How is the un-banked in Ghana being impacted by the financial sector mishaps?

The sudden news of the Purchase and Assumption of the insolvent Capital and UT Banks by the GCB Bank was as shocking as it was devastating to many people who thought it was just a prank being pulled on them on a fresh Monday morning until they heard officials of the Bank of Ghana giving the Central Banks blessing to what seemed like a hostile takeover or a palace coup. The workers of the two Banks and their customers went to bed the previous day as stakeholders of a particular entity, only to wake up to the shocking news of a transferred interest and a forced allegiance to another entity which they had no prior engagement.

This kind of situation, to say the least, would throw anybody into a state of confusion and totally out of touch with reality. Especially, for those workers who have given their entire life to the service of the two Banks and their entire livelihood depend on their continuous employment at the bank; and for those clients who have their entire life savings invested in these banks.

It must also be noted that, despite the suddenness of the information of the public notice of the takeover of the banks, some industry watchers were not too surprised with the development as it unfolded on the morning of Monday, the 14th of August 2017 because they saw the signs on the wall as far back as three to five years ago.

Warning signs of the insolvent banks

It has been variously reported that a former CEO of one of the banks issued a warning as far back as 2014 that the bank was sitting on a time bomb due to the precarious conditions in terms of the health of the bank to continue operating at the time. However, very little attention was given to that leaked internal warning memo by the relevant supervisory bodies along the chain of command until the unexpected happened.

There is now a bigger situation on hand to be dealt with in order not to create false alarm or to give a negative signal to be people not to keep their resources away from the banking system which has given the citizenry more than enough reason to do so in the wake of the many scandals that have been witnessed in the financial sector in these few months.

The Myriad of scandals

Continuously for the past three years or so, hardly is there a full closure to some of the mishaps in the financial sector before another scandal rears its ugly head, further sinking consumer confidence in the sector. Some of the famous cases include fraud cases involving microfinance companies such as DKM, investment scams such as US Tilapia group saga, and a most recent one involving the purchasing of gold and now, the insolvency of two fully fledged award winning indigenous banks.

All these developments are things that ought not to be taken for granted by the powers that be because these things are becoming once too many in a country that is considered to have a very large un-banked population as compared to its peers with similar size of economy and population. It should be noted that it is no longer going to be business as usual and therefore the rhetoric should move beyond the razzmatazz of superior managerial competences and get to work to win the confidence of the people in the wake of these undesirable happenings in the financial sector.

DKM and other microfinance scandals

Back in May 2015, a number of financial institutions and fun clubs including DKM Microfinance, God Is Love Fun Club, Care for Humanity and a host of others, were slapped with a 90-day suspension by the central bank for violating sections of the Banking Act.

The Bank of Ghana was criticized heavily at the time because it was deemed to have been acting only after the incident had already happened. “DKM Diamond Microfinance Company ltd had been misreporting to the Bank of Ghana and had not been keeping accurate and reliable records of all transactions in its books, thereby violating section 53 and section 71 of Acts 673 as amended. DKM Diamond Microfinance Company ltd was overexposed to its affiliates in violation of sections 41 (1) and (2) of Act 673 as amended.”

Apart from DKM, several other microfinance firms in the Brong Ahafo Region were caught in the same debacle. Since that time some 70 microfinance firms have been closed down by the Central Bank.

US Tilapia investment saga  

Before the Microfinance issue, there was another scandal that involved a Tilapia rearing company known as US Tilapia who collected people’s money and promised to give them unrealistic interest on their investments. The issue ended up at the court where the US Tilapia investment company and its owner, Mr Godfred Chief Medicine, were sued for failing to pay back their capital and the promised interest.

He set up offices across the country, asking people to invest money in a tilapia business and pledged to offer 100 per cent interest plus their capital within three months. After several months of his (Medicines) disappearance, some of the victims filed a civil suit against him and the company at the court.

A lot of these investors including other investors in the aforementioned issues have needlessly lost their investment in similar fashion because of the dearth of supervision and regulation in the country. Even though it may seem that the Central Bank did not have direct supervisory role in the issue involving the US Tilapia group, if it had taken the action similar to what it did in the recent case involving gold, perhaps it would have protected the people from investing their money unwisely.

Evaluation of the role of the BoG

These also brings into focus how much of the blame should be laid at the door step of the regulator of the financial sector in the country. While some financial analysts have lauded the posture of the Central bank over the years, others have been critical of its lackadaisical approach in the exercise of its monitoring and oversight responsibilities.

Those who have lauded the Bank of Ghana have argued among others that, the Bank has not been too robust in its regulatory role because of the sensitive nature of the financial sector, and therefore any unguarded move that suggest instability in the sector could signal panic reactions from the people that would further damage the fortunes of the sector.

On the other hand, the concern has been that, the slow approach and sometimes the “wait and see” attitude that seems to have been adopted by the regulator has further gone on to deepen a lot of wrong doing in the sector until the whole situation gets out of hand.

The unbanked population statistics

Estimates by GIZ and the World Bank suggest that some 70% of the population does not have a bank account. According to the World Bank, only 7.77million, representing 30 percent of Ghana’s population have an account, or multiple accounts with banks in the country. This is high even by West African standards. It says for example that, in Nigeria the figure is about 46%. All the same, Ghana has significant financial services infrastructure in place for reaching these people but recent happenings in the sector has been posing a threat to the sustainability of people’s interest along this line. While results have so far been viewed with mixed feelings, the country does have the means to raise the number of banked citizens

Already, the general feeling among small business owners and market traders when they were engaged in an interaction revealed that most people shun banks due to a number of reasons which include lack of trust, difficulty in accessing funds, cumbersome procedures in opening accounts, and high interest charges on loans.

Much of Ghana’s population remains unbanked due to many other reasons which require some level of tact and some sense of urgency to immediately find answers to. Previous asset freezes, limited infrastructure, regional income disparities, a large informal sector and a worrying poverty rate have all combined to limit the ability of the broader population to access financial services.

Trying For Decades

Attempts to reach the unbanked go all the way back to independence. Many of the state-owned banks created thereafter were formed so that credit would be distributed more easily, especially to businesses that had difficulty getting access in the past. In part, this was predicated on the assumption that credit would alleviate poverty. Commercial banks were required to make 50% of their loans to the agricultural sector and the postal service offered microsavings products.

According to the World Bank, however, these programmes were unsuccessful. Lending was limited partly because of lenders’ requirement of collateral, and most of the loans ultimately went to cocoa farmers. The rural branches, meanwhile, were largely used to collect deposits, which were then funnelled to lend to urban customers.

To alleviate the credit gap, more formal institutions were set up. The first rural and community bank (RCB) was established in 1976 in Nyakrom, with its capital coming from the local community. Another RCB was set up in Biriwa the following year. By 1984, the country had 106 rural banks.

In 1985 the Bank of Ghana (BoG) published a code for these institutions. A minimum capital requirement was set and a shareholding structure mandated – shareholders could hold 67% of the equity and the rest would be owned by the central bank. Importantly, individual shareholdings were limited, to allow for wide participation and prevent any group from dominating. The RCBs got into trouble in the 1980s, with the non-performing loan (NPL) ratio hitting 80% by 1986. The problems, according to the World Bank, were the result of inexperience, lack of supervision and the agricultural loan quotas that the central bank placed on these institutions.

Reforms followed one after another. A recapitalisation fund was established, capacity building was implemented and limits on individual shareholdings were adjusted from a fixed cedi amount to a percentage. Policy lending was curtailed or eliminated, agricultural lending was reduced from 50% to 20%, and concessional interest rates for priority sectors were ended altogether. In 2002 the ARB Apex Bank was formed to act under the BoG’s authority as a sort of sub-central bank for RCBs. Minimum capital requirements and capital ratios were also increased. At present the country has 140 RCBs.

Source: Clement Akoloh || Businessweek

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