A lot remains to be done to restore “safety, soundness and stability in the financial sector”, the Bank of Ghana has said – even as it takes control of yet another bank, serving notice that it will continue to strengthen its supervisory and regulatory role.
Apart from full implementation of the new minimum capital requirements for banks by the end-December 2018 deadline, the central bank said it will also address specific risks from high NPLs, poor corporate governance and poor risk management systems.
Its Governor, Ernest Addison, told the press conference at which he placed Unibank under administration that the BoG will also embark on roll-out of the Basel II/III supervisory framework and ensure implementation of IFRS 9 by banks.
The BoG, he said, will strictly enforce fit and proper guidelines for shareholders, directors and key management personnel of banks and SDIs, as well as other supervised Non-Bank Financial Institutions, to ensure bad behaviour is not recycled within the financial sector.
Also, the Banking and Supervision department of the BoG will be strengthened and resourced in order to undertake a comprehensive review and improvement of all supervisory processes, and ensure strong enforcement of prudential and conduct regulatory requirements, he added.
“While several important steps have been taken thus far, a lot remains to be done to restore safety, soundness and stability in the financial sector,” he said.
He added that the regulator will roll out the deposit insurance scheme established under the Ghana Deposit Protection Act, 2016 (Act 931) while introducing Banking Sector Cyber and Information Security Guidelines to protect consumers and create a safer environment for online and e-payments products, in line with government’s interoperability objective.
The Bank of Ghana has over the past 12-months liquidated two banks, placed one under administration, and stopped granting new licences to both commercial banks and microfinance institutions.
It has withdrawn the licences of more than 100 microfinance companies, while referring 30 to the Economic and Organised Crime Office (EOCO) for investigations.
Despite these apparent challenges, Dr. Addison said the financial sector’s outlook is positive and that the BoG remains committed to promoting strong, viable and stable financial institutions.
He noted that in the months ahead, the central bank will engage with stakeholders as it seeks to design specific measures to strengthen systems and processes that will improve the industry.
Background to the adoption of tough measures
The Bank of Ghana, in 2016, conducted a comprehensive Asset Quality Review (AQR) which showed severe deterioration in asset quality within the banking sector. The AQR results also showed substantial provisioning shortfalls in a subset of banks (with a combined capital needs of around 1.6 percent of GDP).
These toxic balance sheets of banks, according to Dr. Addison, contributed to a decline in credit to the private sector and higher lending rates and spreads – undermining the transmission of monetary policy rate to the economy through market rates.
In addition, there was unusual forbearance by the Bank of Ghana, which resulted in the extension of significant amounts of Emergency Liquidity Assistance (ELA) to these ailing banks – some of which were uncollateralised – with accompanying risks to both the Bank of Ghana, in terms of resources to conduct monetary policy operations and reputational risks, and the banks themselves.
The problems in the financial sector were also reflected in the Microfinance or MFI subsector, comprising MFCs, MLCs, FNGOs and RCBs.
The extent of distress in this subsector was characterised by severely impaired capital, inability to meet regulatory capital adequacy requirement, generally low asset quality, and liquidity crises.
These have culminated in threats to depositors’ funds, thus eroding public confidence and undermining efforts to promote financial inclusion.
Of the total 566 licenced MFIs in 2018, 211 are active but distressed or have folded-up. Also, of the total 141 RCBs, 37 are active but distressed or folded-up.
In total, it is estimated that 272 out of the 707 institutions in the sub-sector, representing 38.5 percent, are at risk.
This indicates that approximately GH¢740.5million is owed to an estimated 705,396 depositors of the distressed or folded-up MFIs and RCBs.