Protecting the banking sector against crisis

NEWS COMMENTARY ON THE NEED TO PROTECT THE BANKING SECTOR TO SAVE THE ECONOMY

The Bank of Ghana (BoG) has the overall supervisory and regulatory authority in all matters relating to deposit-taking and lending business as enshrined in the 1992 Constitution. The BoG increased the minimum capital requirement for banks to GH¢400 million, based on an analysis of the inherent vulnerabilities within the banking system. Banks have the responsibility to ensure prudent management of funds, and engage in practices and behaviours that make them safe and sound to attract and retain the trust and confidence of the public. The BoG recently revealed that the banking sector is afflicted with solvency challenges, poor corporate governance practices, weak risk management practices, liquidity challenges and regulatory breaches.

In August 2017, the BoG closed two banks; UT Bank and Capital Bank and appointed KPMG as official administrator of UniBank to help protect the interests of depositors and avoid the possible collapse of the bank. To save five struggling banks; Sovereign Bank, Royal Bank, Beige Bank, Construction Bank and UniBank and maintain confidence in the financial system, the BoG created the Consolidated Bank Ghana Limited to take over. The Consolidated Bank has been capitalised with GH¢450 million. During the Asset Quality Review update in 2016, UniBank and Royal Bank were identified as being undercapitalised. The two banks subsequently submitted capital restoration plans to the Bank of Ghana.

These plans, however, yielded no success in returning the banks to solvency. In the case of Royal Bank, an on-site examination conducted by the Bank of Ghana revealed that its non-performing loans constitute 78.9 percent of total loans granted. The bank overstated its capital position for the purpose of complying with the capital adequacy requirement. In the case of Sovereign Bank, it emerged that its licence was obtained by false pretences through the use of suspicious and non-existent capital. Beige Bank and Construction Bank were each granted provisional licences in 2016 and launched in 2017. Subsequent investigations revealed that, similar to the  Sovereign Bank, Construction Bank also acquired banking licences under false pretences. It is clear from the above that negligence on the part of some leaders of the merged banks led to the current state.

There have been various violation of the banking laws as well as other legal provisions and some of which border on criminality.  We cannot exclude the BoG from this failure. The BoG must carry out due diligence before granting licences. Also, the BoG must not renege on its duties to ensure banks in the country regularly submit reports and annual financial statements for scrutiny. The inadequate supervisory role at the Bank of Ghana, government’s indebtedness and customers unpaid loans to some of the banks contributed as well. The Central Government and the District Assemblies must resist the temptation to award contracts, when funds are not available to pay. The steps taken by the BoG to salvage these struggling banks are commendable. The regulator followed laid-down regulations to ensure customers of the banks do not lose their money. As a further step, the BoG must operationalise the deposit protection scheme established under the Ghana Deposit Protection Act, 2016, Act 931 and address specific risks from high non-performing loans, poor corporate governance and bad risk management systems. The BoG must continue to roll-out the Basel ‘TWO’ and ‘THREE’ supervisory agenda, ensure that banks implement these International Financial Reporting Standards, strengthen the capacity and resource of the Banking Supervision Department to improve upon supervisory procedures.

Also, the BoG’s banking supervision unit must take preventive measures in order to avoid crisis in the financial sector by predicting in advance any major change in factors that may weaken any specific unit that may affect the entire sector. There is the need for the regulator to set comprehensive indicators to monitor the activities of banks in the country and supervise banks on regular basis to ensure that they comply with regulatory requirements in the banking sector.

BY ERIC AKOBENG,  AN ECONOMIST.