The law perverted! And the police powers of the state perverted along with it! …The law […] became the weapon of every kind of greed [,] and [i]nstead of checking crime, the law itself became guilty of the evils it is supposed to punish […]! – Frédéric Bastiat, 1801 – 1850 (French economist, statesman, and author), in ‘The Law’.
In what appeared to be a surprise move by the ‘chief regulator’ of Ghana’s banking industry – Bank of Ghana, it in one fell swoop on August 1, 2018, revoked the universal banking licenses of five privately owned domestic banks, and issued a license to a newly created entity – Consolidated Bank Ghana (CBG) Limited, to be wholly owned by the government of Ghana. This comes on the heels of two other banks (Capital and UT) being taken over by another state owned bank – GCB Bank, under directives of the regulator in August, 2017.
These events have in their wake generated debates around the health of the financial sector of Ghana and its ability to support general economic activity, at the expense of addressing the main elephant in the room – role of the regulator prior to the collapse of these banks.
Indeed the Central Bank acknowledges in its press release which revoked the licenses of the five indigenous banks that among other things ‘…poor supervision (questionable licensing processes and weak enforcement [of regulations])…’ lead to the build-up of vulnerabilities in the financial industry. And that is the elephant in the room!
Somehow, the talk of this town – Ghana has shifted to those who breached the law, and not the custodian of the law; at least not as expected. It is dangerous to allow the Central Bank attempt to clean its own ‘mess’, as the ensuing events appear to suggest. At the barest minimum, the public whose trust was broken by the Central Bank in the performance of its supervisory duties, and whose nearly GH¢10 billion will be used to salvage the mess, deserve every detail of the regulatory lapse, culpable persons, and accountability of the Central Bank to a body, outside of it.
All the reports prepared by the Bank of Ghana and its affiliated institutions which form the basis of the current ‘whip being cracked’, fall directly within the scope of the work of the regulator. The Asset Quality Review which was conducted according to the regulator in 2015 and further updated in 2016 typifies this. Should the regulator be commended for doing its job? Not quite; one could argue.
Role of the Central Bank in Ghana’s banking industry
The role of the Bank of Ghana is varied at least within the context of the management of the Ghanaian economy; price stability subject to growth and job creation, supporting government economic management policies and regulating, supervising the financial industry. Indeed the third responsibility outlined is further developed into a litany of activities in ACT 930 – Banks and Specialised Deposit Taking Institutions ACT, 2016. Section 3 of ACT 930 outlines the role of the Bank of Ghana in the business of financial intermediation in the economy, which must be read together with provisions made in ACT 612 with its amendment ACT 918 and the Companies Code ACT 179. It thus appears that the Bank of Ghana is truly empowered by law to protect not only the financial industry, but to do so proactively to avert the possible costs of remedial actions. ‘…The Bank of Ghana shall have the overall supervisory and regulatory authority in all matters relating to deposit-taking business.
To achieve this, subsection (2) of section 3 of ACT 930 provides the minimum set of activities to be conducted by the Bank of Ghana; including ensuring the soundness and stability of the financial system and the protection of depositor in the country through the regulation and supervision of financial institutions, dealing with unlawful or improper practices of banks and specialised deposit taking institutions, develop appropriate consumer protection measures to ensure that the interests of clients of the banks and specialised deposit taking institutions are adequately protected, whiles considering and proposing reforms of enactments relating to deposit taking business.
In any sound jurisdiction, the regulator should be reading the proactive constructs of the provisions made in the law to guide its activities. So that at no point should consumers of banking services have to be paying for the consequences of the regulator not comprehensively heeding to the proactive provisions of the law. More crucially, what are the punitive measures outlined in the law for wilful negligence, collusion, or simple oversight by the regulator in a case where the protection isn’t provided? Put in simple terms, the whole country will run amok should the Food and Drugs Authority fail in its supervision of the drug manufacturing industry, and the ensuing effect is the outbreak of a health epidemic.
The business of banking is undertaken in a very dynamic environment with varied private actors – who have demonstrated time and again across the world that, in the absence of credible regulatory systems, their perverse actions could collapse economies. The global economy is still reeling from the nemesis of the 2008 financial crises. The Bank of Ghana indeed could be caught up in this maze, which the law credibly indicates that, ‘…the supervisory functions of the Bank of Ghana can be carried out by any supervisory structures established by the Bank, or even appoint any other person or entity which it considers appropriate to assist it in discharging its responsibilities…’
Indeed, there couldn’t be any profound support provided by Ghanaians and capacity to the regulator to protect them from ‘unsavory’ behaviours of a few. Ghanaians failed to provide penal actions or sanctions should the regulator as an institution fail to protect them in accordance to the powers so granted, and that is a major flaw in the system. In other words, the periodic accountability on this particular function to Ghanaians is almost silent. This is unacceptable, because its implications under a defective, unaccountable political system is dangerous.
The failed banks consistently submitted returns to the regulator, the regulator consistently conducted onsite audits and supervision activities, and it has further consulted other institutions to assist in assessing the health of the industry. At what point did schedule officers of the regulator discover these anomalies, if they ever did? Whichever way, culpability cannot be only at the doorstep of the private bankers, and their managers who have been cited in this scandal. Just as the regulator is sharing the details of the reports on the private banks, and driving them towards good reform, the regulator owes Ghanaians a high sense of accountability on disclosure of the breaches of its own internal supervisory systems, beyond generic claims of ‘lapses in enforcement’. This is even crucial given that taxpayers now have to sink in money to protect depositors, effectively robbing them twice. The least the regulator can do, will be to NOT control the narrative, but publish the lapses in its own systems, to ensure the public can hold it accountable to forestall future breaches of such systems.
Breach of licensing procedures
Some of the banks which have been consolidated were deemed to have obtained licenses ‘by false pretences through the use of suspicious and non-existent capital…’ This would not have been an issue worth noting but for the fact that, there were three different banks; Sovereign, Construction and Beige, at different dates in the two years which obtained banking licenses. A cursory look at section 44 of ACT 930, and one can see the rather detailed requirements for registering a ‘financial holding’ company; which includes a bank.
Among other things to be provided includes; capital resource and original capital structure, certified detailed locations and financial position of all affiliated persons who will likely benefit from significant shareholding for a minimum of 10 years, group structure, directors and key management, feasibility report including a financial plan or projection for the first five years of operations, measures and structures the company intends to ensure that business is conducted with sound corporate governance principles, and as contained in clause (ix) of subsection 2 of section 44, any other particulars that the Bank of Ghana may require. These are the minimum requirements. This clearly indicates that the framers of the law were cognisant of the possible breaches by individuals and given the body politic of ours, accorded the regulator the single mandate of preventing fraudulent licenses from being obtained, not for its own sake, but to ensure protection of consumers of financial services. What did the law do? It did not create punitive measures for failure to strictly and diligently adhere to these by the Bank of Ghana, at least within a transparent manner.
Indeed subsection 4 of section 44, is explicit on why the Bank of Ghana shall not register an applicant as a financial holding company, which simply reverses and further re-iterates the conditions described above. This must show the significance of pre-licensing assessments which the Bank of Ghana cannot take lightly. But the post facts indicate the regulator might have been negligent in the performance of this responsibility. But wait, maybe the law itself is to blame. Why? Subsection 5 of section 44 of ACT 930 indicates that ‘the bank of Ghana may impose conditions in respect of the registration of a financial holding company [under this section], and may vary REMOVE or add further conditions that the Bank of Ghana considers necessary to carry out the purposes of this ACT …”
This only begs the question; did the regulator REMOVE any of the conditions specified in subsection 4? What were the justifications, if it did? And who is accountable for this? The blank ‘…we are cleaning up our house…’ frankly does not hold. Why did the framers of the law insert this clause, which the evidence currently appears to suggest has been abused without any accountable mechanisms for control, other than citizens being taxed to pay for such misconduct permissible by the law? You don’t have to be a genius to observe that the cyclical political climate and the seeming dependence of the Bank of Ghana on the executive and by extension the political elite, will be disastrous for the financial industry and depositors by the simple inclusion of this ‘ridiculous clause’ without any accountability mechanisms.
Anyhow one looks at this, the ordinary depositor who also happens to be a taxpayer gets screwed in both responsibilities, right from the construct of the law, and definitely need an awakening.
Impact on the economy
It is almost a cliché these days to assess the impact of such developments on the health of the economy. The exact impact cannot be assessed in this brief time, but possible implications can be identified.
It is ridiculous for the regulator to indicate to players in the economy that, full disclosure of reports in this scandal cannot be made public because it will undermine trust. Trust is already lost and panic withdrawals have ensued whether the regulator admits it or otherwise. The only stopper in that development in the short term is that, depositors do not have alternatives as the market is shallow, so the withdrawals will circle back into the banks. This will not be without costs.
It is even more ridiculous when the regulator indicates that depositors will not lose money, and it intends to issue nearly GH¢10billion to capitalise the operations of the new Consolidated Bank and close the gap in the value of the two banks taken over by GCB Bank in 2017. Why? The bonds will come at coupons, and even though the regulator provides an indication of some reversal in the future, anyone who has paid attention to debates around Tema Oil Company’s debt recovery levy, and the infamous fiscal stabilisation levy, would cringe at this provision made by the regulator.
The implications for employees, suppliers, management, and the economy at large are countless. At a time when the regulator had timelines of recapitalisation breathing down the necks of the domestic banks, these developments have dire implications for any investor looking to invest in the financial industry and the economy at large. It is even more dangerous when the lack of proper supervision has resulted in non-performing loans which have gone through the roof, of any sound financial industry.
There will be direct job losses for bank staff. It will simply be bad strategy to keep the consolidated bank running branches that are within ‘fifty feet’ of each other, whiles thinking of cutting costs to bring the business back afloat. Employees should brace themselves up. It is public knowledge that some employees of erstwhile employees of UT Bank are yet to receive any compensation and severance for their job losses. So the worst is yet to come, unless the newly Consolidated Bank intends to pour more water into a leaking basket, there must be some job losses. Cost of compensation, definitely is going to be a drain on the coffers of the taxpayer given the bank is currently owned by government. There you go, the taxpayer getting ‘robbed’ multiple times!
‘…not closing the stable door after the horse has bolted…’ indeed is a profound adage, which the financial sector regulation laws recognise, but its enforcer the Bank of Ghana flippantly disregards without consequences, and this could only mean that, such disasters are far off from our future, as our past experiences also indicate that, cautions about the behaviour of the Bank of Ghana in its supervisory duties has been ‘mediocre’ to say the least.
We simply cannot be praising the ‘heroics’ of the current governor of the Bank of Ghana. Such praises only detract from the real issues requiring redress and improving governance of that particular institution. To the extent that another government can influence the governance of Bank of Ghana by replacing its leadership, we can only depend on the law to protect the citizens. Parts of the law require redress, and Bank of Ghana needs to be more transparent, accountable, and its supervision officers punished for such failure which has dire consequences for the economy going forward.
By Patrick Kwabena Stephenson,
on Special Assignment for Ghana Business News