Financial Sector clean-up

Background

As far back as 2012, under the NDC administration, the Bank of Ghana was well aware of the mess that bedevilled savings and loans and micro finance companies in Ghana, with the likes of DKM running away with depositors’ monies. 

Then again, an assessment on asset quality review carried out by the Bank of Ghana in 2015 and 2016 revealed severe challenges with solvency, liquidity, and asset quality in Ghana’s banking industry, with some banks showing significant under provisioning and capital shortfalls. It was established that some directors of the banks took depositors monies and lent to themselves and their businesses and refused to pack. This led to liquidity challenges and the inability of these banks to pay depositors when they came asking.

A 2013 audit report on Uni Bank revealed that, in November 2013, Uni Bank bought Meridian House for $5.14 million and sold it for $6.3 million a month later (in December 2013) to StarLife Assurance through a third party. StarLife then claims that it paid $1 million to Uni Bank plus two lands valued at $5.3 million to make the $6.3 million. However, it was discovered that neither was the $1 million paid to Uni Bank nor the third party (Kwabena Bosoah), instead, it was paid to a certain Dekmak Adel Mustapha. In all these, the Finance Department of Uni Bank claims it has no knowledge of the sale of Meridian House and that Meridian House was still in their fixed assets register.

Indeed, on February 23, 2016, when then Finance Minister Hon. Seth Tekper was hauled to the floor of parliament, he told parliament that the collapse of DKM was largely due to unsustainanble products and services that were run by the company. He said, “Mr. Speaker, the company was attracting deposits from the public at rates of interest ranging between 40% per quarter and 55% for two months which were unrealistic and unsustainable”. He added that the conduct of DKMDML threatened the safety of customers deposits and had the potential of adversely affecting banks, avings and loans companies, rural banks and other microfinance institutions operating in Sunyani”.

Former President Mahama himself, at page 20 of his 2016 state of the nation address had the following to say. "Mr. Speaker, Over the past 5 years there has been a proliferation of microfinance companies. These companies come under the direct supervision of the Bank of Ghana. Unfortunately, lack of effective supervision has resulted in many cases in which micro finance companies licensed by Bank of Ghana have breached the rules and created supposed pyramid schemes that have eventually come crashing down."

"One such case is DKM. DKM, with the super high interest rates of between 50 and 55% promised, is believed to have caused a loss to its clients in excess of GH¢77 million. Many depositors have lost their livelihood. While our laws place this matter squarely in Bank of Ghana’s ambit, Government has a concern for the poor unsuspecting Ghanaian clients who deserve to have been protected by a more robust inspection and supervisory regime by the Central Bank."

"I am aware that the Bank of Ghana has commenced liquidation proceedings in respect of DKM. I believe that this process should be part of a comprehensive package that looks at protection of the livelihoods of especially small depositors without rewarding the reckless conduct of the microfinance institution, in this case DKM. The object of this would be to look at reimbursing legitimate customers their original deposit amounts, and not the Alicein-Wonderland prospects they were expecting." 

"This initiative should be conceived in the context of a broader solution that will permanently sanitise and restore credibility to the microfinance industry and strengthen Bank of Ghana’s supervision."

From the above, it was clear that the Financial Sector was in distress and needing a clean-up under the NDC to safeguard the deposits and investments of Ghanaians from the collapse of the financial sector which was glaring.

WHAT CAUSED THE DISTRESS IN THE FINANCIAL SECTOR

Dr. Mahamadu Bawumia, then as Vice Presidential candidate in 2015, in one of his lecturers, predicted some 8 banks were at the verge of collapse of measures are not taken.

The failures of the financial sector under the NDC were a direct result of a system of poor licensing and regulation, non-existent capital, weak corporate governance characterised by related-party transactions, and political influence-peddling among others. 

The NDC, instead of implementing measures that will save Millions of Ghanaians from losing their deposits and investments, were rather focused on the 2016 general elections at the detriment of the welfare of the Ghanaians who were transacting with a weak and virtually collapsed financial sector even after picking signals from the fall of DKM and subsequent assessment reports in the financial sector.

In essence, there was no political will to pursue measures that will restore sanity and confidence in the financial sector by the NDC.

REGULATORY INTERVENTION BY THE BANK OF GHANA UNDER THE NPP

In response to these lapses and risks faced by depositors and investors, the new of management of Bank of Ghana, under the NPP, moved to strengthen the financial sector in September 2017 with a new minimum capital requirement, in which universal banks were required to increase their minimum paid up capital to GHC 400 million by December 31, 2018.

By the end of the deadline, only 16 banks had met the new capital requirement, with 5 other banks securing capital injections from the Ghana Amalgamated Trust (GAT). Hence, the regulatory intervention resulted in market exits (UT Bank, Capital Bank, Beiege Bank, Premium Bank, The Royal Bank, Heritage Bank, Construction Bank and Uni Bank) and mergers (First Atlantic Merchant Bank with Energy Commercial Bank, Omni Bank with Sahel Sahara Bank, and First National Bank with GHL Bank), leading to a significant change in the banking sector of the country. 

By the end of 2019, the Bank of Ghana had revoked the licenses of 9 banks, 23 savings and loans and 386 microfinance companies. The Securities and Exchange Commission also revoked the licences of 53 fund managers for the same reasons. The clean-up also resulted in a financial industry made up of smaller number of well-capitalised banks showing an improvement of all key financial soundness indicators in terms of solvency, liquidity, efficiency and asset quality.

BENEFITS OF THE FINANCIAL SECTOR CLEAN UP

The clean-up exercise by the Bank of Ghana, and the Government’s decision to step in to provide financial support, ensured an orderly exit of the failed institutions, so that over 4.6 million depositors have access to their deposits, and 81,700 investors to their investments, and, over 10,000 jobs saved to date. 

The financial support, provided by the Akufo-Addo Government, ensured no depositor would lose a pesewa of their savings. All depositors of the banks, savings and loans, and microfinance institutions, by the end of September this year, would have received a full, 100% refund of their deposits.

Employees, whose salaries and benefits had remained unpaid by the defunct institutions, have now been paid or are being paid by the Receivers. The alternative would have been millions of depositors losing their savings and over 10,000 individuals losing their jobs.

By September 2020, about 74,000 validated customers of DKM were fully paid through government support as reported by Ghanaweb. DKM customers went ahead to thank President Akufo-Addo for that singular gesture

HOW MUCH WAS SPENT BY GOVERNEMENT TO ENSURE PEOPLE DO NOT LOSE THEIR DEPOSITS AND INVESTMENTS?

As at the end of the first quarter of 2020, a total amount of GH¢13.6 billion has been spent on the resolution of failed banks, Specialised Deposit-taking Institutions (SDIs), Micro Finance Institutions (MFIs), the establishment of the Consolidated Bank Ghana Limited (CBG), as well as the capitalisation of the Ghana Amalgamated Trust (GAT).

Additionally, with the President’s directives to pay fully all depositors whose funds were locked up with the failed SDIs and MFIs, an amount of GH¢5 billion was spent. This brings the total expenditure on financial sector interventions as at June 2020 to GH¢18.6 billion. 

Government has also committed an amount of GH¢3.1 billion towards supporting investors in failed asset management companies regulated by the Securities and Exchange Commission (SEC). This would bring the overall total Government expenditure for the failed financial institutions to GH¢21.60 billion.  

Furthermore, the nine indigenous banks, that were closed, were to a large extent taken over by other indigenous Ghanaian banks – GCB and CBG – ensuring stronger Ghanaian ownership in the banking sector. 

GAT, with 100% Government of Ghana ownership, has also successfully invested in 4 indigenous banks to help them meet the new capital requirements. 

With GAT, Government saved over 5,400 direct and 12,000 indirect jobs, and ensured that the country retained nine indigenous banks instead of only four, after the increase in the minimum capital requirement for the banking industry. The transformational plan, being executed by GAT and the investee banks, will have a significant positive impact on these banks and the economy as a whole.

CONCLUSION

It is therefore clear that the NPP inherited a weak and fragile financial services sector from the Mahama-led NDC Government. Many financial institutions had either collapsed or were on the verge of collapse. The NPP government only cleansed the financial sector, saved depositors and investors from losing their monies, restored confidence in the banking and financial sectors and strengthened the sector to cope with future shocks.

You can read more on the following links:

https://oxfordbusinessgroup.com/overview/restoring-confidence-sector-clean-led-regulators-has-resulted-smaller-more-sustainable-industry

https://kasapafmonline.com/2016/02/collapse-of-dkm-due-to-unsustainable-services-finance-minister/

https://mobile.ghanaweb.com/GhanaHomePage/business/Collapsed-Microfinace-firms-74-000-DKM-customers-fully-paid-Akufo-Addo-1057537

https://www.theghanareport.com/dkm-customers-grateful-to-akufo-addo-as-full-payment-begins/

https://www.graphic.com.gh/business/business-news/financial-sector-cleanup-is-costing-over-gh-21-billion-ofori-atta.amp.html

https://3news.com/banking-sector-cleanup-was-necessary-it-saved-deposits-of-over-4-5m-customers-ofori-atta/