Over the last 12 months, the Bank of Ghana (BoGs) 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 BoG’s minimum capital ratio.
Two weeks ago, the operations of uniBank, Royal Bank, Beige Bank, Sovereign Bank, and Construction Bank ended. In their place the BoG announced a new bank called the Consolidated Bank, as part of measures to ensure the banking sector maintains a strong indigenous presence.
It will be recalled that in the run-up to the 2016 election, then-running mate and current Vice-President Dr. Mahamudu Bawumia predicted that eight banks were under threat of collapse and needed life support. The closure of the five banks brings to seven the number of banks that have been closed in one year. Which is the eighth bank?
The BoG’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 BoG to crack the whip.
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 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 BoG 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 BoG. Loans and advances to customers were also overstated by GH¢1.3billion in prudential returns to the BoG. As a result, by 31 May 2018 over 89% of uniBank’s loans and advances of GH¢3.74billion was classified as non-performing.
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 930, besides poor liquidity risk management controls.
BoG’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 BoG 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 Act 930.
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.
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 BoG 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 Act 930.
At the time of its closure, BoG 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 CAR to the minimum capital of GH¢120million threatened the safety of depositors’ funds and stability of the banking system.
In arriving at the decision to liquidate the five banks, the BoG said it noticed a trend of poor corporate governance, poor risk management practices, regulatory non-compliance, 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.
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 financial crisis.
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 BoG cited for closing the banks.
Supervision and enforcement
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 BoG. 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 BoG issue licences to banks based on false and unverified financial claims?
While blaming BoG 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, Ghanaian industries 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 luxury cars 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 industries are unable to survive, let alone becoming competitive.
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 company. 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 industries 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.
Purpose and strategy
One other area that local industries need to focus on is that of defining their purpose, strategy and business model. 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. Any signals for the BoG?
BoG (2018) Statement on the closure of five banks. Bank of Ghana.
Financial Reporting Council (2016), corporate culture and the role of boards.
Sanusi, L. S. (2010) “The Nigerian Banking Industry: What went wrong and the way forward” CBN.
The importance of Corporate Governance: http://www.applied-corporate-governance.com/importance-of-corporate-governance.html
(***The writer is a Development and Communications Management Specialist, and a Social Justice Advocate. All views expressed in this article are my personal views and do not represent those of any organisation(s). (Email: firstname.lastname@example.org. Mobiles: 0202642504/ 0243327586/0264327586