The financial sector crisis was predominately caused by weakness in banking system preceded by high non-performing loans, illiquidity, weak corporate governance, undercapitalization amongst others.However,the continues insolvency in some banks due to high non-performing loans, misappropriation of funds by some top executives members resulted in their inability to meet their financial obligation to their stakeholder. The banking crisis has also caused severe economic pain to private sector companies which has led to job losses in excess of ten thousand and slowed economic growth. These happenings in the banking sector may have contributed to the steep depreciation of the local currency.
This was precipitated by a run on the affected banks causing panic withdrawals by their customers and in most cases necessitated the Bank of Ghana (Lender of a last resort) to step in and provide liquidity support to the affected banks. Consequently, the Bank of Ghana revoked licenses of seven (7) universal banks mainly because of negative capital adequacy ratio (CAR), high non-performing loans and bad corporate governance practices.
The Dr.Ernest Addison’s reform of banking sector is expected to make the banks more solvent, free up capital for lending. The bank recapitalization is also expected to contribute significantly to the financial sector’s development and make banks more capable to play their intermediation role in the development of the economy due to enhanced capital base. Furthermore, the banking reforms is aimed at addressing issues like risk management weaknesses, operational lapses, governance flaws and to firm up capitalization in the banking system in Ghana for economic growth.
Aftermath of the Banking Reforms
The Ghanaian banking sector has undergone some phase of restructuring though complex and comphrehensive,there are still some edges that needs to be smoothened.The purpose is to make it more sound,resilient and efficient to promote savings, investment and growth for both the public and private sectors of the economy.
The banking sector is expected to promote economic growth and development through financial intermediation if all policies intended to reform it are in tandem with each other. Banks are expected to enhance their credit delivery processes to make funds available, affordable and accessible for the private sector especially for entrepreneurs, start-ups and improve productivity to foster economic growth in the country. It cannot be over emphasized, that industry watchers expect that financial systems with banks as it major component use available resources to reduce risk, provide linkages for the different sectors of the economy and provide conducive environment to remove all impediment which otherwise could lower or hinder savings and investments.
One major factor that contributed to the collapse of the seven banks is the high non-performing loans on their books which can be attributed to poor credit delivery and lack of constant monitoring and the high interest/lending rate by banks which make it almost impossible for borrowers to pay back borrowed funds. It is recommended that with the consistent downward review of the Central Banks MPC rate, universal banks are also expected to review their lending rates downwards to make repayment of borrowed funds easy for the private sector.
The mandate of the Central Bank of Ghana is to regulate and provide supervision to ensure that the whole banking system remains sound and resilient. Banks are regulated by laws which promote policies that allow only financially sound banks to operate, establish appropriate accounting, valuation and reporting rules, limit excessive risk-taking by board and managers and provide for corrective measure on activities of weak institutions. To this end, the need for constant stakeholder discussions on immediate solutions to weather down the impact of the banking crisis and restore confidence and regulatory credibility within the public.
However, supervision and compliance are pivotal to the soundness of the banking system with attention on adequacy of banks risk management practices, constant monitoring and review of all prudential returns is crucial to maintaining soundness of banks and mitigate any unforeseen risk.
Furthermore, the Bank of Ghana going forward must strengthen and enhance the on-site banking inspections and banks’ balance sheet analysis, make sure that the banking supervision department retains professionals with adequate skill to deliver efficiency on the job. Where there is the need to provide additional resources for enhance delivery, it must be done.
In fact to ensure a drastic reduction in the non-performing portfolios of banks in the country, the Bank of Ghana must collaborate effectively with all players in the sector to enhance and enforce the Credit Bureau systems. Indeed, when this is done, it would improve information sharing among banks, deepen credit delivery in the market, better the allocation of credit and reduce default rate by borrowers.
The Bank of Ghana going forward should indispensably tighten the institutional set up of banks and financial institutions. It must require that independent supervisory authorities (external auditors, etc.) improve transparency, disclosure to protect the going concern status of banks.
The Bank of Ghana should collaborate with all the stakeholders to diligently provide supervision to all the banks, so as to scrupulously mitigate the risk of any banking crises in the future.
My five Pillars to Improve Banking Regulations in Ghana
- Enhance dialogue within the banking system as well as all financial institutions
- Improve information dissemination in the banking sector
- Resource well the research department of the Central bank to promptly grasp emerging market trends and development.
- Human resource development and training should be improved
- Strengthen local/foreign cooperation for economic growth.
Good corporate governance practice is a very important factor in steering competitive banking environment, Of course this promote safety of investments and guarantee good returns. Because banks’ liabilities are largely in the form of deposits, which should be available to creditors/depositors on demand, while their assets often take the form of loans that have longer maturities.
By holding illiquid assets and issuing liquid liabilities, banks create liquidity for the economy for development. The liquidity production function may cause a collective-action problem among depositors because banks keep only a fraction of deposits on reserve at a time.
However, depositors cannot obtain repayment of their deposits simultaneously because the bank will not have sufficient funds on hand to satisfy depositors at once.
This mismatch between deposits and liabilities becomes a problem in the unusual situation of a bank run. To this end, the Bank of Ghana is expected to ensure all banks enhance their corporate governance structure to avoid any future financial crisis that would lead to a run on a bank.
The Bank of Ghana should ensure that the following sound corporate governance practices are enforced in all banks;
- Strong risk management functions and special monitoring of risk exposures
- Setting and enforcing clear lines of responsibilities, ensure managerial accountability and transparency
- Ensure that all banks meet the statutory Capital Adequacy Requirement at all times without exceptions.
- Ensure an environment supportive of good corporate governance, that the direct lines of supervision of different business areas are different.
- Ensure dilution of ownership i.e. individual majority stake and government stake.
This article has picked up two key areas of concern to review and has made suggestions as to how they could be strengthened to forestall any future occurrences. The Bank of Ghana should enhance its regulatory supervision of all banks and enforce compliance to sound corporate governance practices within the banking sector.
This article has nevertheless offered some fresh insights concerning regulations and corporate governance that would move the banking sector to a new equilibrium.
By Jerry .J. AFOLABI