 80 per cent of their loan portfolio. This ratio significantly exceeded the prudential maximum ratio of 25per cent of the net own funds Section 62 of Banks and Specialised Deposit Taking Institutions Act 2016 Act 930 or Banking Act 2004 Act 673; Section 42. Lending to governments and their SOEs (VRA, Gridco, Ghana Electricity Company, TOR) also contributed to the distressed conditions of many banks. Frequent disregards to the regulatory limits in the banking laws might also have contributed to the wide distress and bank failure. Furthermore, some of the banks failed to pay attention to sound assets and liability management practices. Loans were granted without regard to the tenor and nature of the funding base of the banks. positions of many banks and cross-defaults in the inter-bank market. Some of the banks had no funding or placements policies which would have placed limits and discriminate against unsound banks. This weakness resulted in massive cross-defaults in the inter-bank markets. The collapse of UT Bank and Capital Bank sent ripples through financial market in Ghana as the importance of effective internal controls and appropriate monitoring was reinforced.
- Weaknesses of the regulation and supervision of financial system is viewed as major factor, contributing to the emergence of bank distress and financial crisis (Mishkin, 2001; Fischer and Risen, 1992). It is argued that if financial liberalization is accompanied with weak prudential supervision of the banking sector, then it would result in excessive risk taking by financial intermediaries and subsequent crisis (Dermigue – Kunt and Detriachge ,1998; Edwards, 2000). The Bank of Ghana’s uneven supervision and inadequate enforcement had also played significant role in exacerbating the problems associated with both financial distress and bank failures over the past decade. Regulator was ineffective in oversight and supervision of the massive changes especially with introduction of universal banking model in the banking industry in 2003 or in eliminating the pervasive corporate governance failures. There were many instances of weaknesses in the supervision and enforcement process. For example, Bank of Ghana’s examinations were not conducted on a bank consolidated basis. In addition, Bank of Ghana did not provide input to other regulators such as Securities and Exchange Commission in planning its examinations of UT Bank operations. Also, the rating and depth analysis weren’t sufficient to capture the distress and insolvency issues of both UT Bank and Capital Bank. For example, Bank of Ghana’s SLEMSC ratings did not differentiate the performance of successful and failed banks. While Bank of Ghana’s examination identified critical risk management issues, many issues the caused the distresses in the industry and ultimate collapsed of UT Bank and Capital Bank escaped the examinations even though they were well known in the industry.
Enforcement was the biggest failure among surveillance processes, despite that Bank of Ghana had all powers under the banking laws to enforce examination recommendations. Bank of Ghana’s sanctions and financial penalties were woefully inadequate to enforce compliance. By paying token penalty points and meagre fines, the UT bank and Capital Bank effectively annulled key aspects of Bank of Ghana’s examination reports over the period under review. Also, with examination cycles between 9 months and 18 months, follow up on examination recommendations were rolled up into the following year’s examination. The prevailing view that the banking sector was health and sound (IMF, 2012;2013;2014;2015), a culture of tolerance and acceptance of the status quo and shortage of specialist skills in universal banking concept compromised supervision effectiveness (Sanusi, 2010). There was insufficient discipline in holding the UT Bank and Capital bank boards of directors to clear remedial program. While these two banks responded to the Bank of Ghana’s examination reports, the boards and senior management seldom committed to specific deliverables, timing or executive responsibility for implementation. Hence, it was difficult for Bank of Ghana to measure the two banks progress against compliance with some of the major recommendations such as recapitalization and the reduction strategies for high non-performing assets. The compliance of these banks was very poor, as owners, boards and senior management frequently ignored the Bank of Ghana’s recommendations despite of seriousness of the issues. The consequence to the two banks of non-compliance was not sufficient to change the behaviour and attitude of boards and management. The boards and senior management faced no personal liabilities as done in other jurisdictions for non -compliance. The Bank of Ghana allowed this poor practices and behaviour to go unchecked for the period under review, establishing a way of doing business that compromised the Bank of Ghana’s supervision process. The failure of UT Bank and Capital Bank suggests that there is direct relationship between uneven supervision and inadequate enforcement and bank failure which is in conformity with theoretical literature.
- Another is offer and acceptance of gratification to/by the regulator as an inducement to waive the imposition of penalties arising from failure to comply with laws or regulations, applying uneven standards/imposing unfair penalties by the regulator with the intention to induce gratification, offering/acceptance of gratification to/from customers and potential customers to do business, and aiding a customer to evade Tariffs and Taxes and to make unwarranted earnings.
- Also, there is non-conformity with Standards and Guidelines [Ghana Accounting Standards, International Financial Reporting Standards and Bank of Ghana prudential guidelines in the preparation of financial Statements, resulting in complete or false information, preparation of multiple financial statements in order to mislead the monetary and tax authorities, Bank of Ghana knowingly associating with or doing business with people of doubtful character, etc]; as well as aiding and abetting [e.g. the failure of a new staff to meet the financial obligations to a previous employer and employing new staff without obtaining suitable reference].
Since banking is based on trust, transparency and confidential behaving ethically is in the best interest of businesses as well as in the interest of other stakeholders in the system. To behave unethically has dire consequences for all stakeholders (depositors, customers, investors and regulators) and for the system. It is therefore not sufficient to have a code of ethics and professionalism. The Code must be readily available to all bankers to promote ethical awareness; it must also be able address all ethical issues and problems for proper professional guidance; the code should be evaluated frequently to ensure that it is current and not stale and must be enforceable to ensure conformity by all professional bankers; and finally, it must be readily adopted by all banks. All Ghanaian banks must therefore see ethics as part of their core management functions and provide ethics training in their organizations. All Ghanaian banks should have corporate cultures for guidance of employees and this should be built and sustained for the benefit of the banks and their employees. Ethical practices will certainly eliminate distress and bank failures in the banking industry, restore confidence in the payment system and bank failures in the economy.
This study revealed that some Ghanaian banks and bankers have their own code of ethics and professionalism but not all Ghanaian banks have adopted the Code of practices. This implies that the industry is not fully sanitized in order to curb unethical and unprofessional practices for restoration of public confidence in the system for efficient financial intermediation and for the economic development of the country. The sanctions for unethical or unprofessional conducts appear to be too weak, such sanctions taken includes the removal of the name of the member from the Ghana Institute of Bankers’ register of registered members, submission of the names of de-listed members to the Bank of Ghana. The problem however is that the removal of the name of a professional banker from the register does not prevent the banker from carrying out his normal duties, this only means that the banker cannot parade himself or herself as a professional banker. Banking is a profession but entry into the banking profession in Ghana is generally unrestricted and so it is difficult to enforce ethics as the industry has not been able to sieve out professional from non-professional bankers for the purpose of sanctions for unethical practices. Unrestricted entry into the banking profession in Ghana is partially responsible for the unethical practices in the banking industry. The Chartered Institute of Bankers of Ghana has made tremendous efforts at sanitizing the banking industry in Ghana through its professional education and continuous development education programmes. Even though few professional bankers are at the helm of affairs of most of Ghanaian banks and are capable of providing ethical leadership for the banking profession most non-professionals seem to support professional banking education development in Ghana.
The study further showed that many Ghanaian banks encourage professional training amongst their staff in order to prepare them for the challenges ahead and ensure that there is adequate manpower to carry on as successful business entities with ethical values which can provide modern and efficient banking services to the large banking public in Ghana. The study also revealed that there is an urgent need for legislation of ethics contrary to the views expressed in the literature review that ethics cannot be legislated as ethics is morality and one cannot legislate morality. In spite of this, Bank of Ghana and Ghana Institute of Bankers of Ghana should jointly develop code of Ethics and Professionalism for the banking industry and also ensure stricter enforcement by the Bank of Ghana and this could be done by regulation. The obstacle however is that ethics is morality and one cannot legislate morality. Ethics training should receive the desired attention in virtually all the banks in Ghana as the banks encourage professional training amongst their staff.
- There is still the need to promote greater awareness of Ethics and the Code of Ethics in the Ghanaian Banking Industry, as this is the best way of promoting ethical behaviour. The Bank of Ghana, Chartered Institute of Bankers of Ghana and National Banking College should step up and sustain enlightenment campaigns for ethical behaviour in the banking industry through seminars, workshops, newsletters, journals, magazines and other publications.
- Bank of Ghana should ensure that every bank engages its stakeholders in determining the bank’s standards of ethical behaviour and also demonstrate it commitment to organizational integrity by codifying its standards in a code of ethics.
- Bank of Ghana should ensure that all unethical or unprofessional conducts are reported to the Banking Supervision Department and appropriate records are kept and up-dated regularly. Some banks have refused to report such persons who have unethically to the Bank of Ghana but allow them to resign quietly from the service. Banks found culpable must be sanctioned properly and adopt “the name and shame” policy
- Stiffer sanctions should be given to unethical/unprofessional conduct and there should be sufficient penalty for unethical practices to deter deviation from ethical behaviour, as compliance with the Code of Ethics is not optional but compulsory for all banks and bankers Ghana.
- There is unrestricted entry into the banking industry which is responsible for a lot of unethical practices; therefore, stricter entry into the banking industry should be enforced, this would help in reducing unethical practices in the banking industry. Serious background checks should be conducted on potential employees
- Efforts need to be intensified to cultivate and promote ethics and the desire for self -regulation by ensuring that all Ghana banks adopt the Code of Ethics in the banking industry
- Professionalism in the banking industry should be promoted and to this end all bankers must register with the Chartered Institute of Bankers of Ghana, which has the responsibility for professional training of Bankers in Ghana. The Bank of Ghana should ensure that only professional bankers with proven track record are appointed to top management positions in Ghanaian banks. In addition, the National Banking College should also run a series of seminar on the ethics and professionalism for both middle and senior managers of the banks operating in Ghana.
- To curb distress and failure in banks, the Bank of Ghana should ensure that penalties and stiff sanctions are imposed on banks for unethical practices and for outright violation of rules and regulations sufficient to deter such violations and discourage unethical behaviours in future. Individuals found to have committed breaches of professionalism and ethics must be personally sanctioned as being suggested by Financial Conduct Regulator in United Kingdom in recent times. The Bank of Ghana must also ensure all boards of directors attend training on the code of ethics and professionalism and corporate governance directive for the banking industry.
- It is recommended that Ethics and Professional training should be made compulsory for all professional bankers and all other bank workers in the banking industry in Ghana. Ethics training should be introduced as a course in all tertiary institutions (universities, Polytechnics& Colleges of Education) in Ghana for early exposure to ethics and ethical behaviours amongst students and leaders of tomorrow so that they can appreciate the benefits of ethics and professionalism early in life.
- Since it would be difficult to legislate ethics in the banking industry it is recommended that Enforcement of Ethics should therefore be at the individual banks as it is said that the best form of regulation is self-regulation.