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This article is not in any way to attack any particular entity but meant to critically examine the banking system in Ghana from the perspective of the lay man in a street corner somewhere.
The Bank of Ghana has over the years been seen to be laissez faire in its supervisory role thereby bringing us to where we have found ourselves now. The assumption that the monies that have been given to the bank in form of liquidity support are loans and therefore would be paid back is not sufficiently true. Some may go as bad debts hence be written off eventually. This is the situation that has precipitated my need to dare share my uneducated views on some of the challenges facing the banking sector.
Before I dare to analyze the challenges, let me first try to present simply how a bank operates.
Mr. Amoah goes to open a savings account with Bank A and makes a deposit of GH¢500 which he doesn’t need immediately so takes it there for safe- keeping, then Ms Adjoa also needs a loan of GH¢ 200 and goes to Bank A for the loan and is granted same. If Mr. Amoah wants to withdraw 100 from his account, this shouldn’t be a problem for the bank, hence no need for any liquidity support since the loan and withdrawal are still less than the amount deposited unless the bank had engaged in transactions which it shouldn’t have gone into because it didn’t have adequate funds or it was beyond their mandate.
In a situation where the bank is unable to meet its depositors’ withdrawal request for any reason, it goes out to borrow from either the money market or from another bank to meet these requests. Often times the banks may not get the required funds with the immediate available resorts and thereby go to the lender of last resort (Bank of Ghana) and then the name changes to liquidity support from a loan. Any bank that goes for such support or arrangement with BoG must strictly comply with certain directives or conditions.
So what would make a Bank resort to this arrangement whereas there are laws to ensure that it doesn’t get to that point? This is so basic that even an SHS business graduate knows that for a bank to remain relevant, it must take into consideration the ratio of loans to deposit (L/D) before making a decision to grant loans, or to ensure the benefits of any capital expenditure before incurring them. This is because in principle, the funds held at any bank do not belong to the shareholders, directors or management but the depositors, and prospective depositors. The former are simply custodians and caretakers.
There are several reasons the banks in Ghana will always resort to BOG for liquidity support thus the crisis we currently have in Ghana whereby indigenous banks are struggling to stay afloat. I will like to discuss few of these problems below.
Corporate Governance: A bank ordinarily has to be a Limited Liability Company, meaning it has shareholders and as such a separate legal entity, which means it is distinct from the owner: who is the (majority) shareholder. In Ghana however, most of the indigenous Banks are run like sole proprietorships whereby most decisions are made by the owners. From who to appoint to the Board, management and even staff to daily operational expenditure, these decisions are made by owners. Most of the CEOs of these Banks are mere rubber stamps who act on the bidding of the Owner. The owners sometimes determine how deposits are even loaned out or invested. Most often, they are invested with another company the owner owns or a new start-up of the owner. But the buck stops with the regulators and the kind of supervisory role they play as they leave them to spend customer’s deposits like their own personal pocket monies.
The Governance culture of most indigenous banks is like managing a photocopy shop where the owner, after buying A4 sheets, determines what to use the rest of the money for, either to buy and sell drinks in front of the shop or to open another shop somewhere else as he believes the daily sales is his profit. We must know that a bank is not like a small shop as the daily deposit doesn’t belong to the owners but the general public and that in making decisions, the interest of the other stakeholders should be considered, not just to further the cause of the owner or shareholder.
Non- Performing Loans: this is an area where, as a country, we have failed over the years. Loans in this country are very expensive and this is no fault of the banks as they are in to make profit, and want to position themselves in a way to remain solvent. Cost of loans is mostly due to the following factors; risk, insurance, and payment schedule. The major factor that contributes to the cost is the risk (security), which is as result of a certainty that the customer would pay back within the schedule agreed. The only assurance the banks have is the KYC information the customer gives at the application of the loan; as to whether the information given to the banks is accurate or not is another thing. This is because to verify the information is a challenge as there is no Bench mark data to even validate the information. To verify the address of the customer is a challenge, to state the least, as most people live in rented premises and can relocate any time without a trace, as there is no housing Data in this country that keeps track of those who build or rent houses. Even with names, it is very easy to change one’s name in this country as the only thing the person needs to do is to register a new Birth Certificate and Voters’ ID Card. So when the customer is defaulting, it is difficult to trace that customer. The only thing the bank can do is to give loans at high interest so as to cover up for defaulting ones.
Sometimes the interest is so much that the lender has no other option than to elope once he encounters a little challenge with payment schedule as the interest would be compounding day in day out. The cost of most loans is so high that one would wonder what kind of business the borrower would venture into to be able to pay back. NPL has become one of the major factors for the collapse of our indigenous banks and should be our concern if we want to avert these challenges permanently.
The Ghanaian Attitude: The quest to solely own something has always been a negative retrogressive attitude of Ghana that affects our being competitive to the global world and doing one thing better. If two or three Ghanaian Banks Merge and Consolidate their Capital can you imagine if any foreign bank would be able to match them? The attitude of owning and solely making all the decisions will always hinder our development. From where I sit, most Indigenous Banks lack the capacity to compete with any Nigerian Bank, because even though they have the home advantage, they are disadvantaged with regards to the resources to compete. Talk about Technology, Branding and Positioning, they come nowhere near the Nigerian Banks, but Ghanaians only marvel about the individual who owns most companies in Ghana, not the quality and the competitiveness of the companies. Same is with the Banking sector as most problems have to do with one man taking all the decisions and his plan to establish other businesses to employ more youths just to be hailed and praised.
In Ghana, since the government has been unable to solve the unemployment problem, any individual who enters into any business with an employment mindset is automatically a hero and no one questions his activities. Now with the collapsed banks, everyone is thinking about job losses, not the cost the country is incurring in trying to fix the problems that have been created or the depositor’s funds. Now, let’s look at this. Since the Bank of Ghana came in with the strict measures, a lot of other bank – affiliated companies are also downsizing their employees. So my point is, were these companies doing real employment or nominal employment? Were these companies actually profitable enough? Hmmmm I dare say that we have an actual attitudinal problem as a country which really needs to be checked.
There are other reasons for the banking crisis or no ‘challenges’ which I will go into with my subsequent write ups as I do not want to bore you with the problems but let’s try to attempt a few solutions.
Most of the solutions are in the problems themselves, but I will attempt a few solutions by making some predictions into the future and taking into consideration the past practices in banks.
BOG should enforce its regulations such that immediate family members of owners do not hold any managerial position unless they are very qualified to do so. This will remove the family and friends type of governance in the indigenous banking sector. This regulation should apply to foreign banks as most of them have their owners outside the country but sometimes appoint managers from their countries to do their bidding. Governance structures should be sanitized by ensuring strict compliance with the laws of BOG, Credit administration should be properly monitored such that owners would not just give loans to themselves to establish new unproductive companies or inject them into their personal businesses. If care is not taken, a lot of people will lose confidence in the indigenous banks as they will continue to keep their funds with foreign banks. Systems which detect internal and external fraud like what we witness are also imperative to boost confidence
BOG should also try to ensure that as the world moves into a cashless and electronic cash system fueled by cutting edge technology, it would supervise the banks in Ghana to get there. As the world moves into a global village, any country whose payment system is not very convenient, efficient, reliable, fast and secured would be left behind. To be part of this, we need a solid banking system with technology which is secured to get there, not what we are experiencing now. So in as much as BOG wants banks to meet minimum capital requirement, it should also ensure that banks have standard technology to be able to provide cashless transactions in a timely and secure manner as well as minimize both internal white – collar fraud by Directors and management..
In the past, people queued in banks to either deposit or withdraw money, but the world is now moving to the stage where people are banking from the comfort of their homes. Technology will take over banking, such that if a bank doesn’t position itself technologically, it would suffer even if it is able to meet the minimum capital by the BOG. People no longer care about the cost when it comes to getting access to their money when they need it, they will not want to join queues to take their money when they need it, or when they want to pay for something they have bought. I will give two examples to support my claim.
Sometime back, DSTV subscribers had to queue to pay their subscription fees, now the last time I paid my subscription it was through mobile money from the comfort of my home. In the past, people withdrew from one bank and paid into someone’s account at a different bank, even now it happens. But gradually, many people now sit in the comfort of their homes and transfer money into other accounts in different banks, although it doesn’t hit instantly. My point is, if the indigenous banks do not stop investing in other unproductive companies and invest instead in technology, a time will come where they will fold up.
As it stands now, MOMO has more customers than most of the Banks in Ghana; I do not share the view that it is only the unbanked population who are customers of mobile money, but now a lot of bank account holders have linked their account to their wallets and then use it for some of their transactions.
Government should try to fast – track digitization of the economy and consolidating data into one database and make it assessable to banks and other institutions so as to verify KYC information. This will at least ensure that banks would be able to recover loans from their defaulting customers. Financial tribunals should be set up so as to quickly give judgment to banks to enable them to prosecute defaulters of loans, and quash the mentality that when one defaults on loans and is sent to court, the court would just ask the defaulter how much he could afford to pay at any schedule. Even in cases that loans are secured with collateral, adjudication takes a long period to secure judgment for the bank to auction the collateral to offset the loan. It has given some customers the confidence to default on loans and get away with it, but let’s remember that it is our money that we will use to cater for the mess created by a few.
To conclude, I will say the BOG has begun to sit up and is doing the needful which is commendable. I believe BOG can reclassify Banks using other variables such as Capital, Technology and branding so that in the end, indigenous banks which are struggling to meet the minimum capital requirement to not fold up but be mentored to catch up with the changing trend of the world. I also believe that universal license should help make our banks do more to catch up with the financial world in terms of high end transactions, not the SUSU type of banking they are into, which is trivializing Banking. Banking at your doorstep is not Susu mobilization but rather convenience to saving and monetary transactions, so banks should stop competing with microfinance, savings and loans and credit unions. I do not intend to say that the indigenous banks are not doing well but there is a lot to be done by way of corporate governance, technology and branding.