Over the past two years the immediate past administration of former President John Dramani Mahama and the Bank of Ghana’s executive management he appointed, led by Dr Nasiru Isshahaku as its Governor, have been cast as the villains that allowed Ghana’s recent banking crisis to blossom, through their incompetence and outright malfeasance. The main actors taking the blame, former President and ex central bank Governor alike, have maintained a studious silence on the matter. Indeed, the main defence has come from Dr Johnson Asiama, immediate past Second Deputy Governor of the BoG who resigned under forced, controversial circumstances and whose vitriolic statements have therefore been taken more as an attack on his successors than a defence of his own tenor in office.
Indeed, in the wake of the accusations made against the past administration the fact that the emergent financial sector crisis was uncovered during its tenor has been lost; the narrative now appears as if it was covered by that government until the incumbent one assumed power and blew the lid off the problem.
Finally however, the usually reticent Seth Terkper, immediate past Finance Minister and BoG board member has stepped up to the plate with a more measured defence of the actions taken by the immediate past government and central bank management to head off the crisis in its early stages. To be sure hindsight finds fault with the policy direction taken at the time but it still contains pertinent lessons that can guide banking sector regulation and its very structural framework going forward.
Basically explains Terkper, the problem, initially uncovered by an Asset Quality Review and forensic audit, called for by the International Monetary Fund in late 2015, was diagnosed as fundamentally one of illiquidity in the banking system, for which the bank’s themselves had little blame. Terkper recounts that the effects of the global financial crisis and consequent global economic recession set the ball rolling and it was accelerated by the shortfalls in gas flows to Ghana from Nigeria – initiated by damage to the West African Gas Pipeline in 2012 – which forced government at the time to resort primarily to oil imports to run the thermal power plants on which the country has increasingly had to rely in the face of demand for power outstripping supply. Those imports had to be financed by the banking sector, the problem being that since pricing at the time did not enable full cost recovery, government had to make up the difference but it simply did not have the money.
This he explains is why the then government immediately turned To the Energy Sector Levy Act (ESLA) to recover those legacy shortfalls in early 2016, once the power pricing error had been corrected, so as to give back to the banks some of the liquidity they had sacrificed to finance those oil imports and this aimed at giving back some GHc2.2 billion in foregone liquidity. This was accompanied by attempts to settle debts owed to government’s contractors to enable them in turn pay back debts owed to the banks that had financed the execution of their public sector contracts.
In hindsight though, the Mahama administration and the BoG grossly underestimated the sheer amount of financial malfeasance by bank owners and managers that showed up in the form of poor corporate governance and risk management; effectively the liquidity provided by government and that provided by the BoG itself in the form of Emergency Liquidity Assistance amounted largely to throwing good money after bad money. Interconnected lending to family and friends without proper risk assessment and outright diversion of funds frittered away the liquidity provided and with it depositors monies.
However Terkper insists that the government and central bank at that time were tough on the banks, contrary to the current conventional wisdom. He points to the various legislations and directives issued to rein in the banks with regards to their conduct, even as steps were taken to institute deposit insurance as a safety net for depositors as it was realized that not all the banks would survive their failing circumstances intact. He also reveals that before they lost power through the 2016 general elections, plans were afoot to increase the minimum capital for banks to GHc230 million which would have been nearly twice the GHc120 million minimum in force at that time.
Too little to late though. While new regulations reduced the lee-way banks had for allocating the capital at hand, they did little to reign in the malfeasant behavior of bank owners and managers. Instructively, it eventually emerged that this was at the heart of the problem and so liquidity injections alone could not solve the problem.
However, while Terkper readily admits that government, during his tenure, only got the diagnosis partly right, he nevertheless insists that the solution applied by his predecessors leaned too far towards the poor governance aspect and not enough towards the short term illiquidity aspect. He points out that if government had not been owing so much to the banking sector, some of the banks that have gone under would have survived and so if their short term liquidity challenges had been given more attention there would be more indigenous participation in the industry than there is right now.
But he also agrees with the IMF’s instructions that banks should assess and provide for their credit to government in the same way as they do for loans given to the private sector. This implies that the banks erred in giving so much financing to government at the time, for which some have paid such a heavy price by losing their operating licenses.
Going forward however, Terkper frets over the situation in which Ghana now finds itself, with private indigenous participation in bank ownership having been reduced drastically. Consequently he suggests that banks be licensed according to tiers, with lower tiers having lower minimum capital requirements to enable indigenous investors afford ownership stakes. He points to jurisdictions such as Nigeria where there are regional banks owned primarily by indigenes.
This is an argument made by several Ghanaian bankers and economists. However the BoG retorts that this is already in place – just that the different tiers go by different names such as savings and loans companies and micro-finance institutions.
Terkper also recommends that financial services industry regulation should be reformed to enable it better handle systemic risk between various genres such as financial intermediaries, the insurance firms, asset/fund managers and pension scheme managers. This too is on the cards currently, championed by the Financial Stability Council. Terkper, like many others is however unsure whether the best way forward is to force closer collaboration between the various regulatory institutions of the various financial services industry genres or to create an overriding Financial Services Regulator as obtains in places such as the United Kingdom, so the BoG can focus on monetary policy formulation and implementation.
Most important though is Terkper’s views on the importance of liquidity in any assessments of financial intermediaries in the future. With several genres still due for imminent assessment and regulatory action – capital market operators and rural banks in particular – this may be a crucial factor in deciding the fates of the companies that operate within them.