Implement Stringent Measures To Prevent Collapse Of Banks 

NEWS COMMENTARY ON THE COLLAPSE OF BANKS

In January 2000, two state banks; Cooperative Bank and Bank for Housing and Construction collapsed in what was dubbed A-Life scandal. 17 years after the A-Life scandal, in August 2017, two indigenous banks; Capital Bank and UT Bank ceased to exist as GCB bank took over the two banks through a purchase and assumption agreement. 18 years after the demise of Cooperative Bank and Bank for Housing and Construction, 5 local banks; the Royal Bank, Unibank, Sovereign Bank, Construction Bank and the Beige Bank collapsed in August 2018. Some interesting observations about the situation are: Firstly, 9 local banks have collapsed since 2000 basically as a result of the same reasons which means we have not as a nation learnt any lesson hence the repetition of the crisis. Secondly, in all cases perpetrators go unpunished. Thirdly, when banks experience crisis, their competitors poach their stranded customers. Furthermore taxpayers suffer when a bank collapses. Lastly, in all cases of bank collapse, the heat is felt by innocent poor staff of those banks but those who caused the mess are left to go without punishment. Redundancy, financial distress on families, credibility issues on former staff are some of the challenges that come up when a bank collapses.

Several factors account for collapse of banks in Ghana. Firstly, there is a sudden obsession for the establishment of banks such that every non-financial institution wants to metamorphose into a bank although they do not have the technical know-how, experience, capacity, human resource and the technology to operate efficiently. Even successful savings and loans companies; microfinance institutions have mostly left their traditional businesses where they commanded significant market share to only cease to function barely a year after the metamorphosis. Secondly, most banks give unrealistic and unreasonable targets to their staff. Staff of banks in their quest to meet some of these unreasonable targets end up overlooking ethical issues and grant loans to undeserving clients which eventually become non-performing loans. Thirdly, most banks are controlled by few individuals who do not listen to advice from board members, auditors and risk management experts. Contributions of customers to collapse of banks in Ghana cannot be overemphasized. While some visit new banks purposely to dupe them and run them down, others window dress accounts to create certain impression to secure bigger facilities and then run away. They divert funds from previous bank to new bank to lure them. Some banks swallow the bait and without associated risk analysis recommends bigger loans which eventually run down the banks. Some staff are given unrealistic targets in what is termed a  ‘buyers’ market’ where customers expect impossible interest rates, threat to close down account etc which may bring the bank down as mostly due diligence are not done. Some customers also use the same collateral or documents to apply for loans and refuse to honour their obligation, leaving high non-performing loans.

The question is can we blame the customers if banks are simply refusing to apply the 5 Cs of bank credit: character, capacity, condition, capital and collateral. In the case of character, lenders need to ensure that borrowers and guarantors are honest and have integrity. Capacity connotes that lenders need to know whether borrowers have the necessary cash flow to ensure repayment or not.  Capital, the third C demands that lenders know the net worth of borrowers. Collateral has to do with the ability of banks to have assets of borrowers, take ownership of and use them to repay debt if borrowers are unable to make the loan payment as agreed. With conditions, lenders need to assess outside circumstances that may affect borrowers’ financial situation and ability to repay.  The question analysts are lamenting is, were all the 5 Cs adequately utilized by those collapsed banks? We have credit reference bureau in Ghana which was introduced in 2010. Credit reference bureau improves access to credit and reduces risk. A credit reference bureau gathers data on borrowing and repayment information from various sources including creditors, banks, hired debt collectors, utility providers etc. There are about 3 credit reference bureaus in Ghana. Did those collapsed banks make use of the credit reference bureau? Before the introduction of credit reference bureau in 2010, 2 banks collapsed but 7 banks have collapsed after the introduction of credit reference bureau which is supposed to help banks reduce credit risk. It is important for stakeholders in the banking industry to learn from the collapse of the banks and implement measures to forestall recurrence of the crisis.

BY: YAW OHEMENG KYEI, A FINANCIAL ANALYST AND MEMBER OF INSTITUTE OF FINANCIAL AND ECONOMIC JOURNALISTS.