Random thoughts of a rural farmer; part 4

Bank liquidity management(Part I): Defying the 2:1 current ratio in accounting
Photo: Francis Owusu-Achampong,

Needless political polarisation

I had decided to give myself a break from commenting on economics and banking related issues following a few calls I had from well- meaning friends who worried about whether I had sympathies for the NPP or the NDC.

I find it such a pity that modern Ghanaian society has become so polarized that freelance writers and especially those who choose to write on banking related issues have to be extremely careful in what they write, when, and even how to write, lest they are branded as belonging to this or that party, with all the discomforts arising therefrom.

I have often asked myself if sympathizing with this or that party is now abominable when, indeed, we have all accepted a multi-party system of political governance and thanks to political philosophers, I have the same single vote just like the Chief Justice, the Inspector General of Police, the kayayo, and indeed, the Electoral Commissioner!

Can we not comment on purely economic or governance issues without being branded as holding allegiance to Party A or Party B? Why has objectivity become so problematic just because we choose to perceive otherwise simple economic or governance issues from incredibly biased lenses?

In a recent discussion made up entirely of university graduates of over thirty years’ standing, my attempts to explain some of the key issues that precipitated the last Ghanaian banking crises led to avoidably emotive submissions from some quarters.

A colleague even suggested (sarcastically) that given my spirited defence of the role of the Central Bank in the unfortunate debacle, I should send an invoice to the Regulator for performing their public relations function on their behalf!

I have not read from any literature about the Regulator completely exonerating itself from the factors that caused the unfortunate collapse of some of the indigenous Ghanaian banks. Incessantly berating the institution therefore does no good to anybody. After all, integrity requires that even when no one is watching each of us will choose to do the right thing, and not necessarily when the Regulator is roaring.

Another friend also quipped that some of the current banks also have liquidity and governance challenges so why are they allowed to continue to be in operation? My response was that the degree of infractions and their effect on the financial system determine the approach of the Regulator.

The Central Bank certainly has to weigh the negative effects of resorting to punitive licence withdrawal when we have not effectively recovered from the previous debacle. Besides the law still grants the Regulator the prerogative to engage in resuscitation efforts and stretch its motherly forbearance tentacles while it uses other measures to avoid another systemic breakdown, without necessarily considering whether the errant banks are locally or externally owned, as some are wont to simplistically resort to.

The governor has an arduous task of balancing the interests of bank boards, shareholders, investors, multilateral financial institutions, the general public and the ruling government. It is no mean task playing the role of a catalyst for stable economic growth and development while complementing the incumbent government’s goals, some of which may not necessarily be congruent to macro-economic stability.

In the interest of our motherland, we must refrain from seeing every economic move as being geared to kill the fortunes of political opponents. The interesting phenomenon is that, at any one time, the political ideology of the ruling government will determine which approach “best” solves a particular economic objective, within what time frame, and at what cost to the society.

Within that milieu, certain businesses may prosper from a particular government initiative while others may not be so lucky, merely through shifts in economic policy but not necessarily a conscious attempt to subdue political opponents. Together, let us open a new chapter of nationalism devoid of extreme partisanship. Parties will come and go but the Republic of Ghana will survive them all.

We must critically and dispassionately assess the ramification of unfounded allegations and populist assurances. These must be made against sound economic principles that can positively impact the economic health of this country and its membership of the global financial community.

Let us collectively gravitate towards a culture where no individual is mightier than the financial system.  After all, even presidents have been jailed elsewhere. To get to that destination requires that financial literacy and governance must become the preserve of those more articulate in the subject rather than the pedestrian discussions thrown on the airwaves and believed as gospel by a largely illiterate populace.

It is imperative that in discussing matters concerning banks, we must all be very circumspect and tone down any political connotations for the sake of the economy. When people with little insight into how banks operate consciously pollute minds in the media under political colouration therefore, my heart grieves tremendously.

I sincerely long for the day when parliament will be filled with men and women with altruistic motives to lift the fortunes of this country to the next level, by supporting well-intentioned policies from the opposing party, or at least, proffering viable alternatives, devoid of pettiness and parochial political submissions.

Peculiarities in banking business.

I feel obligated to get out of my self- imposed hibernation to explain the uniqueness of banking business again. Lots of misconceptions still abound about the business of banking among the general populace. This includes remarkably a chunk of educated persons, funnily even among some of my banking students into whose hands we are going to leave the future of the country’s banking and financial system.

Banking is understandably one of the key sectors in the economy that is subject to intense regulation to assure the common good. The compliance architecture alone can be so daunting and expensive, yet few understand how this does not by itself generate direct income, just risk mitigation.

Wealthy Mr. Right may desire to hold fifty percent of the shares in Excellence Bank Limited but by law cannot do so without the Regulator’s approval in view of current corporate governance dynamics, especially regarding the “fit and proper persons’ directives”. Interestingly, the Securities and Exchange Commission which regulates the conduct of the stock exchange and its participants cannot stop the same Mr. Right from buying fifty percent of the shares in a non-banking firm. Any person can register a business for any lawful purposes but no business can have the word “bank” in its name, unless so licensed by the Central Bank.

Interestingly, even potential customers often become befuddled when in the attempt to open bank accounts, they are subjected to the bank’s “Know Your Customer” policies. Some get so incensed by the questions they are asked that they refuse to open the account, try other banks only to face the same legitimate questioning until they reluctantly meet the bank’s expectations.

Every bank makes strenuous efforts to mobilise deposits. Yet bank staff are enjoined to be interested in the businesses legitimately conducted by their customers which generate such deposits. The idea of looking out for, and reporting on Suspicious Transactions stem from the efforts to avert money laundering and its negative effects on national security and other social cohesion imperatives. This often becomes the source of anger to bank customers, and even to some bank staff who are sweating under deposit mobilization targets imposed on them.

Even after mobilizing the deposits, the bank is enjoined to keep specific percentages of such funds as cash and other liquid reserves. These, they cannot dissipate at will or engage in speculative activities, irrespective of the potential for windfall gains.

Similarly, banks are constrained by other prudential requirements, including ensuring that their capital adequacy ratio, loan to deposit ratio, sectoral concentration ratio, single obligor exposures to particular persons are all within defined regulatory thresholds. No other non-bank firm is subjected to these restrictions.

A steel manufacturer, for instance, can decide to hold any level of fixed assets its management considers appropriate. The same cannot be said of banks which must keep a specific balance between earning assets and non- assets.

Much hulabaloo is often made of the “high profits” banks make, even in periods when other firms are suffering from the effects of say, covid 19. Few commentators bother to understand the seemingly wide margins between interest paid on deposits versus interest charged to borrowers.  Many conveniently ignore the stark fact that all the bank’s complex operational expenses are sourced from this same differential, including the rigidities associated with what businesses the bank can engage in, and particularly the definition of the simple word “profit” in banking terminology.

Even the method of declaring profit and its distribution come under the radar of the Regulator in terms of the quantum to be held or posted to shareholders as dividends. Add to that the fact that under current dispensation, a bank cannot directly engage in non-financial subsidiaries to diversify its income sources. Banks’ operational costs can be quite heavy and mostly of a fixed nature.

Few commentators appreciate the rigours involved in provisioning for expected losses, particularly bad debts, operational risks, market and even reputational risks and why banks must keep stable reserves to cushion unexpected losses as well. Knowledge of the method for classifying loan assets and its effect on profit is not known to the general public, some of whose recalcitrance in paying loans makes a severe dent on profitability.

Couple this with the risks associated with loan recoveries and the slow, tedious and expensive legal processes involved in loan recoveries, poor personal identification system, and collateral realization and you can only sympathise with bank board of directors who now face stringent sanctions if their banks fail or do not perform according to expectation.

The knee jerk instruction to the banks to purchase bullion vans following the unfortunate shooting of a police escort generated a lot of apprehension. If only commentators could appreciate the huge sums spent on security of the banks’ physical assets and electronic fire walls to safeguard its security, perhaps some degree of sympathy will be accorded the banks, compared with other businesses.

Ironically, South African Banks together have the highest investments in proper bullion vans but that has not deterred robbers from attacking these monstrous and expensive security vehicles.

Whereas other businesses can open branches anywhere in the country, subject to capital constraints, a bank cannot open a single branch without approval of the central bank. Even if for purely economic reasons, a bank wants to close down a branch, it must still require the Regulator’s approval. Other businesses do not suffer such constraints.

Another stringent requirement is the introduction of new product development initiatives. These must be supported by extensive feasibility reports and prior approval from the regulator, all of which saps into the bank’s revenue generation efforts.

How many non-bankers are aware of the constraints imposed on the bank by the sheer nature of the maturity profile of deposits and, hence, the limitation this places on what could be financed in the medium to long term? How many people sit down to analyse why most customers keep their deposits in short term instruments, euphemistically labelled as CASA (Current Accounts and Savings Accounts), instead of fixed or long- term deposits?

How can an astute banker fund long term projects like power plants, dams, road construction, etc from such short- term funds without incurring liquidity challenges? How often do we analyse the effect of the government’s insatiable appetite for public borrowing and its crowding out effect on the banks’ ability to source similar funding from the same segment of society?

For a long time until recent years, the entire financial system suffered from what is called the inverse yield curve where short term deposits attracted higher interest rates than long term deposits. The effect, which still lingers on the consolidated balance sheets of banks is that depositors shy away from investing in deposits for the long term. This should rather have been the norm if long term interest rates were attractive.

Attempts to convince customers to buy into the banks’ internal savings instruments suffer from the reluctance of customers who understandably prefer to purchase government treasury bill instruments that offer higher interest rates. The banks have to reluctantly raise their internal deposit rates to compete for the same deposits.

It is so easy to jump to conclusion that in other advanced economies interest rates hover between one and six per cent at most. This presumption belies the economic structures of those countries, the savings culture, the tax regimes, the prevalence of alternative channels of investments and the attractiveness of the political and economic environment that have been nurtured over so many years.

Perhaps if we decide to be less pessimistic and stop utterances that contribute to the perception of high risk in our political and economic climate, we too could enjoy reasonable interest rates in the foreseeable future.

I can go on almost indefinitely to list the peculiarities of banking business which most people fail to appreciate and therefore bash the banks unnecessarily. But on account of space constraints, I wish to end, with an encounter with one of my students who virtually refused to understand the notion that in the trade finance arena, banks deal in documents and not the related goods. He found it too strange in spite of my lengthy, logical explanations.

Banks deal in money and related instruments. Bankers cannot claim to be expert physicists, hydrologists or pharmacologists or experts in other non- financial professions. The banks facilitate the conduct of international trade finance among counterparts who have engaged in their underlying commercial contracts. Banks only step in to effect the wishes of the two parties as enshrined in a related proforma invoice or other document agreed by the counter parties.

In respect of the importation of turbines for Akosombo dam, for instance, a banker is not professionally placed to identify the specifications of equipment that will suit the purposes of the Volta River Authority.

It makes absolute sense, therefore that the bank confines itself to the prior arrangements between the equipment supplier and VRA as detailed in the proforma invoice or other document that formed the basis of the exclusive contract between the counterparties. Banks are of necessity restricted to an appropriate, less detailed description of the turbine and or its accessories. They must mention this in the relative letter of credit or merely reference the related contract number of a specific date.

The bank’s business is to ensure that at negotiation of documents, the correct description of the related equipment appears on all related documents. It is for VRA to ensure that the equipment meets their specification by contracting an Inspection Agency in the country of the exporter to conduct the necessary assessments regarding suitability for purpose and require a Certificate of Origin and other relevant documents from the exporter.

To the extent that the documents comply fully with the terms of the original letter of credit issued, the bank has fulfilled its obligations and deserves its fees and commissions, without meddling in any subsequent potential litigation between VRA and its suppliers.

If a middle level manager in a universal bank fails to appreciate this simple concept but would rather stick to his own ill-informed opinions, then bank trainers have a huge responsibility to sanitise the system through regular education. It took me a great deal of time to explain this concept and why the International Chamber of Commerce has kept this rule in its UCP 600, even up to Revision 2021.

The sheer lack of understanding of this basic principle in trade finance, coupled with other misconceptions about the uniqueness of banking business reinforced my desire to come back from my self- imposed isolation to clarify some of the simple but needlessly  thorny issues be-devilling the practice of banking.

It is hoped that this piece, however short, will help to elicit understanding from the public about the intricacies of banking business and why we should avoid sweeping statements about how and why banks conduct the business of financial intermediation.

The writer is a Fellow of the Chartered Institute of Bankers and an adjunct lecturer at the National Banking College, and the Chartered Institute of Bankers, a farmer and the author of “Risk Management in Banking” textbook.

Email; [email protected]  Tel. 0244 324181 / /0576436414

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