The year is AD 2019 with new prospects. Many people might have shaken off the usual hangover after New-Year’s eve. In the Banking sector we have come a long way in recovering from the GH¢400million regulated whisky, but with such a lingering hangover that it requires a fit and proper test.
As announced by the Bank of Ghana, sixteen (16) banks met the new paid-up capital requirement by using their income surpluses and/or injection of fresh capital. The Ghana Amalgamated Trust (GAT), by an arrangement with pension funds, somewhat supported the remaining five (5) which are mainly indigenous banks to meet the 31 December 2018 deadline – therefore constituting the list of twenty-three (23) banks currently in the country.
The last-minute arrival of the Special Purpose Vehicle (GAT arrangement) really created a narrow escape for the five (5) banks from the immediate penalties defined in Section 33 (Act 930) about non-compliance with capital requirements. Also, three (3) pairs of banks, the First Atlantic Bank/Energy Bank, First National Bank/GHL Bank and the Sahel Sahara/ Omni Bank were able to meet the requirement after pooling their resources together, with the latter receiving some support from GAT.
At the turn of events, the licences of two new banks – Heritage Bank and the Premium Bank – were revoked after they had survived the August 2018 tsunami which claimed five (5) banks and were looking forward to better days.
The reasons for them not living beyond the first week of the new year is due to the recapitalisation-related hangover and what the regulator described as breaches involving the use of capital from suspicious sources to obtain their licences. In my observation from afar, if branding in the banking sector were anything to go by, Heritage Bank for instance would have passed the test – but the reasons had gone beyond the beautiful architectural designs. The issue of ‘fit and proper’ test came up, and apprising myself of the standards as defined in the ‘Fit and Proper’ Directive published in 2018 by the Bank of Ghana gave me an insight into the decision.
In fact, Part V (28) of the ‘Fit and Proper’ Test Directive derived from relevant provisions in the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) is informative and striking to the current discourse. Part V (28) (e) touches on (pending) legal proceedings and clearly states:
- Pending – as well as concluded – criminal or administrative proceedings may have an impact on the reputation of the appointee and the regulated financial institution.
- ii) While there is a presumption of innocence, the very fact that an individual is being prosecuted is relevant to propriety.
Banking is indeed a highly regulated enterprise across the world, with much premium on reputation. Even so, the recent decision of the Bank of Ghana was partly influenced by a ‘fit and proper’ test that has since stirred up a hornet’s nest with emotional triggers and heated controversies among the public. It is very nauseating to have witnessed the licences of nine (9) banks revoked within a space of two (2) years in a country with many developmental challenges to grapple with and cannot do without banks’ support.
Nonetheless, regulation has its own axe to grind with weaknesses it identifies in the system, and many will appreciate its fairness or otherwise based on the underpinning facts or information available to them. More often, many of us rely on press releases from the central bank to dissect the issues, but do not ignore other voices with vested interests therein. That said, the business year has eventually taken off with the 23 recapitalised banks positioned to undertake big-ticket transactions as envisaged.
These should be very exciting moments for a bank’s stakeholders, including its shareholders, Board of Directors, management, staff and the public (customers) that it has recapitalised. But that in itself is not the means to an end in a bank’s capital challenges, because the gains therein can begin to drip down just after the firm footing of recapitalisation.
It is worth re-emphasising that capital is one of the vital ingredients for the banking business. That’s why bankers and regulators alike always keep their eagle eyes on it. It is a fact that while they were exploring funding sources toward the recapitalisation, bank managers at the same time had on their hands other issues equally deserving of attention.
These relate to dealing with rising non-performing loans and liquidity challenges, as well as operational expenses to keep them afloat. Regarding the worrying number of non-performing loans and liquidity challenges, the inability of state institutions to pay contract proceeds on time worsens some banks’ asset-quality.
The resultant effect is capital impairment and a weakening balance sheet. Interestingly, regulations require banks to submit stringent periodic prudential returns to the regulator, which by creation does not accept a bank’s pleading for non-performing loans eroding its capital base – even if the borrowers include government and/or its related agencies.
Again, banks will soon publish the 2018 full-year financial results, and one can imagine the effects of headwinds experienced in the year on their bottom-lines. If the financial results should subsequently show operating losses for some banks after the recapitalisation, the negative outcomes will cause the central bank to evoke Section 105 of Act (930) regarding an adequately capitalised bank recording materials losses and needing prompt corrective action. Such consequences should be wake-up call for us to work harder after passing the current capital test.
In all, experiences over the past two years from the revocation of banking licences should guide us to conduct our own regular ‘fit and proper’ tests which do not necessarily require a visit to the physician to learn how to deploy our resources prudently – thus, not to erode the new minimum paid-up capital through reckless and avoidable credit decisions. Happy new year! 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.