Why five banks failed in Ghana

Seven banks have collapsed in less than two years in Ghana, as poor management and lack of adherence to standard banking principles have led to insolvency of a few and obtainance of banking licence under false pretence has led to the revocation of the licences of others.

A Banking Act introduced in 2004 had mandated banks to maintain a minimum capital adequacy ratio of ten percent, to ensure they are strong enough to operate in the competitive sector. Minimum capital requirement was increased to GHS 60 million in 2007 and GHS 100 million in 2013. Since then, some banks have struggled.

To strengthen the financial system and protect depositors, the Bank of Ghana conducted an Asset Quality Review (AQR) of banks in 2015 and updated same in 2016. The review showed that a few indigenous banks were vulnerable with inadequate capital, high levels of non performing loans, and weak corporate governance. Two of such (UT Bank and Capital Bank) were closed in 2017, with some of their assets and liabilities acquired by GCB Bank under a Purchase and Assumption Agreement. Other newer banks were also said to be showing signs of distress, with efforts to extricate themselves from financial difficulty proving abortive.

The 2016 AQR update revealed that uniBank and Royal Bank were significantly undercapitalized. Following the report, the two banks submitted capital restoration plans to the Bank of Ghana, but they were not good enough to return the banks to solvency. The two banks and three others — Beige Bank Limited, Sovereign Bank Limited, and Construction Bank Limited — have now had their licences revoked.

BoG to the Rescue

With legacy problems including macroeconomic factors, poor corporate governance and
risk management practices, regulatory non-compliance, and poor supervision plaguing the Ghanaian banking sector, the central bank has been working hard to keep the sector strong.

“Ghana needs a strong and stable banking sector to drive the process of economic
transformation,” a statement by the Bank of Ghana said. “A weak banking sector means that access to credit will be limited while lending rates will continue to be high.”

With the two banks that failed last year already acquired by one of Ghana’s top banks GCB, the central bank established a new lender from the merger of uniBank Ghana Limited, The Royal Bank Limited, Beige Bank Limited, Sovereign Bank Limited, and Construction Bank Limited. Deposits of the five banks have been transferred to the new lender Consolidated Bank, with a promise to customers that it will be better managed to become a strong indigenous bank to support Ghana’s economic transformation.

Why they failed

The central bank had in March appointed KPMG as official administrator to save uniBank. However, the audit firm’s reports confirmed, based on a detailed review and validation of the financial
condition of uniBank, that the bank was already insolvent at the time of their appointment and it was too late to save the bank whose operations were deemed unsustainable.

Altogether, shareholders, related and connected parties of uniBank had taken out an amount of GH¢5.3 billion from the bank, GH¢3.7 billion of which were neither granted through the normal credit delivery process nor reported as part of the bank’s loan portfolio and another GH¢1.6 billion granted as loans and advances without due process. The GH¢5.3 billion ($1.1 billion) taken out illegally constitutes 75 percent of the bank’s total assets.

Ghanaian economist Prof. John Gatsi had in March predicted the collapse of uniBank alluding to the huge debt owed the bank by the government. As at May 31, 2018, the Ghanaian government and its agencies reportedly owed uniBank about GH¢869 million ($182 million).

The central bank cited poor corporate governance, high non-performing loans and obtainance of banking licences under false pretences for the failure of the other four banks.

BoG in error

Prof. Gatsi, who is also a senior lecturer at the University of Cape Coast said the central bank was wrong to save the failed banks in the manner they did.

“It is wrong for the government to create a new bank without approval from Parliament. There is a problem with the consolidation because the right processes were not done,” Gatsi said on Ghanaian radio Starr FM.

While the Bank of Ghana is tasked with regulating the banking sector, Gatsi believes when it starts getting too involved in Commercial Banking activities, it becomes a problem.

He referred to a letter sent to the Ghanaian Finance Ministry by KPMG in June, requesting the government to pay what it owed uniBank to avoid its collapse.

“Did the BoG accept the report from KPMG? If they did, where is the report? The people of Ghana are interested in the report,” Prof. Gatsi said.

“We are eroding the indigenous banks in the sector. It is time for the BoG to show that can salvage these banks. It has been done in other countries and we can do it too.”

Post-consolidation

The BoG is within its right to take every necessary step to secure depositors’ funds. If the central bank were to await parliamentary approval to start Consolidated Bank, it would have failed depositors whose funds are hanging in doomed banks.

Now that it has kept depositors’ funds safe and ensured they can continue enjoying banking services, the central bank will turn its attention to holding all parties whose actions contributed to the failure of the five banks accountable “through administrative, civil, and criminal actions as appropriate”.

The bank also said it will provide financial support to other indigenous banks as needed, to help them meet the minimum capital requirement of GH¢400 million by 31st December 2018.

“The Government has indicated that such support will be limited to indigenous banks that are solvent, well governed and managed, in full compliance with the Bank of Ghana’s regulatory requirements, and able to demonstrate that they have been unable to access private sector solutions for recapitalization due to market conditions.

“Additionally, the Government has committed to further explore policy interventions needed to make the entire financial system more robust, for the benefit of the Ghanaian economy,” the Bank of Ghana stated.