The 2019 and Deposit Insurance Scheme

The years 2017 and 2018 were not the best for Ghana’s financial services sector. The two years witnessed the collapse of seven of Ghana’s commercial banks – Capital and UT Banks in 2017 – and another five: Unibank, Beige Capital, Sovereign, Royal and Construction Banks in 2018with dire consequences for their directors, shareholders and staff.

Though depositors have not lost their funds, the ramifications have affected other licensed deposit taking institutions that have had to cope with the resultant bank rush threatening the collapse of the whole banking sector.

The subsequent bank rush and its attendant consequences have led to renewed calls for the implementation of the Ghana Deposit Protection Act, 2016, Act 931, to protect depositors’ funds as is done in many jurisdictions.

Deposit insurance as explained by bankers is a measure implemented to protect bank depositors, in full or in part, from losses caused by a bank’s inability to pay its debts when due. This, therefore, forms part of the safety net provided in the financial system to promote financial stability.

In Ghana’s instance, the Deposit Protection Act 2016 was designed for banks to lend or invest most of the money deposited with them instead of keeping the amount mobilized locked up in their vaults. According to the principles behind the concept, if a bank’s borrowers fail to repay their loans when due, the bank’s creditors, including its depositors,risk losing their funds.

This scenario ensures that since the banks rely on customer deposits that can be withdrawn on little or no notice,banks in financial trouble are prone to bank runs, where depositors seek to withdraw funds quickly ahead of possible insolvency.

This becomes even more serious when examined in the light of banking institution failures which have the potential to trigger a broad spectrum of harmful events, including economic recessions,which has made policy makers maintain deposit insurance schemes to protect depositors and to give them comfort that their funds are not at risk.

To ensure that the system works as it has been designed to, these schemes are for the most part government run or established, and may or may not be a part of a country’s central bank, while some are private entities with government backing or completely private entities though a number of countries have more than one deposit insurance system in operation. These countries include Austria, Canada(Ontario & Quebec), Germany, Italy, and the United States.

Ghanaian 2016 also put in place the modalities for such a scheme. According to the Bank of Ghana, BoG, governor, Dr. Ernest Addison the steady growth in the number of financial institutions in the country calls for the development of a system that will guarantee the safety of depositors’ funds.

He noted that the increasing complexities of the financial sector in recent times require, more urgently, that an insurance scheme, together with the tightening up of the bank’s supervisory role is, put in place.

“Banks are getting into consolidated arrangements with affiliates in capital markets, insurance firms and those engaged with real estate companies which are all part of the complications we see in the financial system.

“So we can have the most prudent application of banking rules,have the most effective oversight over the financial sector to anchor stability but then, you also need that deposit insurance scheme to provide the additional safety net to boost confidence in the financial sector especially for small depositors,” he said.

Curiously however, the 2019 budget recently presented to parliament by Finance Minister Ken Ofori-Atta is silent on this key aspect of the financial services sector.

In presenting the budget statement, he admitted the fact that the banking sector has had its share of challenges and commended the central bank for doing an excellent job in stabilising the sector which resulted in lowering inflation, lower interest rates and a relatively stable currency despite there surging strength of the dollar.

“The financial system is critical to the functioning and development of the economy and, banks are central to our financial system. In addition to providing employment to a large segment of the population, the role of banks as the provider of credit and liquidity to the economy remains critical to the functioning of our economy.

He went on to list the weak fundamentals as poor corporate governance and risk management over the years led to high levels of non-performing loans (NPLs) and abuse of depositors funds through related parties and affiliates in breach of regulatory requirements.

These breaches were not limited to the existence of the then weak banks but also extended to the specialized deposit-taking institutions (savings and loans companies, Finance Houses, Rural and Community Banks, and microfinance institutions). This eventually led to the failure of seven banks, with potentially adverse consequences for depositors,creditors, employees, suppliers, and other stakeholders.

Rescuing these seven banks cost the state some GH¢9.9 billion clearly unbudgeted for. In addition, government had recapitalize the five banks with GH¢450million. In addition, Government had to issue a bond with a face value of GH¢7.6billion to cover the gap, between the deposit liabilities and the remaining good assets of the failed banks. All these were to repose confidence in the banking system because it will ensure that no deposit will be lost, and customers will continue to access their deposits without difficulty. 

The Government has continued to provide assurances to depositors and customers of licensed banks and specialized deposit-taking institutions, through demonstrable actions, that their deposits are safe. Indeed, following the creation of the

Consolidated Bank Ghana Limited (a state-owned bank licensed by the Bank of Ghana as a universal bank), the government capitalized it with GH¢450 million.

In addition,Government issued a bond worth GH¢7.6 billion to cover the gap between the liabilities and the good assets of the failed banks. This action has reposed confidence in the banking system because it will ensure that no deposit will be lost, and customers will continue to access their deposits without difficulty.

Though government is going ahead to clean up the specialised deposit-taking institutions (SDI)sector made up of savings and loans companies, finance houses, rural and community banks, and microfinance institutions calls have intensified for the implementation of the deposit insurance scheme so government will not take on such huge liabilities in case of any future bank collapse.

Though it is a fact that the banks have cleaned up their act having written of their non-performing loans and addressed capital needs as at now the challenge is that the huge financial injection by government will have its impact on Budget 2019 as elements that government never took into consideration had to be added to ensure the banking space was free.

Government is therefore being forced to recover the taxpayers’ money from debtors, shareholders, and related and connected parties, who, through unfair means, siphoned funds, from the defunct banks to the detriment of depositors, employees, other stakeholders, and the economy as a whole.

Government could have been saved a lot of blushes if it had implemented its own deposit insurance scheme for which the law is already in place.

One banking expert whose views are totally at variance with Dr. Addison’s stance is a former Deputy Governor of the BoG, Mr Emmanuel Asiedu-Mante, who described the deposit protection scheme as an “unnecessary burden” on both banks and depositors which if care is not taken can keep interest rates at neck levels hence no need for it as it would amount to raising the cost of banking, which would then be passed on to customers through increased interest rates.

According to experts, the implementation of the scheme will be an extra burden on the institutions citing data from BoG which shows that total deposits of the banks rose by 10.6% between 2016 and 2017, a reduction from the 27.6% growth recorded between 2015 and 2016. They therefore concluded that the deposit insurance scheme will require banks to pay premiums (between 0.3 -1.5% of deposit), there will be less for banks to carry out their core functions. He therefore advised the central bank to reconsider its decision.

Dr. Addison disagreed with the industry players who believe the deposit insurance scheme is irrelevant adding that the idea behind its introduction is to have an additional layer of protection in addition to the Central Bank’s oversight.

“That is also a reason why we have had to increase the capital requirement for banks. All things being equal, we expect that with a strong and well-capitalized bank, at least the sector will be well positioned to offer saver services to customers than in a situation in which the banks had weaker capital.

“So not only are we looking at the issue of deposit insurance, we are also emphasizing the importance of banks having adequate capital,” he added.

Mr. George Ahiafor, Chief Executive Officer, XdsData, Ghana’s premier credit reference bureau, standing by Dr.Addison, said the central bank must go ahead with the implementation of the scheme as it is very relevant in the scheme of things if Ghana wants to have a properly functioning banking sector.

He said information that is gathered by credit reference bureaus which collects and maintains data on the credit history of individuals, businesses and organisations and the personal details of the borrowers including name, address, occupation and contact address will be shared with potential lenders. The lenders use this information to determine the credit-worthiness of a potential borrower. This is a very important tool for lenders to access the potential payback capacity of the borrower, risk and interest rate determination.

Managing director of Stanbic Bank Ghana, Mr. Alhassan Andani also stated that the introduction of the deposit insurance scheme in Ghana was long overdue as it is a tool that is needed to insure depositor’s funds just as banks insure their physical assets.

By Kafui Gale-Zoyiku