On 19 August 2019, the Bank of Ghana announced the completion of its two-year clean-up of specialised deposit-taking (SDIs) and non-bank financial institutions (NBFIs). The outcome of this exercise has been the revocation of licenses from various SDIs and NBFIs and consolidation of the sector. The expectation is that the recently enacted reforms will lead to improving asset quality and “resilient, inclusive, and supportive additions to Ghana’s economic growth trajectory”. While the public has been assured that the SDIs’ clean-up is over, the insurance and fund management industries have yet to experience any substantive interventions from their regulators and the Ministry of Finance, their sector ministry.
In this paper, I am proposing an alternative course of action in the fund management and insurance sectors to ensure that depositor, investor, and policyholder funds are protected without incurring excessive direct and indirect costs to taxpayers, business owners, and those whose livelihoods depend on wages and salaries earned by employees of distressed financial institutions. Instead of using public funds to pay customers and then suing former shareholders for reimbursement, I propose that government should help facilitate the efforts of current shareholders to raise external funds to solve their companies’ problems.
Since 2017, over 400 licences of SDIs and NBFIs have been revoked in the financial sector as per the table below.
|Licenses Revoked or at Risk||Cost (GHS)|
|Universal Banking||11||14 billion|
|Microcredit||29||To be decided|
|Savings and Loans and Finance Houses||23||3 billion|
|Fund Managers||To be decided||To be decided|
|Insurance Companies||To be decided||To be decided|
|Total||> 407||>18 Billion|
Ghana is likely to incur a minimum of GH¢18billion (US$3.3billion; 7.4% of GDP) direct costs for this exercise once the dust settles. While there are no readily available estimates of the indirect costs of the clean-up (legal and consulting fees, rebranding expenses, job-losses, decreased productivity, stress, among others), a thorough analysis is highly likely to indicate that the total direct and indirect cost of the financial sector clean-up will far exceed the direct costs.
The financial system is reeling from the actions that have been taken to clean up the sector.
- Banking: Significant liquidity challenges remain at several banks, despite having technically met the GH¢400million capital requirement. Recovering funds from the receivers of banks such as Beige, even when those funds had been collateralised with GoG securities, will be a long-drawn-out process. ADB is reportedly seeking over GH¢100 million via a private placement, despite retaining its licence through the Ghana Amalgamated Trust (GAT) arrangement.
- Non-Bank Financial Institutions: News of upcoming and ongoing clean-ups in microfinance, rural, and savings and loan sectors has resulted in panic-withdrawals across the board, including at institutions that are not short-listed to be taken over. Financial institutions that would have otherwise rolled-over investments or accepted long-term payment plans are rushing to redeem investments in other financial institutions – increasing the pressure on those already-stressed companies. This risks creating significant collateral damage and a run on the NBFIs.
- Fund Managers: Recent news of forensic audits and hints of ‘shady’ transactions and potential liquidations have intensified the panic-withdrawals, affecting fund management companies. This comes followsingthe decision to use ‘red-paint’ to highlight the managers with regulatory issues on the SEC website: a move that prompted lots of fake news and reportage that those companies were going to be shut down. Fund managers have yet to gain clarity on when funds that have been locked up in Microfinance and Savings and Loan companies will be paid, and what the process will look like. The news that 50% of fund managers have not yet been paid by CBG due to a failure to ‘prove’ their claims is evidence of the long-drawn-out nature of the process referred to above.
Also, non-financial sector issues have added to the challenges being faced:
- Contractor Payments: The widely publicised difficulties that government contractors are facing to get payments for work undertaken has had a significant impact on the financial institutions which funded their projects.
- Slow Legal Process: Hundreds of millions of Ghana cedis in judgments are not being fully executed due to the slow process and a lack of liquidity in the economy, making it challenging to sell seized assets at auction.
- Depreciation of the Ghana cedi: The depreciating Ghana cedi is encouraging depositors and investors to move their funds into foreign currency, increasing pressure on financial institutions to release depositor and investor funds.
I am thus of the opinion that steps can be taken in the short-term to ensure that government and regulatory bodies can fulfil their mandate to protect investors and depositors without incurring the direct and indirect costs associated with the ongoing and proposed regulatory actions. Thus, I am writing this petition to propose an alternative course of action for the companies that are at risk due to the liquidity challenges they are experiencing.
The Current Process
The current clean-up process involves six (6) main steps:
- Increasing capital requirements (primarily banks and insurance companies).
- Investigating distressed financial institutions for evidence of:
- Signs of insolvency.
- Wrongdoing on the part of employees, management, directors, or shareholders
- Revoking the licences of firms deemed to be insolvent
- Using public funds to pay depositors/investors of affected firms.
- Assigning assets and liabilities of affected firms to a receiver
- Commencing legal proceedings against former shareholders, directors, and other stakeholders (for example, related parties) to be reimbursed for funds advanced to depositors/investors.,
This current process is extremely expensive, as highlighted above. Questions also exist regarding various aspects of the process. For example, a majority of universal banks were not successful in attracting cash injections to increase their capital requirements, relying instead on their existing balance sheets or financial transactions that have yet to produce liquidity. Additionally, the court processes being used to recover depositor funds have been contentious, resulting in countersuits and dismissals, and are likely to be long drawn. The Bank of Ghana Governor has been vocal regarding his displeasure regarding the transparency and effectiveness of appointed banking receivers.
Why liquidation instead of administration?
Why has the Bank of Ghana opted for the mass revocation of licences in the SDIs and NBFIs instead of being more selective and applying different measures to suit the different institutions?
As described by Mokal (2004), receiverships are undesirable because: (1) the receiver has no incentive to ensure that financially distressed companies will cease to exist; (2) has the ability to sue shareholders and directors, which weakens incentives to ensure maximisation of value for the company’s business; and (3) “has little incentive in either of these cases to control the costs of receiver wastefulness or negligence”. It was in this spirit that changes were made to the English Enterprise Act of 2002.
Mokal also made the distinction between economic and financial distress (emphasis added):
“So why should there be a corporate ‘rescue’ mechanism like administration (or even receivership)? When a company becomes unable to pay its debts as they become due, why not send it into liquidation straight away? It promised to pay back what it was borrowing and now is unable to do so. So why not wind it up? This question is usually answered by drawing a distinction between financial distress and economic distress.
In some cases, the net present worth of the troubled company’s business as a going concern is less than the value of its assets broken up and sold separately. This means the business is not viable anymore, or in other words it has become economically distressed. The longer the assets constituting it remain harnessed to their current use, the more money will be lost by all those with claims against the company as a group.
In such cases, we can see that attempting to save the company or its business as a going concern is out of the question. Doing so would not, ex hypothesi, be in the interests of the company’s creditors as a whole. And even more explicitly, attempting to save the business would not be likely to achieve a better result for the creditors as a whole than would be likely if the company were wound-up. So here, the purpose of formal insolvency proceedings should be to realise the company’s property in order to make a distribution to its creditors.
Alternatively, the company might only be in financial distress. This is another way of saying it is cash-flow insolvent, which means simply that it is unable to pay its debts as they arise. This is deemed to be the case if the company fails upon demand to repay a debt of at least £750 that has become due.
A company which is only financially distressed is economically viable, and its assets might be in their highest value use. However, because these assets happen to be illiquid and because large debt repayments are looming, say, it might be rendered incapable of meeting these obligations. In this case, the purpose of the insolvency proceedings should be to save either the company …or its business as a going concern. Given its essential viability, dismantling the business would not be in the interests of the company’s creditors, since to break up the assets would be to withdraw them from their highest value use and apply them toward inferior projects.”
Given this background, a number of the financial institutions that are under duress appear to be financially distressed as opposed to being economically distressed. In some cases, the payment of government contract-linked obligations to those financial institutions would resolve their short-term liquidity issues, allowing them to pay their debts as they come due.
If this is the case, the decision to revoke licences and liquidate these businesses seems to not only be destructive for the shareholders and directors, but also destructive for the creditors of those businesses – resolving the issues of the companies while preserving them as going concerns could allow for those companies to be sold, merged, or otherwise monetised for more value than liquidation.
The Unique Case of Fund Managers
While the general principles are the same, the debate of receivership versus administration for fund managers in Ghana is necessarily a bit different than that for firms regulated by the Bank of Ghana for three main reasons.
- Firstly, the liabilities of a fund manager are investments which, unlike the deposits of an SDI, are subject to fluctuations in value in the normal course of business – this makes the discussion of insolvency a bit different. If the assets of a fund manager were ever to exceed the liabilities, the appropriate thing would be for those liabilities to be written down accordingly.
- Secondly, Act 929 does not give the Securities and Exchange Commission the same powers to appoint a receiver and take over the operations of fund manager(s). What is supposed to happen after a fund manager’s licence is revoked? The Act is not very clear.
- Thirdly, the SEC is funded by the fees that it earns from its operations; meaning that it does not have access to the funding that would be required to make investors whole (assuming that it had even had the theoretical mandate to do so), given that investments (by their definition) are subject to risk and can lose value without recourse to the fund manager.
These three issues therefore beg the question of why SEC appears to be following the footsteps of the BoG in taking actions against its licensees. BoG was well within the rights afforded it by Act 930 to take the actions it took – allowing it to ‘protect’ the depositors of its licencees by revoking licences and appointing receivers. BoG was also able to provide funds to the depositors of its defunct licencees. Even though a Deposit Protection Act had not been put into effect, BoG had somewhat of a moral obligation to make depositors whole to prevent wider contagion or systemic effects. The SEC lacks all three: ability, funding, and obligation.
Solving the challenges currently being faced by financial institutions will involve accomplishing two major tasks:
- Ensuring that there is enough liquidity to deal with time-sensitive financial obligations of distressed firms
- Ensuring that confidence is restored (not only in affected financial institutions but also in the wider financial industry in general).
These two goals are inextricably linked – higher confidence reduces the liquidity needed for withdrawals and redemptions but sufficient liquidity to meet a certain level of withdrawals and redemptions increases confidence.
My proposal involves a shift away from relying on public funds to settle customers and depositors, an expensive process that increases debt levels and results in hundreds of millions of Ghana cedis spent in legal, consulting and other expenses – not including job-losses and psychological stress. The actions connected with the financial sector clean-up have been largely premised on the idea that shareholders have assets which must be taken away from them and turned into cash that will used to reimburse the state for their upfront costs. The forced-sale value received for those assets will have been reduced by legal fees, consulting fees, court fees, and auctioneer fees among others.
A more efficient and less expensive approach would be to work with those firms that are financially distressed as opposed to being economically distressedto raise funds against the assets that are available. This cooperative approach would save time and avoid the transfer of value away to lawyers, consultants, accounting firms, and the buyers of shareholder assets at forced-sale value.
As suggested above, there will be several benefits to executing this proposal:
- Money Saved: fees will not need to be paid to lawyers, accountants, consultants, receivers, auctioneers, among others.
- Jobs Saved: institutions experiencing liquidity challenges will not need to shut down and/or lay-off personnel.
- Time Saved: with the cooperation of the affected institutions, identifying and gaining value from assets will take less time.
- Fewer Distractions: actions such as the revocation of licences attracts media coverage and is easily politiciced. Affected parties are likely to issue statements, lawsuits, and use the media in an attempt to salvage their reputations.
- Increased Recovered Value: securitising or borrowing against assets will result in more value than attempting to recover them through legal action. If government, through the receivers appointed, is successful at recovering the assets pursued (thus far it has not been successful), the assets will be sold at forced sale value and will be net of a variety of expenses.
Executing this proposal would require a few key things to occur:
- Identification and review of assets that are available to securitise, sell, and/or borrow against.
- Provision of credit enhancements from government in the form of guarantees, comfort letters, or bonds.
- A reduction in the constant public statements indicating that negative actions are coming.
Assets Identification and Review
The first thing that would need to be done is identify and value the assets that the firms under duress have recourse to. Valuations of these assets may already exist – assets that have not been valued recently can have those valuations done within 30 days or less using the services of the many well-qualified audit and valuation firms in Ghana. This would ideally be done at the expense of the fund manager, as the procurement process for a government-funded valuation may take unnecessarily long.
I am aware that the SEC is currently conducting reviews of the assets and liabilities of some of the fund managers. The problem with this process is that this review is part of a forensic audit that – according to statements made by representatives of the commission and feedback from at least one fund manager under investigation – is aimed at uncovering evidence of wrongdoing at the firms being reviewed.
When a person arrives at an emergency room with life-threatening wounds, a well-trained physician will take steps to stabilise the patient, regardless of how the wounds occurred. I believe that the same logic should apply here – while it may be important to understand the factors leading to the distress being experienced, it is more important to ‘stop the bleeding’ – understanding how and why things went wrong can and should be done, but it should be done at the right time.
Provision of Credit Enhancements
It is well known that liquidity is generally difficult to come by in this economic environment – corporate entities as large and profitable as MTN have had challenges raising funds in Ghana. Investors appear to be adopting a ‘wait and see’ approach to investing in the country, and as such I cannot see how the fund management firms experiencing distress can be expected to raise funds without some support.
A guarantee or some other form of credit enhancement – for example, a bond against government receivables or fixed assets of the companies – would allow fund managers to attract outside financing to solve their short- and/or medium-term obligations. The concept of the ESLA bond that was put in place to provide liquidity to banks, for example, could be used to create an instrument to finance receivables due to contractors owing banks and fund managers. A fund could be established and jointly promoted to securitise the land and buildings that are owned by fund managers.
While the proper instrument may take some time to put in place, the very knowledge that an instrument is being put in place would likely have an impact on investor sentiment.
Reduction in Public Statements
During 2018 and 2019, several statements were made in public by representatives of the BoG and SEC that were arguably detrimental to the stability of the industries that these institutions regulated. Bank of Ghana officials made several statements indicating the number of firms who had met (or were likely to meet) the minimum capital requirement. While the SEC has issued statements meant to discourage panic-withdrawals,, representatives of the commission have also issued statements informing the public of investigative actions and have granted interviews during which they have discussed topics such as forensic audits and possible violations of Act 930.
While some of the public statements could be defended as required by law, it is important to note that the natural response to news of sanctions and possible violations of law is for investors to seek to disinvest in that institution. As more investors seek to withdraw funds, the stability of the institution in question becomes more at risk – as such, regulators and their representatives must carefully consider the impact of their words when making official statements and granting interviews about their licencees.
The entire process of gathering information, creating an appropriate vehicle, and executing the plan should be possible within a three-month period:
- Fund managers submit regular reports of their assets and liabilities and are required to submit annual audited accounts.
- Information regarding locked up funds have already been requested by the commission.
- SEC is already conducting forensic audits, which should be in the latter stages of completion.
In this document I have presented an alternative to funding the ongoing financial sector reforms, the cost and consequences of which are being disproportionately borne by the taxpayer. The ability of the financial sector to thrive depends not only on liquidity but also on confidence – by working with distressed financial institutions to identify and secure funding against some of their illiquid assets, the financial sector can recover without dealing a serious reputational blow to affected market operators and the market in general.
I am aware of other similar proposals being circulated among the relevant institutions (that is, the Ministry of Finance, the Securities and Exchange Commission, and the Ghana Securities Industry Association). It is my hope that these proposals are seriously considered and acted upon. There is still time to incorporate some of the lessons learned from the banking sector reforms.
The petitioner Independent Economic Consultant. Senior Fellow, IMANI Africa
 Bank of Ghana has stated that a different approach will be used in the case of Rural Banks, suggesting that there will not be any licences revoked.
 This could be the topic of a completely different debate and as such I will limit my discussion of this point.
 That the BoG was allowed to take these actions implies, in my view, that amendments must be made to Act 930.
 Serious questions exist regarding the amount of money actually provided to depositors – unless these customers took their funds outside of the domestic banking system completely, the actual direct cost of the clean-up is likely far less than the amount reported.
 Again, the argument can be made that it would be difficult to deem a fund manager economically distressed due to a mismatch of assets and liabilities, as investments lose value as a normal course of business.
 My understanding of the amount of time it took to select the firm conducting this exercise helped inform our opnion that the firms should conduct their own anlyses.