The ban on deposit mobilization commissions

The Bank of Ghana has announced that the practice whereby banks in Ghana pay commissions to third parties as “facilitation” or “business development” fees for directing deposits to them, will no longer be tolerated. This is a widespread practice which, just as the BoG alleges, is a significant contributor to the inordinately high cost of funds incurred by banks in Ghana.

Consequently, this newspaper whole heartedly supports the central bank’s stance on the matter. However, we doubt that the stance can effectively be implemented.

The unsavory truth is that this practice is too widespread, and too critical to the deposit mobilization efforts of the banks for them to do away with it amiably. While the BoG correctly asserts that it is most common with regards to public sector depositing institutions, it is also fairly common among private institutions too, particularly those that do not have stringent corporate governance regulations; which means most indigenous enterprises and small and medium sized foreign owned businesses as well.

Faced with the threat of sanctions, banks are going to weigh the risks of regulatory action against those of loss of market share to competitors who are willing to risk circumventing the central bank’s new directive. We suspect that the latter will carry more weight than the former.

This means that for the directive to work sanctions would have to severe and applied without mercy. The BoG has warned that it would not hesitate to withdraw the operating licenses of culprits. We see this as an empty threat; virtually every bank is guilty of this practice and if their regulator unreservedly tries to apply its threat, Ghana would find itself without a banking industry at all in no time, a potential situation which the banks are all aware of and so will be unafraid of such drastic action.

Therefore, we recommend that the BoG takes a more realistic position with regards to applicable sanctions for non-compliance to its directive. Severe financial penalties could be applied without throwing the industry into the kind of turmoil which the commercial banks are aware the BoG cannot allow to happen through withdrawal of operating licenses. Such financial penalties could be devised in such a way that the costs from sanctions would be higher than the potential rewards of securing deposits through facilitation fee payments, thus making the latter unattractive to the banks that offer them.

Just as importantly, the directive must be applied to all tiers of financial intermediation. With the exception of large corporations and the most visible public institutions, well managed and thus financially solid non-bank deposit takers such as savings and loans companies are viable alternatives to tier one commercial banks as havens for short term deposits. If they are not included in the BoG ‘s regulatory net, the banks would be tempted to circumvent the new directive in order not to lose deposits to such alternative financial intermediaries.

In summary, like with all positive policies, the latest one from the BoG will require strict, practical implementation if it is not to join the long list of directives that are good but ignored by those they are directed at because they are not properly enforced.