Fundamentals of banking crises – …understanding the Ghana situation

Any sudden event which creates a great demand for actual cash, may cause and will tend to cause a panic in a country where cash is much economized and where debts payable on demand are large”(Walter Bagehot – 1873).

When major banking crises occur, all who depend on banking services suffer. Depositors can lose their funds or have their accounts frozen and over the time their value is eroded by inflation. Good borrowers get cut off from credit. Pensioners may find their living standards diminished. Holders of insurance policies may find their counter-party bankrupt and taxpayers end up footing a bill that otherwise could have permitted much-needed expenditures on other items. Banking crises are often also labeled financial crises in the narrower sense and typically, result from illiquidity of bank assets leading to difficulties in meeting depositors’ demand for cash and eventual insolvency.

Even a solvent bank may face liquidity crisis. There can also be pure liquidity crises where institutions remain solvent – at least if not forced to sell off a sizeable portion of their assets at distress prices – but where their access to liquidity has dried up. Sometimes this may reflect market concerns as out a particular institution, but often it reflects a general seizing-up of the short-term borrowing on which they frequently rely. These broad events are referred to as systemic crises as contrast with crises affecting only one or a small group of institutions.

With modern highly interconnected financial institutions, serious concerns about even one major institution may raise doubts about many of the other institutions with which it deals, giving rise to panic runs on the financial institutions. A systemic banking crisis can also stimulate fiscal crisis if governments feel it is necessary to step in and make good the banking sectors’ obligations in order to reduce the risks of contagion and a greater financial crisis.

WHAT ARE BANKING CRISES

Banking crisis reflects the crisis of liquidity and insolvency of one or more banks in the financial system (Source: IGI Global). During such crisis, banks encounter critical liquidity shortage to the extent this disrupts their ability to meet the withdrawals demanded by depositors.

Banking crises include: “bank runs” which affect single banks, “banking panics”, which affect many banks and “systemic banking crises” in which a country experiences many defaults and financial institutions and corporations face great difficulties repaying contracts (Source: Wikipedia). The term banking crisis can be used interchangeably in countries where the banking system dominates financial intermediation.

Banking crisis in other words is a situation of bank failure – here a bank has failed its obligations to its customers due to one reason or another and it is placed under Central Bank statutory management (eg. liabilities exceeding the market value of their assets).

CASES OF BANK CRISIS OR FAILURE

Example 1.

THE ARGENTINA BANKING CRISIS

In March 1980, one of the largest private banks in Argentina – Banco de Intercambio Regional failed. Few days later, the Central Bank hard to intervene to rescue three other banks two of which were liquidated. Thereafter began serious crisis of the Argentine financial system which ended up in the liquidation of seventy one (71) financial institutions over the next two years (Source: The World Bank, 1984).

The Argentine financial crisis could be primarily attributable to firms defaulting in payment of their bank loans. These defaults came from enterprises failures and also due to lack of effective and efficient supervision by the Central Bank. Bank collapse in Argentina had serious negative impact on the national economy. The economy experienced temporal disruptions of the credits and payment system, unemployment, misallocation of credit and ultimately, capital outflows. Bank failure entailed heavy losses to depositors and holders of financial assets. (Source: The World Bank, 1984).

Example 2.

BANKING FAILURE IN THE U.S.A

Banking problems occurred in the United States in 1980 through 1996. Many factors were responsible for these problems the most acute one being weaknesses in bank regulation. In particular there were overly restrictive laws and regulations which contributed to thousands of depository institutions being exposed to substantial interest rates risk in the late 1970s and early 1980s. Subsequently, this cozy period was followed in mid-1980s by laxity in the regulation and supervision, enabling many inadequate financial institutions to grow rapidly and engage in high-risk activities (Barth & James 1991).

REASONS WHY BANKS COLLAPSE

Banking crises may have multiple causes but the major causes may include:-

  1. IRRESPONSIBLE BORROWING AND LENDING(LOAN MANAGEMENT)

Banks, customers and governments are all contributors to improper borrowing and lending which in turn creates a downward spiraling economy. The loan portfolio of any bank is strongly influenced by regulation. The reason being that the quality of bank’s loan has more to do with risk and safety in banking system than any other aspect of the banking business. Therefore, due to the risky nature of loans on the bank’s performances, some loans are restricted or even prohibited by law. For example, in Ghana, the Central Bank has set a Single Obligor Limit” for Universal Banks. Single obligor limit in banking refers to, “the maximum amount a bank is allowed to lend to a single borrower or individual in relation to the total shareholders’ fund of that bank”. In some banks in Ghana for instance, 25% of its net worth can be lent to a secured customer whilst 10% of its net worth can also be lent to unsecured customer.

Simply put, the banks make too critical errors. First, they lend money to people who could not pay it back (to buy homes). They pursued what is referred to as “predatory lending” or lending to individuals they knew could never pay back (sub-prime mortgage). Secondly, banks knowingly group these loans into bundles called Collaterized Debt Obligations (CDOs) and sold them as extremely safe derivative investments. Customers also play their roles as well, acting as easy prey for the banks predatory practices. Individuals bought homes they could not afford utilizing loans they could not pay back. This drove them into debt, to the extent at which they had to default. Lack of governmental oversight responsibility cannot be exempted from the above-mentioned problems. This indicate that lending management in banks is very essential for its growth as its fall.

  1. POOR CORPORATE GOVERNANCE

The main factors that support the stability of any country’s financial system include good corporate governance, strong prudential regulation and supervision, and appropriate savings deposit protection system and sound disclosure regimes.

  Corporate governance is the manner in which systems, procedures, processes and practices of a bank are managed so as to allow positive relationships and the exercise of power in the management of assets and resources with an aim of advancing shareholders’ value and satisfaction together with improved accountability, resource use and transparent administration (Arun & Turner, 2002).

The banking supervision cannot function properly if there is no good corporate governance. Experience have shown the need for an appropriate level of responsibility, control and balance of competences. The poorer the bank’s corporate governance, the riskier the bank. Therefore, the concept of good governance in banking industry empirically implies total quality balance sheet management which includes management of capital adequacy, assets quality, management, earning and liquidity.

  1. MACROECONOMIC CIRCUMSTANCES

Macroeconomic instability could have two negative effects on the loan quality of the local banks. First, high inflation increases the volatility of business profits because of its unpredictability, and because it normally entails a high degree of variability in the rates of increase of the prices of particular goods and services which make up the overall price index.

Secondly, high inflation makes loan appraisal more difficult for the bank because, the viability of potential borrowers depends upon unpredictable developments in the overall rate of inflation, its individual components, exchange rates and interest rates. Hence, the future real value of loan security is also uncertain.

  1. BANK RUN

Bank run is a situation where a large number of customers withdraw their deposits from financial institution at the same time due to loss of confidence in the banks.

As much of the capital in a bank is tied up in investments, the bank’s liquidity will sometimes fail to meet the customer demand. This can quickly induce “panic” in public to a bank, driving up withdrawals as everyone tries to get their money back from a system that they are increasingly skeptical of. This leads to a bank panic which can result in a “systemic banking crisis”, which simply means the entire banking sector is affected by the crisis in which domestic banks experience a large number of defaults by borrowers, leading to a sharp increase in the banking sector’s non-performing loans. When the crisis is systemic, the bank’s total losses is beyond the banking system capital.

  1. INSIDER LENDING

The single biggest contributor to the bad loans of many of the failed local banks was insider lending. Insider loans accounted for a substantial proportion of the bad debts. The high incidence of insider lending among failed banks suggests that, problems of moral hazard were especially acute in these banks. Factors which normally contribute to this situation include:-

  • Use of political connections to obtain public sector deposits. As a result of political pressure the parastatals which made these deposits are unlikely to have made a purely commercial judgement as to the safety of their deposits.
  • Political connections also facilitated access to bank licenses and were used in some cases to pressure the bank regulator not to take action against banks when violations of the banking laws were discovered. All these factors reduced the constraints on imprudent management.
  • Excessive concentration of ownership. In many failed banks, the majority of shares were held by one man or one family, while managers lacked sufficient independence from interference by owners in operational decisions.
  1. LENDING TO HIGH-RISK BORROWERS

The second major factor contributing to bank failure is lending at high interest rates to borrowers in high-risk segments of the credit market. This involved elements of moral hazard on the part of both the banks and their borrowers and the adverse selection of the borrowers. It is in part motivated by the cost of mobilizing funds. Since they are perceived by depositors as being less safe than the established banks, local banks had to offer depositors higher deposit rates. Some of the local banks relied heavily on high-cost interbank borrowings from other banks and financial institutions.

The high cost of funds meant that, the local banks had to generate high earnings from their assets; for example, by charging high lending rates, with consequences for the quality of their loan portfolios. Since they had to charge high lending rates to compensate for the higher costs of funds, it becomes difficult for the local banks to compete with the foreign banks for the “prime borrowers”(i.e. the most creditworthy borrowers). In addition, most of the failed banks did not have adequate expertise to screen and monitor their borrowers.

  1. LIQUIDITY SUPPORT AND PRUDENTIAL REGULATION

The willingness of the regulatory authorities to support distressed banks with loans, rather than close them down, is probably an important contributor to moral hazard. The extent of imprudent management in the failed banks indicates that there were serious deficiencies in bank regulation and supervision. It is also possible that, political pressure is brought to bear on central banks to exercise regulatory forbearance. The central bank also lacked sufficient independence from the government to refuse liquidity support to politically connected banks and to strictly enforce the banking laws.

  1. FRAUD AND CORRUPTION

There have been rampant frauds and corrupt dealings in many banks. Employees and management in collaboration with outsiders may be susceptible to corruption or capable of fraud on a bank especially, with the present high computer technology, e.g. money laundering through internet.

  1. BANKING STRATEGIES AND OPERATIONS

In many cases, banks failure have been brought by the shortcomings in their own strategy. The following are some examples of errors in bank strategy:-

  • Rush to expand has been one of the most common causes of failure.
  • Failure to inculcate new management style to bank’s staff, to utilize information technology effectively.
  • Poor credit assessment (i.e. failure to conduct an accurate assessment of credit risk).
  • Interest rate or exchange rate exposures resulting in losses.
  • Concentration of lending and connected lending: – this means that banks have long standing links to particular customers or an economic sector in mind allowing lending to the specified sectors or customers.
  • Lack of internal controls.
  • Over-reliance of IT systems, without adequate back-up, sufficient verification, proper audit arrangements or management understanding enough about the systems.
  1. GOVERNMENT INTERFERENCE

There are some instances, government interferes in banking business by recommending particular customer for loans possibly at special interest rate or to maintain or extend an economic branch networks in a location in the country. These interferences have precipitated many banks liquidation or solvency (Economic Development Institute of the World Bank, 1988).

IMPACT OF BANKING CRISES

Banks play a critical role in economic growth, primarily through investment and lending. In this direction, banking crises have a range of short-term and long-term repercussions. Major impact of banking crises include the following:-

  1. DECLINE IN FUNDS FOR INVESTMENT

If banks are short of liquidity, they will be less willing to lend money to firms and individual customers. In particular, banks will be reluctant to lend to business which are taking risky investments. Therefore, firms who wish to borrow money to finance investment may find it very difficult to get a satisfactory loan. As a result, the firm will reduce investment and staff strength. If there is a significant fall in investment levels, then this will lead to lower economic growth and higher unemployment. For example, after the credit crunch of 2008, many banks in the US and Europe were short of funds (they had lost money lending to subprime mortgages).

  1. NEGATIVE MULTIPLIER EFFECT

Investment tends to be quite cyclical. A fall in investment levels causes lower economic growth, however, this lower growth has a knock- on effect; with lower demand, firm cut back further on investment levels. With declining investment, some workers are made redundant and as there is also lower economic growth, it causes job losses in other sectors like retail – which sees a general decline in demand.

  1. CONFIDENCE

Any banking crisis will have an impact on general economic confidence. News about a banking crisis will tend to make people more risk averse. Customers will ideally prefer to increase savings and reduce spending. However, if they fear their savings are not safe in a bank, they will also switch to keeping monies in their homes or other alternative avenues and no keep money in a bank.

  1. UNEMPLOYMENT

The unemployment resulting from banking crisis is primarily “demand deficient unemployment”. It is unemployment caused by a decline in investment and consumer spending and the overall fall in aggregate demand.

See Also:  Belling The Cat

UNDERSTANDING GHANA BANKING CRISES

On August 14, 2017 the Bank of Ghana (BOG) in its press release announced its approval for the takeover of two (2) indigenous banks, UT Bank Ltd and Capital Bank Ltd, by GCB Bank Ltd.

REASONS FOR UT, CAPITAL BANKS FAILURE

Though the failure of the two banks was due to significant capital deficiencies, the underlying reason was poor corporate governance practices within these institutions. In that instance, there was a dominant role of shareholders who exerted undue influence on management of the banks, leading to poor lending practices. This was also reinforced by weak risk management systems and poor oversight responsibility by the boards of directors.

Some of the examples of recklessness that led to the failure of the two banks include:-

  • Co-mingling of the banks’ activities with their related holding companies. For instance, one bank was paying royalties for the brand name, even at that time the bank’s financial performance was abysmal and could not pay dividends. Interestingly, the royalties were approved by four out of seven members of the board without the consent of the other significant minority shareholders, including an International Financial Institution.

As a result, the International Institution placed a notice on its website abrogating all relationships with the bank, and this led to most of the foreign lenders cutting off their credit lines to the bank and recalling their credits, thereby creating serious liquidity squeeze to the bank.

  • Also very high executive compensation schemes were being operated by the affected banks which were not commensurate with their operations. The risk and earnings profile of the banks could not support the compensation schemes.
  • Non-executive directors of the banks compromised their independence and fiduciary duties to serve as checks on executive directors. This was because, rewards such as business class tickets were being granted to them annually.
  • Interference by non-executive directors in the day-to-day administration of the banks weakened the management oversight function of executive directors. Some non-executive directors were also acting as consultants to the same banks with no clear mandate, which gave rise to conflict of interest situations.
  • Non-adherence of credit management principles and procedures as the banks were heavily exposed to insiders and related parties. There was also no evidence of interest payments on these investments. The investments were therefore, impaired- some members of the

 board at the time accepted the responsibility to pay off the said amount through a board resolution.

  • Diversion of funds to holding companies and their related parties was widespread. In the case of one bank, placements could not be traced to the bank’s records though some customers showed proof of their investments with the bank.
  • Irregular board meeting also accounted for weakness in the board oversight. In all of these cases, one thing was clear, and that is, the banks could not delineate themselves from their past practices as finance houses. They followed the same practice of borrowing from high net worth persons at very high costs, without any plans to bring themselves in line with the industry norm. (Source: Bank of Ghana Website & Graphic Business News – December 12, 2017).

COLLAPSE OF FIVE (5) BANKS

Just after a year later, on August 01, 2018 the Bank of Ghana (BOG) again in a press release announced the consolidation of five (5) indigenous banks to form a new bank called Consolidated Bank Ghana Ltd (CBG). The five (5) collapsed banks included:-

  • Unibank Ghana Ltd
  • The Royal Bank Ltd
  • Beige Bank Ltd
  • Sovereign Bank Ltd
  • Construction Bank Ltd

REASONS FOR COLLAPSE OF THE FIVE (5) BANKS

The major reason for the revocation of the licenses of the five banks and the decision to merge them was the insolvency of the banks (same reason was cited in respect of UT and Capital Banks).  According to the Governor of Bank of Ghana, the Central Bank rolled out such measures “to strengthen the financial system to protect the interest of depositors”.

The Governor of the Central Bank further explained that, customers could still carry out their business as usual at their respective banks which would now become branches of the Consolidated Bank. Also all staff of the merged banks would now become staff of the Consolidated Bank.

Detailed on the table below are the causes, specific to the above-mentioned collapsed banks:-

CAUSES SPECIFIC TO THE COLLAPSE OF THE FIVE (5) BANKS

BANK REASONS WHY LICENCE WAS REVOKED
1.      Unibank Ghana Ltd.  

Ø  Under capitalization.

 

 

2.      The Royal Bank Ltd. Ø  Under capitalization.
3.      Construction Bank Ltd. Ø  Obtained License by false pretence through the use of suspicious and non-existent capital
4.      Beige Bank Lld. Ø  Obtained License by false pretence through the use of suspicious and non-existent capital.
5.      Sovereign Bank Ltd. Ø  Obtained License by false pretence through the use of suspicious and non-existent capital
  Source: Bank of Ghana Website – Dec. 02, 2017 & Myjoyonline.com  – August 01, 2018
   
 

 

 

 

 

It is important to note that, the March 2019 Banking Sector Report of Bank of Ghana (BOG) showed a well-capitalized, profitable, liquid and stable sector with strong prospects for increased financial intermediation. The measures taken by Bank of Ghana, saved the deposits of some 1.5 million Ghanaians, their businesses, the people they employed and also minimized job losses in the banking sector.

REVOCATION OF LICENCES OF INSOLVENT MICRO-FINANCE INSTITUTIONS

CAUSES OF COLLAPSE – 347 MICRO-FINANCE INSTITUTIONS

Over the years, the Bank of Ghana notified these institutions of regulatory violations, deficiencies and vulnerabilities which had been identified through off site reviews and on site examinations. Unfortunately, efforts by the Bank of Ghana to get the affected institutions, their shareholders and directors rectify these deficiencies, yielded no results.

Consequently, the financial position of these institutions continued to deteriorate, leading to their insolvency with majority of them ceasing operations and closing their offices with depositors funds locked up. Even those that had not closed their offices were unable to pay their depositors. This placed a substantial amount of depositors’ funds at risk.

Given the risks these institutions continue to pose to the entire financial system, and the need to protect depositors, the BOG set out to sanitize the sector through the orderly resolution of the failed institutions in accordance with the provisions of the Banks and Specialized Deposit Taking Institutions Act, 2016 ( Act930), and Non-Banking Financial Institutions Act, 2008 ( Act 774).

INSTITUIONS INVOLVED

347 Microfinance institutions have had their licenses revoked, comprising 155 insolvent institutions that have already ceased operations, and 192 other insolvent ones. In addition, the licenses of 39 microcredit companies (also known as money lenders) were revoked, comprising 10 of such companies that were insolvent and had ceased operations, as well as other insolvent ones.

Prior to the revocation of these licenses, the Bank of Ghana gave the owners/management of these institutions several opportunities as provided by law to take steps to rectify the identified regulatory violations and other supervisory concerns raised by the Bank of Ghana.  The institutions whose licenses were revoked, however, failed to take steps to address their insolvency and other relevant issues. A significant number of these institutions had already ceased operations and had locked up their offices, denying their customers of access to their funds in contravention of relevant laws.

MICROFINANCE INSTITUTIONS IN GOOD STANDING

It should be noted that, apart from the 347 Microfinance institutions whose licenses were revoked, 137 Microfinance institutions were in good standing and remained operational.

The table below shows the 137 Microfinance Institutions in good standing:-

 

(Source: Bank of Ghana Website & Ghana Web June 06, 2019).

REVOCATION OF LICENCES OF 23 INSOLVENT SAVINGS AND LOAN COMPANIES   

According to a statement from Bank of Ghana (BOG), the revocation of licenses of the 23 Savings and Loan companies became necessary because, “they are insolvent and even after a reasonable period within which Bank of Ghana has engaged with them in the hope that they would be recapitalized by their shareholders to return them to solvency”.

It is the Bank of Ghana’s assessment that these institutions have no reasonable prospects of recovery, and that their continued existence poses severe risks to the stability of the financial system and to the interest of their depositors.

The table below shows the 23 institutions whose licenses have been revoked:-

23 SAVINGS AND LOAN INSTITUTIONS CLOSED DOWN BY BANK OF GHANA

BANK REASONS WHY LICENCE WAS REVOKED
1.      GN SAVINGS & LOANS LTD. Ø  GN savings had a net worth of negative 30 million Ghana cedis.

Ø  High non-performing loans

Ø  Abysmal capital adequacy ratio of negative 61.02%.

Ø  Checks by BoG shews that GN Bank has transferred huge sums of depositors’ money to another company owned by Groupe Nduom in the USA called International Business Solutions. What is more? These transfers were done with no documents to support the said transfers.

Ø  According to the Bank of Ghana, GN Savings and Loans has suspended operations in 70 branches, even including the head office. Also, the entire management team has been suspended mainly due to the same liquidity and insolvency crisis.

 

2.      FIRST ALLIED SAVINGS & LOANS COMPANY LTD. Ø  Failure to meet customers’ deposit withdrawals. This issue was particularly more pronounced at the Adabraka and Kumasi branches.

Ø  Abnormally negative net worth.

Ø  Failure to submit prudential returns to BoG since June 2018 on account of technical issues.

Ø  Non-performing loans way in excess of 88.89% of the company’s total loan portfolio.

Ø  Issues with capital adequacy.

 

3.      GLOBAL ACCESS SAVINGS & LOANS COMPANY LTD. Ø  Global Access had a net worth of negative 58.19 million Ghana cedis by May 2019.

Ø  Failure to keep proper accounting records.

Ø  Global Access Company paid a huge amount of money to its majority shareholder for using their premise.

Ø  The 2017 audited financial statements were not submitted to Bank of Ghana neither was it published.

Ø  The cash reserve ratio requirements were never met since 2016.

4.      LEGACY CAPITAL SAVINGS & LOANS LTD. Ø  Legacy capital recorded a net worth of negative 19.52 million Ghana cedis by May 2019.

Ø  Poor accounting records keeping.

Ø  The capital adequacy ratio was negative 16.96% by May 2019.

Ø  Poor loan underwriting standards.

 

5.      MIDLAND SAVINGS & LOANS COMPANY LTD. Ø  Failure to keep proper accounting records.

Ø  As at the end of May 2019, Midland Savings and Loans had a capital adequacy ratio of negative 311.91%.

Ø  Some investments were impaired because of failure on the part of Midland to conduct due diligence on counterparties.

Ø  Overexposure to related parties in spite of liquidity issues facing Midland Savings and Loans.

Ø  The various branches of Midland were inactive due to inadequate funds.

Ø  Inability to meet the minimum cash reserve ratio.

 

6.      ALPHA CAPITAL SAVINGS & LOANS LTD. Ø  Net worth: Negative GHS11.51 million.

Ø  Capital adequacy ratio: Negative 81.05%

Ø  According to BoG, meeting depositors’ withdrawals was a significant challenge for the company.

Ø  That resulted in numerous agitations and confrontations by aggrieved customers of Alpha Capital.

Ø  What is more, Alpha capital ceased operations as its offices were under lock and key.

 

7.      CDH SAVINGS & LOANS LTD. Ø  Net worth: Negative GHS171.36 million.

Ø  Capital adequacy ratio: Negative 35.90%

Ø  After taking over Ivory Finance Company Ltd, CDH savings and loans commenced operations in 2016.

Ø  Three (3) years down the line, CDH recorded a net worth of negative 171.36 million Ghana cedis, which was a real challenge. CDH was collapsed due to many reasons outlined by the Bank of Ghana.

Ø  The company was therefore declared insolvent by the Bank of Ghana and its license revoked

8.      COMMERZ SAVINGS & LOANS LTD. Ø  Net worth: Negative GHS40.99 million.

Ø  Capital adequacy ratio: Negative 126.15%

Ø  Due to many complaints received by BoG from Commerz customers on account of inability to withdraw deposits, Bank of Ghana advised the board of directors to consider injecting additional capital. This was, however, unsuccessful.

 

9.      EXPRESS SAVINGS & LOANS COMPANY LTD. Ø  Net worth: Negative GHS119.83 million.

Ø  Capital adequacy ratio: Negative 610.52%

Ø  As its name suggests, Express savings and loans was expected to deliver express services to its customers. But NO! By May 2019, the company has closed down 14 out of the total 18 branches it had with no approval from BoG.

 

Some of the reasons why Express Savings and Loans license was revoked include the following:

Ø  Failure to meet minimum capital adequacy ratio as a result of accumulated losses.

Ø  Very bad net worth of GHS 119.83 million.

Ø  Failure to submit audited financial statements since 2016.

 

10.  FIRST AFRICAN SAVINGS & LOANS COMPANY LTD. Ø  Inability to meet withdrawal demands of depositors.

Ø  Impairment in paid-up capital with a net worth of negative 22.29 million Ghana cedis.

Ø  Very bad capital adequacy ratio. Negative 90.15%

Ø  Failure to do due diligence, which led to impairments in some of their investments.

 

11.  FIRST GHANA SAVINGS & LOANS COMPANY LTD. Ø  Inability to meet the required minimum cash reserve ratio.

Ø  The net worth of 14.08 million Ghana cedis indicated impairment in the company’s paid-up capital.

Ø  Failure to submit a credible capital restoration plan.

Ø  Very low capital adequacy ratio.

 

12.  FIRST TRUST SAVINGS & LOANS LTD. Ø  When the company’s attention was drawn to possible revocation of license and hence closure, it decided to merge with Ideal Finance Limited.

Unfortunately, Ideal Finance was also crippled with severe                                        insolvency and liquidity crisis.

Ø  According to BoG, even if the merger was approved the total net worth of the two companies will be negative 164.60 million Ghana cedis, which will be way below standard.

Furthermore, the combined capital adequacy ratio will also translate into negative 47.26%.

This, if allowed, cannot address the current financial crisis facing these two companies.

 

13.  WOMEN’S WORLD BANKING SAVINGS & LOANS COMPANY LTD. Ø  WWBG had a net worth of negative GH45.56 million by May 2019.

Ø  Capital adequacy ratio: Negative 46.62%.

 

Ø  Failure to meet the minimum required cash reserve ratio.

Ø  Women’s World Banking Savings and Loans failed to implement the on-site recommendations by the Bank of Ghana.

Ø  There were material uncertainties in the 2018 audited financial statements.

 

14.  UNICREDIT SAVINGS & LOANS LTD. Ø  Net worth: Negative GHS221.32 million.

Ø  Capital adequacy ratio: Negative 97.83%

Ø  According to the bank of Ghana, uniCredit was unable to access its funds from another sister company (UniSecurities), which has resulted in gross liquidity issues.

Ø  On top of that, uniCredit had too many non-performing loans.

This and many other things resulted in the inability of the company to meet customers deposit withdrawals and hence its collapse.

 

15.  IDEAL FINANCE LTD. Ø  High non-performing loans.

Ø  Failure to submit returns since 2018.

Ø  Ideal Finance recorded a poor capital adequacy ratio of negative 32.8% as at the end of November 2018.

Ø  Inappropriate classification of some 15 loan accounts leading to extra loss.

Ø  Overexposure to credit customers.

Ø  Ideal Finance had a net worth of negative 117.5 million Ghana cedis as at the end of November 2018.

 

16.  ADOM SAVINGS & LOANS LTD. Ø  Net worth: Negative GHS9.60 million.

Ø  Capital adequacy ratio: Negative 126.23%

Ø  The BoG review of the company exposed serious insolvency with capital adequacy ratio hovering over 126%.

Ø  Some of the reasons for the revocation of the license include weak earnings, weakness in management oversight, among others.

 

17.  IFS FINANCIAL SERVICES LTD. – FINANCE HOUSE Ø  High non-performing loans.

Ø  Poor Net Worth.

Ø  Low capital adequacy ratio.

Ø  Poor Investment Decisions.

Ø  Alarming liquidity challenges.

18.  CREST FINANCE HOUSE LTD.
Ø  High non-performing loans.

Ø  Poor Net Worth.

Ø  Low capital adequacy ratio.

Ø  Poor Investment Decisions.

Ø  Alarming liquidity challenges.

 
19.  DREAM FINANCE COMPANY LTD. FINANCE HOUSE Ø  High non-performing loans.

Ø  Poor Net Worth.

Ø  Low capital adequacy ratio.

Ø  Poor Investment Decisions.

Ø  Alarming liquidity challenges

20.  ASN FINANCIAL SERVICES LTD. FNANCE HOUSE Ø  High non-performing loans.

Ø  Poor Net Worth.

Ø  Low capital adequacy ratio.

Ø  Poor Investment Decisions.

Ø  Alarming liquidity challenges

   
21.  ACCENT FINANCIAL SERVICES LTD. FINACE HOUSE Ø  High non-performing loans.

Ø  Poor Net Worth.

Ø  Low capital adequacy ratio.

Ø  Poor Investment Decisions.

Ø  Alarming liquidity challenges

   
22.  ALL TIME FINANCE LTD. FINANCE HOUSE Ø  High non-performing loans.

Ø  Poor Net Worth.

Ø  Low capital adequacy ratio.

Ø  Poor Investment Decisions.

Ø  Alarming liquidity challenges

23.  STERLING FINANCIAL SERVICES LTD. FINANCE HOUSE
Ø  High non-performing loans.

Ø  Poor Net Worth.

Ø  Low capital adequacy ratio.

Ø  Poor Investment Decisions.

Ø  Alarming liquidity challenges

 
  (Source: Bank of Ghana Web – August 08, 2019).
   

 

The Bank of Ghana after revoking the licenses of the 23 Savings and Loans companies because they were insolvent and could no longer meet the obligations of customers as shown on the table above, the Central Bank’s action left 25 Savings and Loans companies in good standing and would therefore remain operational in the country.

On the table below are the Savings and Loans Companies that are currently in good standing and would remain operational according to Bank of Ghana (BOG):-                                                    

  • LOANS AND SAVINGS COMPANIES CURRENTLY IN GOOD STANDING – APPROVED BY BOG
1.     ABii National Savings and Loans Ltd

2. Adehyeman Savings and Loans Company Ltd.

3. Advans Ghana Savings and Loans Ltd.

4. Asa Savings and Loans Company Ltd.

5. Assurance Savings and Loans Ltd.

6. Bond Savings and Loans Ltd.

7. Best Point Savings and Loans Ltd.

8. Bayport Savings and Loans Plc.

9. Direct Savings and Loans Ltd.

10. Equity Savings and Loans Ltd.

11. Golden Link Savings & Loans Ltd.

12. Golden Pride Savings and Loans Ltd.

13. Izwe Savings and Loans Ltd.

14. Jins Savings and Loans Ltd.

15. Letshego Ghana Savings and Loans Plc

16. Multi Credit Savings & Loans Co. Ltd.

17. Opportunity International Savings and Loans Co. Ltd.

18. Pacific Savings & Loans Co. Ltd.

19. Pan-African Savings and Loans Company Ltd.

20. Progress Savings and Loans Ltd.


21. Services Integrity Savings and Loans Ltd.

       22. SIC Life Savings and   

              Loans Ltd.

 

        23. Sinapi Aba Savings  

              and Loans Company   

              Ltd.

24. The Seed Funds   

            Savings and Loans    

            Ltd.

 

       25. Utrak Savings and

             Loans Ltd.

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Bank of Ghana Website, Joy Business Online August 17, 2019 & Ghana Web August 19,

KEY REASONS WHY BANKS ARE REGULATED

When a bank fails it can create problems for the wider economy. People and businesses can lose money they have placed with the bank. Hence, the need for regulation of banking institutions, cannot be overemphasized. Below are the major reasons why banks are regulated:-

  1. SAFETY AND STABILITY OF BANKING INSTITUTIONS

One of the most important roles for regulation in banking is to address concerns over the safety and stability of banking institutions. Regulation helps make sure that banks have good management so that they do not make bad investments or are too risky. Regulation also makes banks hold shock absorbers to deal with bad investments. These shock absorbers are referred to as capital. Bank supervision and examinations are designed to evaluate an institution’s soundness, risks and compliance in attempt to prevent bank failure. In the United States, the concept is referred to as “safety and soundness regulation” and in most of the rest of the world as “prudential regulation”.

  1. PROTECTION OF DEPOSITORS

The depositors, being the creditors of a bank are usually not informed on the bank’s investment activities. Moral hazard may emerge when banks engage in investments that are too risky at the cost of its depositors. Having a regulator to monitor banks on behalf of depositors, provides assurance and maintains their confidence in the financial system. Regulation is used to make it less likely people will take out their money unexpectedly. There is a deposit guarantee scheme that ensures that even if a bank fails all deposits will be protected.

  1. FRAGILE BANKING FUNCTIONS

In banks, the deposits received from householders are considered as liabilities while loans offered constitute as its assets. Therefore, the bank’s balance sheet largely consist of liquid liabilities and illiquid assets. In any case where the public were to lose confidence in banking system, a bank run would occur. Knowing that a bank supplies loans from many small deposits pooled together, its liquidity is trapped in long-term investments (loans). Hence the consequence of a bank run would likely be the bank collapsing due to its inability to cater to the sudden increase in cash demand. Having a Central Bank (regulation) would mitigate this risk of default given its role as the “Lender of Last Resort”. In times of need, the Central Bank can supply liquidity to banks, thus preventing collapse.

  1. PRESENCE OF SYSTEMIC RISK

Financial Institutions and banks that are huge and highly interconnected impose systemic risk to the banking system. A default by a bank can lead to the default of its creditor banks on their own counter-parties and so on. This effect by one large bank may lead to a catastrophic effect on the rest of the other financial institutions. Facing the “too-big-to-fail” problem, regulators are needed to monitor and restrict banking activities that may lead to such scale of banking failure.

 

FUNDAMENTALS OF CENTRAL BANKING

The ultimate objective of Central Banks has been to support sustainable economic growth through the pursuit of price stability and financial stability. Over time, however, the balance of each goal has fluctuated according to existing cultural, economic, and political pressures. The three key principles that are indispensable facets of central banking today and going forward are:-

  1. LONG-TERM PRICE STABILITY

Long- term price stability is the most important contribution central banks can make to ensuring strong and sustainable growth. Both high inflation and significant deflation can entail heavy economic costs. Maintaining price stability, frequently understood as a low stable inflation rate over the medium term, will also contribute to stabilizing business cyclical fluctuations in economic activity through a solid anchoring of inflation expectations.

  1. FOSTERING FINANCIAL STABILTY

Fostering financial stability should also be important part of a central bank’s mandate. Avoiding excessive credit dynamics is instrumental in achieving this objective, since the accumulation of debt   over time, can lead to growing imbalances in both the real and financial sectors that can culminate in systemic financial crisis. Central Banks should be given responsibility for identifying such systemic threats and for trying to offset related risks to long-term price stability. This implies that Central Banks must have ultimate authority over all the relevant policy tools, including macro prudential instruments.

  1. MAINTENANCE OF INDEPENDENCE

It is crucial that independence of Central Banks be maintained. Central banks must be able to focus on policies oriented towards long-term objectives. They must be kept free from undue political or popular pressures to provide short-term stimulus or other policy actions that are ultimately inconsistent with this core mandate. The indispensable accountability should be ensured without prejudice to the principles of Central Bank independence.

MEASURES FOR FINANCIAL STABILITY AND CRISES PREVENTION BY CENTRAL BANKS

The important roles played by Central Banks regarding financial stability and crisis prevention include:-

  • Enforcement of compliance with banking laws and prudential regulations.
  • Introduction of more advanced inspection techniques by the use of computer assisted audit techniques. In this regard, bank examiners would use audit command language to interrogate computer files in the banking institutions and provide exception reports.
  • Strengthening the inspection follow up process, to ensure that financial institutions promptly address weaknesses observed during on-site examination.
  • Using the primary responsibility to ensure the efficiency and stability of the global payments and settlements systems. Failures in the function of such systems would likely, have serious systemic implications for the economy.
  • Macro prudential policies have a role to play in crisis prevention, especially in dealing with credit –supported booms, particularly those in the housing sector. However, the effectiveness of those tools will have to be carefully monitored and evaluated. Macro prudential policies designed to improve the health of individual financial institutions rather than the system as a whole, might also be useful in reducing the magnitude of both credit booms and subsequent busts.
  • Working closely with other government agencies in addressing the problem of non-performing loans. Preparations beforehand, in association with other government bodies, are of crucial importance in ensuring the crisis does not spin out of control.
  • There is broad-based consensus that exchange rates are the best to minimize the international repercussions of domestic monetary policies. In order to avoid having to resort to administrative measures to deal with such “spillover” effects, Central Banks should support structural measures to improve the functioning of their domestic financial markets and to increase that resilience to external shocks.
  • The need to be cognizant of lessons of economic history, and be ready to explore various analytical frameworks that would help anticipate the emergence of such crises.

 

CONCLUSION

Effective regulation helps to promote the safety and soundness of banks and ensures that banks are able to effectively play their roles in supporting the growth and development of the economy. Building resilience for individuals, governments and banks, will serve us well for future downtowns, whatever the cause may be. It will also help with the pressing need to restore trust in the system, a foundation of which is that financial institutions are trustworthy.

Banks are charged with a special public trust to safeguard customers’ savings and wealth, and effective internal control systems and good corporate governance could have ramifications on the entire financial system and the economy as a whole.

ABOUT THE AUTHOR

ROBERT OWUSU is a Fellow of the Chartered Institute of Bankers (Ghana). A seasoned banker with wide experience in Retail Banking, Internal Auditing, Project Management, Electronic Banking with high specialty in Internet Banking. He is also a Consultant and a Supervisor of CIB examination.

CONTACT

E-mail addresskwa rob@yahoo.com

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