Over the last century, Savings and Loans (S&L) institutions have been the backbone of the massive growth and economic development witnessed in the United States’ economy. Indeed, at the beginning of the 19th century, banking was still something only practised by those who had assets or wealth that needed safekeeping.
The first savings bank in the United States, the Philadelphia Saving Fund Society, was established on December 20, 1816; and by the 1830s, such institutions had become widespread. They provide many of the same services to customers as commercial banks, including deposits, loans, mortgages, cheques and debit cards. S&Ls were originally created to provide more economic opportunities like home loans to more Americans, such as members of the middle-class.
In Ghana, the story is not different; S&Ls, which are categorised as the Non-Bank Financial Institutions, have been the forefront of economic development. They work closely with Small and Medium-size Enterprises as well as market folks and provide an avenue for savings and credit facilities to help them grow their businesses. I am much particular to associate S&L to Ghana’s development because they have been vibrant in meeting the needs of a certain class of individuals and firms that the traditional banks may not ordinarily offer.
The clean-up exercise
The financial sector was in distress in the last few years, with high non-performing loans and average capital adequacy ratio below the statutory minimum of 10 percent back in the days. The savings and loans sub-sector dominated the Specialized Deposit-Taking Institutions sector in Ghana, representing 42 percent of the total asset size of the sub-sector. According to Bank of Ghana, only 8 out of the 37 companies in the savings and loans industry had a paid-up capital above the minimum amount of GH¢15million as at December 2017. These challenges had ramifications on the sector’s ability to undertake and deploy effective financial inclusion.
Consequently, it wasn’t so surprising when Bank of Ghana lifted its stick on 16th August, 2019 to revoke and discipline recalcitrant S&Ls which were bringing the solidity of the sector into disrepute. According to the central bank, the revocation of the licenses of these institutions became necessary because they remained insolvent even after a reasonable engagement period with the regulator to facilitate recapitalisation by their shareholders and return to solvency.
The Bank of Ghana also indicated that these institutions had no reasonable prospects of recovery, and their continued existence posed severe risks to the stability of the financial system and to the interests of their depositors. In line with the government’s commitment to protect depositors’ funds, following the revocations, the government made funds available to enable the Receiver pay depositors after their claims was validated. Details of some of the reasons that led to BOGs decisions to revoke the licenses of these institutions are as follows:
- The levels of capital held by some S&Ls and finance house companies were in violation of the minimum regulatory capital required by Act 930. This made it precarious for these institutions to continue to undertake the business of specialized deposit-taking institutions, given the risks they posed to their depositors and other counterparties to whom they were exposed directly or indirectly;
- Excessive risk-taking without the required risk management function to manage risk exposures;
- The use of depositors’ funds to finance personal or related-party projects or businesses on terms that were not commercial, leading to little or no income accruing to the relevant savings and loans companies or finance house companies, and thereby compounding their liquidity challenges;
- Corporate governance weaknesses with weak Board oversight, poor accountability, and override of internal controls;
- Creative accounting practices and under-provisioning for impaired assets, thereby misrepresenting their true financial condition to the Bank of Ghana and other stakeholders; and
- Persistent regulatory breaches, involving non-compliance with Bank of Ghana’s prudential rules, and failure to implement Bank of Ghana on-site examination recommendations.
Addressing societal needs
That notwithstanding, there is a bigger question to address in terms of what the contribution of S&Ls to savings mobilisation and credit availability have been. More importantly, to what extent does their contribution address needs that have not been satisfactorily resolved by the traditional banking system?
The general clientele of S&Ls companies is essentially urban-based and largely female (Goldstein et al, 1999). These companies largely deal with clients who can contribute to their strategy of savings mobilisation. The clientele is usually made up of individuals with peculiar financial needs. These are people with relatively low social status and low income. Also, a comparatively large number of the clientele needs to be served for their operations to be profitable. There is, therefore, a high risk of default which needs to be well-managed.
Until recently where some commercial banks leveraged on Financial Technology (FinTech) firms to provide micro lending and loans to a section of the society to deepen financial inclusion, this was at the forefront of S&Ls. As the case has been for some time regarding banking principles of lending, the credit methodology requires documentary evidence, long-standing banker-customer relationship and collateral which most micro, small medium-size businesses do not possess at the time of request
The central bank, in 2007, reported that the banking system reached only about 5 percent of households and captured 40 percent of money supply. Evidence shows that personal guarantors tend to be relatively effective and enforceable as security for loans in Ghana. As a result, these companies rely relatively heavily on personal guarantees of the borrowers while banks often insist on third-party guarantors who are in a strong financial position and clearly understand their obligations. Even though some banks appear to be giving collateral-free loan, the process to obtain such facilities remain a misery.
Figure 1 shows financial performance for some selected S&Ls.
S&Ls traditionally have remained focused on their core mandate of dealing with small businesses to keep them afloat. Data from their financial statements for a sample of 7 out of 25 shows that the Capital Adequacy Ratio levels meet the prudential guidelines of 10 percent set by the central bank of Ghana. They remain profitable with a year-on-year growth. With a mandate of providing loans and advances at affordable rates, some of them must strengthen credit risk management framework to check the high level of non-performing loans.
Empowering the GHALSAC
As we know, the Ghana Association of all Savings and Loans Companies (GHALSAC) is registered under the laws of Ghana and licensed by Bank of Ghana. It obtained a certificate to commence business in the year 2008 as a company limited by guarantee, without any share capital, and to operate as a non-profit making institution. Since its inceptions, GHALSAC has been very instrumental in ensuring sanity and instilling confidence in that sector.
The issues raised by Bank of Ghana in the past as the reasons for the revocation of the licenses of some of the S&L institutions have made it even more necessary for GHALSAC to continue strengthening S&Ls institutions and to improve on the existing policies, framework and governance. Additionally, GHALSAC, as part of its objectives, must continue to serve as a platform for effective communication and collaboration among member institutions as well as a mouthpiece and a consultation body for discussions with key stakeholders in the sector.
Some major challenges
Non-performing loans: S&Ls are often faced with the incidence of their clients not repaying loans granted them as a result of many factors. Key among these is the poor credit risk management practices by some credit officers. They may give loans to sole proprietors who may not repay their loans for genuine and intentional reasons. There is also the issue of poor due diligence prior to the granting of the loans and poor monitoring. Some of their clients may change their locations, making it difficult and almost impossible to reach them.
Corporate governance breaches: Anytime good corporate governance rules are breached, it is a recipe for chaos. Some of these Savings and Loans companies are owned by entrepreneurs who have no regards for due process. They push their employees to engage in fraudulent transactions and sometimes, the genuine transactions with their related parties are not fairly priced. All these red flags are challenges that do not augur well for the survival of the organisation in the long run.
Investments with risky companies: Some of these Savings and Loans companies offer their depositors very high interest rates on their deposits with them. These high interest rates cannot be obtained from solid financial institutions. They can only be obtained from weak financial institutions that are struggling; and sometimes, microfinance institutions. These eventually lead to defaults when the investments mature.
Staying afloat
For S&Ls to remain relevant and continue to contribute their quota to economic development through the avenues they create for financial inclusion, especially banking the unbanked, they need to address the queries raised by Bank of Ghana in the past, and re-assess their business models to avoid license revocation.
Management must continue to insist and practise good corporate governance. There are times when some management teams often interfere with the work by getting funds diverted to other chain of businesses of theirs without following due process. Not only is this unethical, but it is also equally criminal. When this diversion of funds is not checked, it degenerates into liquidity and capital adequacy problems that can lead to regulatory infractions and compliance breaches.
It is important to intensify the risk management framework in the financial services industry. Risk management is critical for survival and growing concerns. Poor risk management emanates from financial mismatch and overconcentration in one sector. When these savings and loans companies take short-term funds from depositors and use them for long-term projects, it eventually leads to liquidity problems.
The way forward
S&Ls have become an integral part of the financial system in Ghana; and no doubt the impact continues to be great. There is a need to improve on the quality of credit administration as well as underwriting standards.
It’s important for S&Ls to leverage technology to drive business. Fintech – broadly defined as technology-driven financial innovation – is rapidly changing the nature of financial products, services and marketing of institutions globally. It is, therefore, important to invest in technology.
S&Ls can change the narrative around them now by resolving to practise good corporate governance, avoid poorly priced related party transactions, and work on their risk management. When all these are done with the help of the regulator and other policy-makers, they would become the engine of growth for the SME sector and continue to make significant contribution to national and economic development like their counterparts in other jurisdictions.
>>>Disclaimer: The views expressed are personal views and don’t represent that of the media house or institution the writer works for.
>>>the writer is an Author, Banking, Finance and Investment professional working with an international bank in Nairobi, Kenya in East Africa. Contact: [email protected], Cell: +254 705459061
