How do you spot a country with a banking crisis? Panic withdrawals and customer’s inability to access savings are two engrained symptoms. But the nadir can arguably be linked to bank failures or banking activities characterized by a full-blown crisis of confidence. With the above conditions being present, crisis, in our opinion, is a perfect description of the current state of Ghana’s banking industry.

Even though a lot has been said, many of the narratives are replete with denunciations and political rhetoric to the extent that the rational Ghanaian sometimes finds it difficult to know what is true. Whiles some see this phenomenon as an innocent effort by the government to avert the disappointments of an industry beset by poor management and weak lending, others have branded it as a politically engineered tool purported to disrupt certain businesses in the country.

Amid these varying opinions, certain issues still linger and are worth discussing. What really triggered the situation? Were there other possible solutions besides Merger, Acquisition, and Consolidation (MAC)? In any case, what impacts do such policy directives have on Ghana? Not only do these questions help to open-up the assumptions of a rational Ghanaian on this issue, but they also help to determine the point of entry and the kind of discussion that was, and is supposed to be done on the ubiquitous problem that has engulfed the country in recent time.

What caused the crisis?

It is imperative to note that prior to the infamous merger and acquisition of banks, poor banking supervision, among other things, had created a culture of impunity in the financial industry. Questionable licensing processes and weak enforcement of regulations had heaped “coals of vulnerabilities” in the banking system, making it susceptible to crisis. Not so long ago, there was a microfinance canker, where institutions like Nobel Dream and DKM had set Ghanaians ‘ablaze’? In the world of honesty, such happenings can help us accept that Ghana was already experiencing banking crisis, and one of the main reasons for this predicament is the poor banking monitoring and evaluation on the part of the “chief regulator” (Bank of Ghana). Other reasons can be ascribed to liquidity risk and mismanagement on the part of bank administrators.

The recent MAC of banks itself did not trigger the crisis but was one of the immediate steps BoG had to take to curb an already existing canker. Nonetheless, MAC added to the crisis by virtue of the fact that the expeditious nature of them dampened the level of confidence Ghanaians had in the banking system. What makes it fascinating is that some of these banks (e.g. Unibank etc.) were also in the award-winning category of the annual Ghana banking awards.

Auditors 

We wish not to degenerate into blame games; however, actions of certain role players in this crisis can hardly be ignored. Bank of Ghana in its financial stability report (August 2018) indicates that three banks out of the five consolidated banks manipulated their accounting figures to increase their capital positions in order to obtain licenses to operate. This wouldn’t have been an issue, but the very fact that auditors somehow failed to uncover these creative accounting practices, gives us the recourse to question the professionalism as well as the credibility of auditors in giving independent authentication to the financial statements of banks in the country. For what it’s worth, auditors contributed to the crisis by failing to sound the “alarm of nonperformance” of the struggling banks.

What were the other possible options?

 In recent decades, banking activities in Ghana have been carried out within a remit of several vulnerabilities. It is either policymakers were intentionally oblivious of the facts or didn’t have the political will to do what was necessary. Regardless, it is an undeniable fact that something had to be done. In our opinion, MAC was the best and most appropriate option in terms of bank restructuring. By virtue of this option, the central bank has made a powerful statement. It has realized its mistakes and is beginning to position itself to bring sanity to the financial industry. That alone is a plus, and very encouraging in the context of engendering confidence in the system.

A caution with MAC!

It is good to merge outperforming banks to prevent an embarrassing collapse. It is even better when we have fewer and stronger ones that can make the business environment more competitive. But it should be noted that Merger and Acquisition can sometimes lead to insecurities, disruptions, and blunders. For proof, google the “BenQ-Siemens” merger debacle, or perhaps the infamous America Online and Time Warner merger failure. What about the acquisition of Palm by HP (Hewlett-Packard)?

Indeed, we cannot equate the recent merger and acquisition in Ghana to the aforementioned. But with these vignettes, we can attest to the fact that MAC does not automatically solve the existing crisis. In our opinion, without constant and proper supervision, the canker will reemerge, and continue to linger like “a shadow beside an object”.

Socioeconomic Impact on the Ghanaian Economy

 Several implications can be identified but the obvious and most paramount and visible ones are:

On financial and banking sector, the crisis presents a myriad of systematic and unsystematic risks on Ghana’s economy via the liquidity risk window. For instance, UniBank’s debt to local and foreign lenders alone as of March 2018 was about 208% of its assets. In effect, about 4.1billion of deposits from individuals, SMEs, SOEs, and NBFI (non-banking financial institutions e.g. pension funds) are at risk.

On employment, Capital and UT bank alone account for about 1700 job losses adding to the soaring unemployment situation in the country. This number is expected to escalate when the other five consolidate banks are considered.

On liquidity and SMEs operation, the crisis highlights a collection of mixed impacts. On one hand, MAC banks would become larger banks with an enormous capital base to finance huge private and government projects, avoiding situations where money has to be raised in the foreign money market with exchange rates challenges. On the other hand, the impact of the crisis would be experienced in terms of SMEs finding it difficult to access credit from the bigger banks. The worry stems from the fact that about 70% of Ghana’s GDP comes from SMEs and account for roughly 92% of the businesses in the country. Think of how negatively it will affect the economy if these small enterprises faced out from the system. 

In summary

A content analysis of Bank of Ghana’s report highlights several financial malpractices by MAC banks. Some of them had operated with licenses gotten by “false pretenses via suspicious and non-existing capital”. Some also had serious problems such as capital adequacy ratio falling below the minimum required 10%. Insolvency and a deficit of the minimum capital requirement were also some of the highlighted problems of these banks. With these revealing conditions, a restructuring of the banking sector through merger, acquisition, and consolidation seems appropriate in financial sector management.

But we merely cannot be praising the “derring-do” of the constituents of the central bank for the bank restructuring, after all, that is its role. For what it’s worth, the reasons for the restructuring interestingly reveals poor banking supervision by the “chief regulator” over the years. As already stated, the banking industry was experiencing a crisis before the restructuring; so to think that MAC without appropriate monitoring and evaluation will automatically solve the crisis is tantamount to us wishing that “pigs can fly”. It suffices to say that such predicaments are not far from the future.

The influence of this crisis is huge as one begins to imagine the economic impact on the financial and banking sector; on liquidity and SMEs operation, and even on unemployment. In such a context, there is a humiliation of honesty and exaltation of culpability. Whichever way, blameworthiness in this setting shouldn’t be one-sided. Whiles the central bank is now “biting” and cleaning the banking industry, it is only fair and appropriate for Ghanaians to expect them to return the favor by being highly responsible in performing their supervisory role.

In the wake of the ongoing banking sector reforms, we recommend the following: First, we recommend BoG in the coming years to establish a credit rating system for the banks after receiving and analyzing their financial reports and further timely publish the capital adequacy (countercyclical buffer) and other critical information, which would make the ‘disclosure rule’ role work for the money market participants as recommended for by Bank for International Settlements (BIS). Second, BoG should strengthen and ensure timely implementation of all monitoring and evaluation reports including enforcing legal actions where required such as quick revocation of the license of operation acquired under false pretense. Finally, the government and BoG ought to empower the non-banking institutions, like the credit unions, rural banks, and micro-finance bodies to grant credit to the SMEs, because the operation of the few banks would now concentrate on financing the bigger projects in the economy at the disadvantage of SMEs which is the backbone of the economy with 70% of GDP.

Xiada Ghanaian Research Group (XGRG) comprises Ghanaian PhD students in Xiamen University.

xiadaghanaianresearchgroup@gmail.com 
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