How accurate are your prudential returns?

The word “remember” rhymes with September, October, November and December. As such, during these months, many people organise special events to capture the moments. For obvious reasons, “December to remember” is the most noticeable one because it is characterised by many events especially church activities to set the tone for end of year and the beginning of a new one. In the like manner, the last two years in the Banking sector will never go into the archives without being remembered going forward as the “August to remember” with the “January hangover”.

Many Ghanaians especially workers of the erstwhile nine (9) banks will continue to remember with nostalgia, August 2017/2018 and January 4, 2019 when their employers’ banking licences were revoked from them. The archives will also not forget to keep records of the facts that led to the revocation because such valuable information will serve as the reference point and source of learning to correct the wrongs to shape the future. For instance, one of the issues related to the fact that many of the liquidated banks were not reporting accurate information on their investments with other financial institutions to the Bank of Ghana. This fact is glaring on the face of the records, hence, having identified it including other problems cause authorities to adopt checks and balances to prevent them from re-occurring.

Investment with Others 

This is investment relating to a bank’s placement of funds with other banks or financial institutions (savings or loans, finance houses, pension institutions etc). This investment also relates to securities (T-Bills etc). It became public that such investments or deposits were “cooked” and window-dressing at best on the balance sheets. From hindsight, it would be established that the weaknesses in not obtaining verifiable proof of such investments with other institutions by way of audits or supervisions provided a gap through which the offences were committed.

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Cases in reference

The most recent example related to the Premium Bank in which it was stated that “the prudential returns submitted to the Bank of Ghana were inaccurate as exposures to related-parties were misreported as investments with non-bank financial institutions.” In the earlier cases, it was noted with regard to the Construction Bank that “owing to the bank’s inability to access investments purportedly made in its name with other financial institutions, the Bank of Ghana has concluded that a total of GH¢80 million of the bank’s GH¢120 million initial paid-up capital is unavailable to the bank for its operations, leaving an amount of GH¢ 40 million (one-third of the minimum capital of GH¢ 120 million).” In the same vein, it also came to light that the erstwhile Royal Bank caused “overestimation of investments with other financial institutions.”

What is more, as far back as 2014, the red flag concerning supposed investments with other financial institutions was evident in the controversial memo from the corridors of Capital Bank (now in receivership). Part of the memo to the Board for their urgent action read “acceptance of debt liability created through non-conventional practices and delivery of re-imbursement plan that will not create any further liquidity strain for the Bank. Proper capitalisation of the Bank since deposits with other Banks is not backed by actual liquidity.”

Reporting

As has been the practice in Banking Supervision, Banks and other financials are required to submit prudential returns to the regulator by providing relevant information relating to their assets, liabilities, income and expenditure with details in that form and period the regulator requires it. The period has usually been weekly and monthly apart from the financial statements which are published quarterly and annually. Based on the weaknesses identified from the cases in reference, the new approach to curb the menace requires the reporting financial institutions to provide such information in the following format:

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Institution Name: ABC Bank Ltd (the reporting institution)

The format requires the reporting financial institution to provide the name(s) of all the institutions it has the investment (exposure/loan) etc., the principal balance(amount), interest amount (Gh¢), the type of products/instruments, Interest rate applicable, Value Date (date transaction took place and maturity. Since financial institutions (universal banks, Insurance Companies, Pensions, Investment firms, Savings and Loans, Microfinance Institutions, Finance Houses, Rural Banks, Mortgage Institutions and the Bank of Ghana sell different products, ABC Bank (in the illustration) is required to name all those institutions alongside the products (investment (exposure/loan). Thus, for the purpose of supervision, it becomes easy to verify the authenticity or otherwise of the information ABC Bank has provided by contacting the other institutions. This way, regular offsite and onsite supervision and collaboration with other regulatory bodies will help identify any institution that breaches the regulations and attract sanctions accordingly. Thanks for your time, God bless!

This script was written by a Chartered Banker with a flair for feature writing. Apart from his work schedules, he edits or proof-reads corporate material for his colleagues, executive managers – including distinguished professionals working in various fields outside Banking. Through this column, his articles feature on third-party online media platforms in Ghana and outside.

Email: Kwaku.Anumu@gmail.com

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