How Ghana is working to improve the banking sector

In the last 12 months, several banks have collapsed in Ghana. Astoundingly, some were granted bank licences as recently as 2016-2017. Most market participants agree that the herculean efforts of the Bank of Ghana (BoG), the country’s central bank, during this period prevented bank runs and minimised contagion to the wider economy. But questions remain as to how the financial, operational and governance failings in these banks were allowed to persist.

In 2015-16, the BoG conducted asset quality reviews on certain local banks and identified financial concerns, some of which would become realized in the next year.

By August 2017, the BoG had revoked the licences of two local banks: UT Bank and Capital Bank. It stated publicly that the two banks were “heavily deficient in capital and liquidity, and their continuous operation exposed the financial system to instability and depositors’ funds to risks”. The capital restoration plans were not credible and in its final conclusion, the BoG described both entities as “deeply insolvent”. Fortunately, there was market appetite to acquire the residual assets, and the BoG eventually selected GCB Bank, a domestic commercial bank with over 160 branches. GCB Bank acquired the deposits and certain assets and liabilities of both failed banks.

By March this year, the situation had worsened. The BoG was forced to appoint KPMG as an official administrator to assume control of UniBank, an Accra-based lender that principally provided banking services to retail customers and local corporates. In April, efforts by the BoG to assist the management of Sovereign Bank, another struggling local bank, with the appointment of a financial adviser to aid its recovery, ultimately failed.

The pinnacle of the crisis occurred this August. Amid a blaze of publicity, the BoG acted swiftly to revoke UniBank’s licence and the licences of four other local banks it deemed insolvent – Beige Bank, Sovereign Bank, Construction Bank and The Royal Bank – and merged their assets into a new wholly state-owned entity, the Consolidated Bank Ghana Ltd (CBG). The governor of the BoG confirmed that CBG had been recapitalized through a taxpayer-funded bailout in an amount of GHS450 million (approximately $92 million) and a GHS5.76 billion bond (approximately $1.18 billion) to absorb the financial losses. It is anticipated that the previous shareholders will not recover their equity investment, if at all, until the “creditors left in the receivership have been settled”.

The speed and efficiency with which the BoG took action to avert depositor losses and disruption in local financial markets was a welcome display of the regulatory efforts that mature African economies, such as Ghana, have taken since the financial crisis of 2008. The Banks and Specialised Deposit Taking Institution Act (2016) is the legislative framework upon which Ghana’s resolution regime for resolving failing banks was built. The powers and discretions granted to the BoG under this legislation enabled it to take the necessary action to bring the failing banks into state ownership. Local banks play a critical role in the flow of credit to local businesses and the provision of payment services to rural and urban communities; a disorderly dissolution of the failed banks could have resulted in significant adverse ramifications in the real economy.

In its extensive report on the merger and consolidation of the failed banks into CBG, the BoG provided a litany of reasons as to why these banks may have failed: “Macroeconomic factors, poor corporate governance and risk management practices, related party transactions that were not above board, regulatory non-compliance, and poor supervision, (questionable licensing processes and weak enforcement) leading to a significant build-up of vulnerabilities in the sector”. A number of significant and controversial allegations were made in the report regarding the conduct of the banks including, among other matters, significant non-performing loan portfolios, liquidity shortfalls, rampant undercapitalization and excessive loans to shareholders. In the interests of greater transparency to its stakeholders, the BoG issued a further public report entitled “Frequently Asked Questions” to justify the nationalization of the failed banks.

It is worth reiterating that, without the pre-emptive action taken by the BoG in commissioning the 2015-2016 asset quality review, the alleged financial irregularities may not have been uncovered. However, in a statement earlier this year, Dr Ernest Addison, the governor of the BoG, acknowledged that the central bank’s reputation did not emerge from the crisis unscathed. He said: “As you will realise by now, poor banking practices, coupled with weak supervision and regulation by the Bank of Ghana has significantly undermined the stability of the banking and other non-bank financial institutions … [t]he financial sector cleanup has started but not completed.”

Remediation steps to facilitate the clean-up of the banking sector have been underway for months. A flurry of legal directives have been issued to address some of the shortcomings identified in the regulatory framework. The BoG has imposed a minimum capital requirement for local banks of GHS400 million (approximately $90 million), which is more than double the previous requirement. It has also established an Office of Ethics and Internal Investigations and a new corporate governance directive to correct the governance culture and set out the conditions to determine whether a person is fit to operate as a director or senior manager of a regulated financial institution. The scope and transparency of the Ghana Deposit Protection Corporation, which is responsible for protecting deposits on bank failure, is to be reviewed and potentially enhanced. Finally, to address the capital shortfalls, the governor of the BoG confirmed that it will implement the capital requirement directive, which will incorporate the relevant provisions of the Basel II/III international accord into Ghanaian law by 1 January 2019.

A cautious optimism is returning. The governor of the BoG recently concluded a speech to a local banking association with these words: “The current challenges in the banking sector are surmountable, and we can positively turn these into opportunities to establish a stronger and adequately well-capitalized banking sector to support economic growth”.