Fit and proper test beyond the financial meltdown

The financial sector cleanup which started in 2015 and has continued till date has already cost the Ghanaian tax payer some very huge sums of cash in excess of GHS21 billion even though the process is not fully completed. This financial meltdown will go down in history as one that did not just cost the tax payer money but also led to unprecedented job losses, collapse of businesses, and locked up funds of individuals and private sector enterprises. Some schools of thought believe that this historic financial sector meltdown was purely due to the following;

• Negligence and lack of competence on the part of directors, executives and supervisors at the Bank of Ghana (the regulator) especially in the Banking Supervision Division;
• The compromises on the part of External Auditors in relaxing and neglecting their fiduciary responsibility;
• The neglect and compromises of directors of the all the collapsed banks, Micro-Finance Institutions, Savings and Loans companies and other specialized Finance Houses;
• The failure of the three main lines of defence in any financial institution in executing their fiduciary responsibility as mandated by corporate governance practices i.e., The Internal audit/control function, The Enterprise Risk/Credit management function and The Compliance function.

First line of defence: Under the first line of defence, operational management has ownership, responsibility and accountability for directly assessing, controlling and mitigating risks.

Second line of defence: The second line of defence consists of activities covered by several components of internal governance (compliance, risk management, quality, IT and other control departments). This line of defence monitors and facilitates the implementation of effective risk management practices by operational management and assists the risk owners in reporting adequate risk related information up and down the organization.

Third line of defence: Internal audit forms the organization’s third line of defence. An independent internal audit function will, through a risk-based approach to its work, provide assurance to the organization’s board of directors and senior management. This assurance will cover how effectively the organization assesses and manages its risks and will include assurance on the effectiveness of the first and second lines of defence. It encompasses all elements of an institution’s risk management framework (from risk identification, risk assessment and response, to communication of risk related information) and all categories of organizational objectives: strategic, ethical, operational, reporting and compliance.

I think it is important that after this financial sector clear up the Bank of Ghana should collaborate with all the other relevant regulatory bodies to subject all the remaining financial institutions to the Fit and Proper test, the reason being that that is the best way to build and restore the confidence in the financial system in Ghana.

Secondly, the same school of thought argues that, the whole clean up process could have being done differently and the Bank of Ghana and the Government of Ghana itself could have saved the taxpayer some cash if comprehensive review, assessment and audit were carried out by the Bank of Ghana to know the specific debtors and their total liability exposures to these financial institutions. Need I say more, debtors of one bank may have links to other financial institutions i.e. the debtors web and how they are connected to each other.

Moreover, others have said that the failure of Bank of Ghana to apply sanctions to banks that engaged in series of related party lending and compromised the Single Obligor limit (The obligor limit is the maximum amount a bank is allowed to lend to a single borrower or an individual in relation to its total shareholders fund, which stands at 10 percent of the bank’s net own funds for unsecured loans and 25 percent of the bank’s net own funds for secured loans.) rule also contributed to this historic financial sector meltdown.

Why the Fit and Proper Test in very Necessary    

The Fit and Proper Test is very important especially after this financial meltdown for all Directors, Executives, Managers and the financial institutions not leaving out majority shareholders especially they are individuals. It must include the following;

• Integrity
• Honesty
• Reputation
• Competence
• Capability and
• Financial soundness.

The objective of the Fit and Proper Test directive of the Bank of Ghana is to set out a framework which can be used by regulated financial institutions as well as the Bank of Ghana in determining whether a person is fit to be a director, a significant shareholder or to hold a key management position within the financial organization.

Again, on the other hand, Fit and Proper Supervision seeks to ensure that Banks’ directors are capable of taking decisions that ensure the sound and prudent management of their banks. Such decisions safeguard, by extension, the soundness of the banking sector as a whole. The primary responsibility for selecting suitable directors and making sure that they remain suitable lies with the banks.

Criteria for Potential Directors

We conduct fit and proper assessments for newly appointed directors in accordance with the respective national laws implementing the Capital Requirements Directive. The appointees are assessed using the five fit and proper criteria set out in the Capital Requirements Directive:

Source; European Central Bank, Banking Supervision

“The Bank of Ghana has released a new directive – Fit and Proper Persons Directive 2019 – which sets out the minimum assessment criteria for its approval of persons to serve as significant shareholders, directors and key management personnel in the commercial banks, savings and loans companies and deposit-taking finance houses regulated by the central bank.
A similar directive will follow in due course which sets the assessment criteria and guidelines for such positions in rural and community banks, micro-finance institutions and non-deposit taking institutions”. Source BoG

Financial Meltdown

“The Bank of Ghana’s bold measures over the last two years to clean up the banking and SDI sectors, involved the revocation of licenses of nine universal banks, 347 microfinance companies (of which 155 had already ceased operations) and 39 microcredit companies/money lenders (10 of which 29 had already ceased operations). These massive failures were brought about by several years of an unsustainable licensing regime which lowered standards for entry into the banking and SDI sectors, as well as poor supervision and enforcement from the Central Bank. This was compounded by poor corporate governance and risk management practices, family and friends managing and influencing banks, abuse of related party relationships and unsustainable business models.

Many of these institutions had denied depositors access to their deposits for a long period of time, creating liquidity challenges in the financial system, resulting in a high incidence of credit defaults in the system. The threats posed to the stability of the financial system and the economy at large was enormous, justifying the bold actions taken by the Bank of Ghana.

The Government, through a Purchase and Assumption programme, facilitated GCB’s consolidation of two banks. The Government then set up the Consolidated Bank Ghana Limited and capitalized it with GH¢450 million to ensure that no depositor lost their deposits. The Government of Ghana has had to issue bonds to the tune of GH¢11.2 billion to cover the cost of the financial sector resolution and protect depositors. In addition, Government of Ghana had provided an amount of GH¢925 million in cash to cover the small depositors of the 386 microfinance institutions, bringing the total cost to GH¢12.125 billion.

The cleanup has prevented some significant deposits held by some 2,655,100 depositors (1,525, 550 bank depositors and 1,129,820 MFI depositors) from losing out.

The failure of these institutions was caused primarily by poor governance and lax oversight by Boards of Directors and unlawful behavior of shareholders and related and connected parties who had plundered these banks’ deposits and resources.

Source; Ministry of Finance.

Recommendations

• Going forward the Bank of Ghana and all stakeholder regulatory bodies in the financial sector must collaborate and subject all the Directors,EXCO members, Individual majority shareholder to the FIT and PROPER Test to ensure that supervision of entities are exercised properly and prudently following due corporate governance processes.
• The Bank of Ghana must engage all the entities in the financial sector space to promote arrangement of consultation for supervision on case by case basis to achieve financial soundness.
• The Bank of Ghana should effective immediately enhance its Banking Supervision Department with experience, competent and selfless employees for the task of supervision going forward.
• Bank of Ghana should enhance its sanctions on financial institutions when infractions are noted during periodic reviews.
• Mechanisms should be in place to ensure that supervisors are advised, at all levels and directorship authority reviewed and shareholders who can exert a material influence, directly or indirectly, on the operations of regulated entities, and thereafter, are notified of changes in such managers, directors and shareholders, on the occurrence of specified events.

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