As I spent time thinking through the banking sector clean-up by its regulator, the Bank of Ghana, many things came to me; but one question kept me thinking – was the current approach of revoking licences and appointing a receiver to help wind-down the business of these companies the best the central bank could have adopted?
Though I have been in the business of reporting as a journalist for over 10 years, I began Business journalism or reporting within the financial space actively in 2012, which is almost seven years ago. I admit this is not a great deal of time, but it still enough to have seen how managers of the banking or financial sector have gone about their work and tried to expand their business without the right strategic plan that would allow these businesses to grow organically.
While asking myself the question of “was or is the central bank’s approach to cleaning the sector they regulate the best, and should only directors of these institutions be made to suffer the penalty while the very people who had the responsibility to have supervised them walk around boldly and enjoy their retirement with others only transferred from their current department to new ones?” I came across a piece on a WhatsApp platform, and it was posted by the editor of a paper;
If it Was You
“For over one year now, depositors could not get their money.
Many of these customers have suffered serious hardships, trauma etc.
Some died because they could not get their monies to resolve crises, especially healthcare.
Some lost their children, wives, husbands, parents, siblings etc., because they could get their monies to provide health care for them.
The children of some of these people have been sacked from school because their parents cannot get their monies to pay fees.
Many missed life-changing opportunities because they could not get their monies to undertake certain processes.
The list is endless.
Their monies ooooo!
I sympathise with the workers who lost their jobs, some of which had not been paid salaries for about a year but kept going to work hoping for something positive.
However, it is important to note that the workers and managers were in employment because of the money people deposited with them.
Therefore, if they failed to effectively and efficiently manage the deposits, the collapse was inevitable.”
I must say I was touched by this, and I recounted the many stories I had to edit and put on radio of marriages that had broken down and children that can no more go to school, and SME businesses that have collapsed – because of these depositor’s inability to access the funds they placed with these institutions.
But I asked myself if the approach of revoking licences and appointing a receiver to take over the assets and liabilities and ensure assets are sold to defray these liabilities to paying depositors was that the best approach.
But before we go into the various approaches which were all going to cost the taxpayer a pretty penny, lets first look at how much was allocated or has been spent on this exercise to this point. After government spent some GH¢12billion in cleaning up the banking sector, it estimated a third of that amount was needed to secure depositors’ funds lodged with various Micro-Finance Institutions (MFIs) and Saving and Loans (S&L) companies.
The Bank of Ghana (BoG) Governor, in one of his engagements with the media, said the preliminary estimates showed that it would cost around GH¢700million to clean up the MFIs. It is expected that BoG will use the GH¢700million to protect customer-deposits in the event of an institution’s collapse, similar to what happened under the banking sector clean-up exercise.
But at this point I’m asking if even before the central bank decided to move to the Savings and Loans sector, can we say depositors of the banks and MFIs who had their funds locked-up have received their monies – especially those with the banks which were consolidated?
And again, have institutions like MFIs which had their monies locked with these 9 banks been paid – not forgetting that some of these have already been closed down because their investments were or have been locked with the Consolidated Bank – which is said to be struggling (one can point to its half-year financials)
Is it that the central bank was only interested in closing down those institutions, and not concerned enough to follow through with the receiver to ensure that the very people it purportedly sought to protect have received their funds and are fine before moving to the next sub-sector?
But by the way, the same central bank by way of information tells us that it will be committing some GH¢1billion to clean up the Savings and Loans sector.
Figures from the Bank of Ghana show that as of Friday, August 16, 2019, it had revoked the licences of 9 Universal Banks, 347 Microfinance Companies, 39 Microcredit Companies, 16 Savings and Loans Companies, 7 finance house companies, and two non-bank institutions.
Approach to clean-up
There has been a lot of debate over the current approach being used by the central bank in its clean-up exercise. Some believe that BoG is being inhumane by not applying a sympathetic face to the exercise, while other schools of thought think what is being done was long overdue and is a necessary evil.
But in all these, government – which has given its full support – makes us to understand that given the risks posed by the collapsed institutions to the entire financial system, there was a need to protect the interest of depositors. And so the Bank of Ghana had to sanitise the banking and non-banking sectors, since they are all deposit-taking institutions, through an orderly resolution of the failed institutions in accordance with Sections 123 to 137 of Act 930.
In fact, the World Bank and International Monetary Fund – our development partners who conducted stress-tests on the sector some years ago and called on government at the time to undertake a clean-up as we were sitting on a time-bomb, and nearing collapse of the sector – I dare say never suggested or implied this current approach should be used, but possibly would lay before government all possible scenarios with impacts on both the economy and employment.
Remember that we just over 30 million people, and having banks exceeding 30 in number was a problem – but “Na who cause am?” Obviously, the central bank is to be blamed as it was giving licences to just anyone that showed they had the money. But good regulators could have advised individuals to invest in other banks, to allow them become bigger ones able to participate in huge transactions.
But everybody was interested in owning their own banks so they could call themselves directors and CEOs – an attitude that must be checked.
It is better to own a piece of a company that will guarantee you a constant inflow of profits rather than have it all and its taken from you due to non-performance or regulatory violations. This attitude of ‘me myself and my family only’ by Ghanaians must stop.
But getting to the point I want to make, I focused on three of the possible scenarios, which I call consolidate, revoke or bailout. The central bank chooses the revoke.
My argument is simple: of what benefit was it to the state when the regulator with the support of government decided to go on its revoking of licences spree and closed down the institutions completely, and appointed receivers intending to make the banking sector robust and strong in terms of finances?
After what they did with my tax and yours – running into GH¢14billion and more still to be used for cleaning up the mess properly – what are we left with? The money goes into a bottomless pit and cannot be recovered while unemployment goes high!
Let not anyone be deceived with rhetoric that the receiver will retain some of staff to help the process. I ask, which process and for how long? Because these guys are going to be given a contract to help execute the plan and wind-up these institutions.
As we speak today, employees have not received their exit packages because the receiver may be, or is, struggling to even take over assets to sell and make money to pay some depositors and outstanding debts – not to mention the employees.
But what I want to point out here is that while I sympathise with the depositors who are struggling to get their funds back, let’s add workers who lost their jobs – some of which have not been paid salaries for about a year but kept going to work hoping for something positive.
Let’s even say 5,000 (just an assumption because it’s over and above this figure, in the tens of thousands) people have lost their jobs and each person had 3 dependents, being a wife and two kids or a mother and father with a brother to take care of. Let’s do the math: the three dependents give us 15,000, and if we add that to the 5,000 we have 20,000 who have been hit; and if you go to the north, it will be about four constituencies which will be hit.
Was a Bank and Financial System Bailout an option?
I dare say this was a better option that government and Bank of Ghana should have considered in its quest to clean-up the financial sector.
By revoking licences and spending the taxpayers’ money all of us still become losers, because what has happened is the economy has become slow and it will take time for confidence to build up again; jobs have been lost and companies collapsed, while those funds the taxpayer put in have gone down the drain.
But if I can save the jobs and companies but only lose the GH¢14billion cedis, for me that is a better option. This is because we had to find that amount of money, anyway, to undertake the clean-up exercise.
Let me take us back and to a bigger economy wherein they once got to this point, and how it was tackled. President Obama, on the night of February 24, 2009 when he appeared before Congress, devoted part of his speech to making his position known on the rollout of a financial bailout. According to CBS News reporter, he began by restating the justification for the plan itself, saying: “There will be no real recovery unless we clean up the credit crisis that has severely weakened our financial system.
“I want to speak plainly and candidly about this issue tonight, because every American should know that it directly affects you and your family’s well-being,” Mr. Obama said. “You should also know that the money you’ve deposited in banks across the country is safe; your insurance is secure, and you can rely on the continued operation of our financial system. That is not the source of concern.”
This is what I expected my government to have done, but I also refer you to an interesting article by the Guardian (a better bailout was possible during the financial crisis) that gives you an approach Obama used and Gordon Brown’s administration also used in the UK. See link (https://www.theguardian.com/business/2018/sep/18/bailout-financial-crisis-donald-trump-barack-obama-george-soros)
In the UK situation, they first gave institutions the right to try and raise fresh capital from the market; and the approach was such that if they failed then the Bank of England – being our version of the Bank of Ghana – was going to then inject funds into those financial institutions as a bailout.
We are told that government was the biggest culprit in some of the bank’s problems: UniBank and GN Bank say they undertook government projects – some through providing funds to contractors and the energy sector, whereby utility providers owed them.
Maybe that is the reason why the previous government, led by John Mahama, felt introducing the ESLA (Energy Sector Levy Act) was one important move to deal with the problem rather than collapsing institutions. In my discussions with former Finance Minister Seth Terpker, he revealed that their government was interested in saving jobs and businesses, hence ESLA was one of the major tolls that were to be used to bail out the banks instead of closing them.
Or should they have consolidated?
Another approach the Bank of Ghana could have considered was to consolidate. What does this mean?
The term ‘consolidate’ comes from the Latin word consolidatus, which means ‘to combine into one body’.
According to Investopedia, “To consolidate (consolidation) is to combine assets, liabilities, and other financial items of two or more entities into one. In the context of financial accounting, the term consolidate often refers to the consolidation of financial statements, wherein all subsidiaries report under the umbrella of a parent company.
“Consolidation also refers to the union of smaller companies into larger companies through mergers and acquisitions (M&A).”
So, in my opinion, the regulator – just as it did for five of the collapsed banks in forming the Consolidated Bank, an argument that is in the Guardian article above – could have compelled some of the institutions to come together and tightened its regulations, instead of sitting there and waiting to see things get worse.
When did we know that we needed to provide/enforce fit and proper rules as well as corporate governance rules?
This was after we collapsed the first two banks some two years ago, UT and Capital Banks, and a year after we dealt with the others; but it is important to place on record that Construction Bank decided to return its licence and close down by itself. That, some say, is when they saw the hammer the central bank was coming with.
I am of the opinion that the regulator BoG, could have forced the banks or MFIs to consolidate – like in the Nigerian situation, when the minimum capital was raised from 1 billion Naira to 25 billion Naira the banks were asked to consolidate.
We all know that the BoG has often reiterated the reasons why banks should consolidate their capital base. This was informed by the weak quality of assets, weak management, poor corporate governance, insider-related abuses, weak capital base, and emergent systemic insolvency problems. This was when Dr. Ernest Addison took over and raised the capital requirement to GH¢400million from the then GH¢120 million.
My observation is: if you saw the problems while you were the headmaster – and you are now to telling the whole world that as for you, under your leadership, no one will be spared when caught violating the rules – then you should have started from day one.
In my opinion, as is said when an account is audited by chartered accountants, “I think the central bank had it within its power to have forced banks to merge by way of consolidating them”.
Even though the Bank of Ghana is a regulator that is doing its rightful job within its mandate, this administration must know it will bear the consequence of these actions when they go to the polls.
As I said, the move of just revoking licences will at all times slow the economy, heighten tensions, reduce confidence in the beginning in the financial sector – because it’s like a wheel you halt and takes a lot of energy to move and get going fast, which takes time and affects the ruling government’s political fortunes.
Why so? Because if 5,000 have lost their jobs and they have 3 dependents as I indicated earlier, that is 20,000 people robbed of their daily bread.
Now, when the banking sector clean-up came to Microfinance, Micro Credit and Savings & Loans, owners cashed in and said they were reliable, strong and could be trusted, and so people moved their funds there. This slowed commercial banking business and forced many of the banks to start introducing promotions to mobilise deposits, and some of these are still running.
Then the MFIs where hit with the latest within that sub-sector, being the Savings & Loans; we are back to square-one. When you talk to businesses, they tell you the system is slow and others say there is no money. This has affected publicity or advertising budgets, and salaries have not been increased in some of these institutions over time – the solvent ones, I mean.
Now many are confused as to where to put their funds, even though the exercise has left stronger banks and a highly regulated environment I am happy with.
We are just a few months to elections; and as to how the exercise was done, political meanings are strongly being read into it. And that is why the Obama administration decided to bail out the then-collapsing institutions, but still went ahead to tighten regulations in the sector.
I can bet my last coin on the fact that the 2020 elections will be about unemployment, collapsed banks and MFIs – pointing out who the owners and what their political affiliations are, and the fact that depositors cannot retrieve their funds. But this could have been totally avoided if we went the bailout way, or reduced the impact if we consolidated.