BoG bans commissions on deposits

Dr. Ernest Addison, BoG Governor

The Bank of Ghana has issued a stern warning to Banks and Special Deposit-Taking Institutions (SDI) against the payment of facilitation/business development fees or any other fees to attract deposits.

In a statement issued yesterday, the central bank cautioned that any institution which fails to comply with the notice shall face severe sanctions.

The regulator observed, during last year’s banking industry clean up exercise, a practice whereby facilitation/business development fees or some other payments are being made to agents who assist in the mobilization of wholesale deposits, particularly from the public sector. The practice has the tendency to increase the cost of funds of financial intermediation institutions, which invariably is passed onto customers through high lending rates.

Indeed, this is a widespread practice engaged in by virtually all financial intermediation companies, commercial banks, savings and loans companies, micro-finance institutions and specialized deposit taking institutions alike. Top executives of public institutions or private enterprises are offered and receive flat rate commissions for successfully directing institutional deposits towards a particular deposit taking institution. In other cases, third parties with influence in a depositing institution receive similar rewards for their efforts.

However, a debate has already started over who gains and who loses as a result of such transactions. For instance, in some cases the deposit taker actually reduces its cost of funds because it can receive a current account deposit at no interest cost but wit the knowledge that it will have custody of that deposit for a predetermined amount of time. In effect this makes it a fixed deposit that only costs the facilitation fee, rather than the much larger interest cost that would have been incurred if it had been placed as a formal fixed deposit. In such a case, it is the depositing institution that effectively loses that forgone interest and the deposit taker actually reduces its cost of funds, possibly to the benefit of its borrowing customers.

But even in such cases the deposit taker is exposed to a possible mismatch of its assets and liabilities, since depositor may be forced by circumstances to call in its deposit, despite the best efforts of the facilitating person who was given an inducement.

The new directive is also silent on whether the threat of sanctions will apply to third party agents with whom the deposit taker has a formal deposit marketing agreement; some people and enterprises earn a living from executing such arrangements.

Industry analysts are also pointing out that the directive will be difficult to enforce since deposit mobilization costs are not itemized individually, even in audited accounts. This means clever accounting can mask facilitation fee payments as other costs associated with a deposit mobilization drive.

The central bank noted that it would not relent in revoking the licence of any institution which in the judgement of the Bank of Ghana, is deemed to be engaged in unsafe or unsound banking practices. This would be based on Section 16 (1) (f) of the Banks and Specialized Deposit-Taking Act, 2016 (Act 930), which gives the Bank of Ghana authority. But bankers spoken to by Goldstreet Business yesterday on condition of anonymity uniformly expressed confidence that the BoG would not go as revoking – or even suspending a banking license just because of facilitation fee payments, unless such payments wer5e directly responsible for the extreme insolvency of the deposit taking institution.