The financial sector clean-up that started in 2015 till date has already cost the taxpayer some very huge sums of cash – in excess of GH¢21-billion, even though the process is not fully completed. This financial meltdown will go down in history as one that did not only cost the taxpayer money but also led to unprecedented job losses, collapse of businesses, and locked up funds of individuals and the private sector. Some schools of thought believe that this historic financial sector meltdown on the African continent was purely due to the following:
- Negligence and lack of competence on the part of directors, executives and supervisors at the Bank of Ghana (the regulator), especially the Banking Supervision Division,
- The compromises on the part of External Auditors in relaxing and neglecting their fiduciary responsibility,
- The neglect and compromises by directors of all the collapsed banks, MFIs, Savings and Loans, Finance House institutions,
- The failure of the three main lines of defence in any financial institution in executing their fiduciary responsibility as mandated by corporate governance practices – i.e. The Internal audit/control function, The Enterprise Risk/Credit management function and The Compliance function.
First line of defence: Under the first line of defence, operational management has ownership, responsibility and accountability for directly assessing, controlling and mitigating risks.
Second line of defence: The second line of defence consists of activities covered by several components of internal governance (compliance, risk management, quality, IT and other control departments). This line of defence monitors and facilitates the implementation of effective risk management practices by operational management, and assists the risk owners in reporting adequate risk-related information up and down the organisation.
Third line of defence: Internal audit forms the organization’s third line of defence. An independent internal audit function will, through a risk-based approach to its work, provide assurance to the organization’s board of directors and senior management. This assurance will cover how effectively the organisation assesses and manages its risks, and will include assurance on the effectiveness of the first and second lines of defence. It encompasses all elements of an institution’s risk management framework (from risk identification, risk assessment and response, to communication of risk-related information) and all categories of organisational objectives: strategic, ethical, operational, reporting and compliance.
I think it is important that after this financial sector clean-up, the Bank of Ghana should collaborate with all other regulatory bodies to subject all the remaining financial institutions to the Fit and Proper test; reason being that it is the best way to build and restore confidence back into the financial system of Ghana.
Secondly, the same schools of thought argue that the whole clean-up process could have been done differently, and the Bank of Ghana and government of Ghana could have saved taxpayers some cash if a comprehensive review, assessment and audit had been carried out by the Bank of Ghana to learn the specific debtors and their total liability exposures to these financial institutions. Need I also say debtors of one bank may have links to other financial institutions – i.e. the debtors web and how they are connected to each other.
Moreover, others have said that the Bank of Ghana’s failure to apply sanctions to banks that engaged in a series of related party lending and compromised the Single Obligor limit (the obligor limit is the maximum amount a bank is allowed to lend a single borrower or an individual in relation to its total shareholders fund, which stands at 10 percent of the bank’s net own funds for unsecured loans and 25 percent of the bank’s net own funds for secured loans) rule also contributed to this historic financial sector meltdown.
Why the Fit and Proper Test is Very Necessary
The Fit and Proper Test is very important, especially after this financial meltdown, for all Directors, Executives, Managers and financial institutions – not leaving out majority shareholders, especially if it’s an individual. It must include the following:
- Capability, and
- Financial soundness.
The objective of the Fit and Proper Test directive of the Bank of Ghana is to set out a framework that can be used by regulated financial institutions as well as the Bank of Ghana in determining whether a person is fit to be a director, a significant shareholder or to hold a key management position within the financial organisation.
Again, on the other hand, Fit and Proper Supervision seeks to ensure banks’ directors are capable of taking decisions which ensure the sound and prudent management of their banks. Such decisions safeguard, by extension soundness of the banking sector as a whole. The primary responsibility for selecting suitable directors and making sure that they remain suitable lies with the banks.
Criteria for Potential Directors
We conduct fit and proper assessments for newly-appointed directors in accordance with the respective national laws for implementing the Capital Requirements Directive. The appointees are assessed using the five fit and proper criteria set out in the Capital Requirements Directive:
|Five criteria for fit and proper assessments|
|Knowledge, skills and experience||Does the candidate have the knowledge, skills and experience necessary to take on a specific role in the bank?|
|Reputation||Does the candidate have a criminal record or a history of administrative or tax irregularities? Is the candidate involved in pending legal proceedings?|
|Conflicts of interest||Directors must be able to act free of external influences when taking decisions. Does the candidate have any conflicting interests that may hinder objective decision-making?|
|Time commitment||Is the candidate able to devote sufficient time to the proposed role within the bank?|
|Collective suitability of the board||Looking at the added value of a particular candidate for the board as a whole, how does the candidate fit within its overall composition?|
Source: European Central Bank, Banking Supervision
“The Bank of Ghana has released a new directive – Fit and Proper Persons Directive 2019 – which sets out the minimum assessment criteria for its approval of persons to serve as significant shareholders, directors and key management personnel in the commercial banks, savings and loans companies and deposit-taking finance houses regulated by the central bank.
“A similar directive will follow in due course, which sets the assessment criteria and guidelines for such positions in rural and community banks, micro-finance institutions and non-deposit taking institutions.” – (Source: BoG)
“The Bank of Ghana’s bold measures over the last two years to clean up the banking and SDI sectors involved the revocation of licences from nine universal banks, 347 microfinance companies (of which 155 had already ceased operations) and 39 micro-credit companies/money-lenders (10 of which 29 had already ceased operations).
These massive failures were brought about by several years of an unsustainable licencing regime that lowered standards for entry into the banking and SDI sectors, as well as poor supervision and enforcement from the central bank. This was compounded by poor corporate governance and risk management practices, family and friends managing and influencing banks, abuse of related party relationships, and unsustainable business models.
Many of these institutions had denied depositors access to their deposits for a long period of time, creating liquidity challenges in the financial system and resulting in a high incidence of credit defaults in the system. The threats posed to stability of the financial system and the economy at large was enormous, justifying the bold actions taken by the Bank of Ghana.
Government, through a Purchase and Assumption programme, facilitated GCB’s consolidation of two banks. It then set up the Consolidated Bank Ghana Limited and capitalised it with GH¢450million to ensure that no depositor lost their deposit. The government of Ghana has had to issue bonds to the tune of GH¢11.2billion to cover costs of the financial sector resolution and protect depositors. In addition, government has provided an amount of GH¢925million in cash to cover the small depositors of the 386 microfinance institutions – bringing the total cost to GH¢12.125billion so far.
The clean-up has prevented some significant deposits held by some 2,655,100 depositors (1,525, 550 bank depositors and 1,129,820 MFI depositors) from being lost.
The failure of these institutions was caused primarily by poor governance and lax oversight by Boards of Directors, and unlawful behaviour of shareholders and related and connected parties who had plundered their deposits and resources.
This financial sector clean-up has cost the Ghanaian taxpayer US$3 to US$4billion. – (Source: Ministry of Finance)
- Going forward, the Bank of Ghana and all stakeholder regulatory bodies in the financial sector should collaborate and subject all the Directors, EXCO members, Individual majority shareholders to the FIT and PROPER Test to ensure that supervision of entities is exercised properly and prudently, following due corporate governance processes.
- The Bank of Ghana must engage all entities in the financial sector space to promote arrangements for consultations about supervision on a case by case basis to achieve financial soundness.
- The Bank of Ghana should effectively and immediately enhance its Banking Supervision Department with experienced, competent and selfless employees for the task of supervision going forward.
- It should also enhance its sanctions on financial institutions when infractions are noted during periodic reviews.
- Mechanisms should be in place to ensure that supervisors are advised at all levels and directorship authority reviewed; and shareholders who can exert a material influence, directly or indirectly, on the operations of regulated entities are notified of changes in such managers, directors and shareholders on the occurrence of specified events.
©Jerry J. AFOLABI is a Financial & Economic expert who believes that ordinary people can do extraordinary things when given opportunity. He is a change maker with the ability of easily getting people to get things done for the good of humanity.Email;firstname.lastname@example.org