More financial institutions are being issued universal banking license to operate as banks yet the unbanked population of our country has not seen any significant reduction but rather people losing confidence in the system. The breaking news that shocked the banking system on Monday 14 August 2017 has left a lot of questions on the minds of many and I ask????
Right now, the panic and fear in the financial sector has made it very uncertain to know what is going to happen next especially when there are reports that some seven more banks are also straggling to meet the minimum operating capital. Again I ask, what would happen to these seven banks when the new minimum capital is announced by the central bank?
The collapse of the two banks, UT and Capital Bank was caused mainly by bad corporate governance and huge non-performing loans on their financials that made it very impossible for them to meet their day to day obligations as they fall due, hence they became INSOLVENT. The writer up would discuss views on what may have caused the failure of the two banks and make some workable recommendations to forestall future happenings.
Causes of bank failure
- Lack of capital adequacy i.e there is the need for at least a balance in the asset and liability ratios. When a bank is unable to pay its debts as they fall due, even though its assets may be worth more than its liabilities, it is termed ‘Cash Flow Insolvency/ Lack of liquidity’.
- Risky loans that go sour; what we call non-performing loans/ impaired loans.
- When the liabilities have grown larger than the assets of a bank or the market value of its assets have fallen far below its liabilities, we say the bank is INSOLVENT and must stop/cease operations immediately.
- Poor or bad corporate governance practice in banking/financial institutions. A cursory review of the Board of Directors on the board of most banks/financial institutions revealed that most of the directors lack the adequate and sufficient knowledge in financial/accounting management; what I call board of ‘SQUARE PEGS IN ROUND HOLES’
- Poor/bad adherence to Credit policy and interference in credit delivery by top management/board and at times government for personal interest gains.
- Fraudulent practices by both top management and ordinary employees for self-gain.
Recommendations to prevent bank failure
- First and foremost, there is the need to increase the minimum capital requirement to GHS500million which is almost equivalent to USD120million, this is very crucial and must be given the needed attention since it is one of the major keys to the success and growth of our economy. Increasing the minimum capital will cause and compel some transformation through Merger & Acquisition in the banking system to consolidate the capital base and promote financial growth.
- The Bank of Ghana must and should ensure strict enforcement with sanctions the banking law that says ‘All banks must publish publicly their financial statement at the end of each financial year. UT bank had not published its financial statement since 2015 although it was listed on the Stock Exchange!!!!
- The Bank of Ghana and the Governor must and should require all universal banks to insure all Deposit funds going forwards as I proposed to the pervious Governor. This would take care of the risk of depositors losing funds in the events any happenings.
- The Bank of Ghana must and should require all universal banks to insure all their NPLs going forwards although it is a basic regulatory requirement to ensure provisions are made for them fully. BoG must ensure strict enforcement with sanctions.
- The Bank of Ghana must and should immediately prepare a white paper to remove all ministers/members of parliament and political party’s members from the boards of banks/financial institutions. Reasons being that their commitment/involvement and participation on these boards are missing, they just enjoy free sitting allowances and other free benefits at the expense of the banks/financial institutions.
- The Bank of Ghana must and should ensure strict enforcement with sanctions the adherence of corporate governance codes on banking and best practice.
If banks can create money, then I ask how they become insolvent. There is the need for measures to be put in place quickly to forestall any future collapse/failure of any financial institution to protect and safeguard the integrity/confidence/dignity of the banking system and ensure safety of depositor’s money. I wish to send a warning to the government that as long as there is destabilization or poor fiscal and monetary management in the country, banks/financial institutions failure may not be forestalled.
Government must work hard to restore the economy to a very stable sound economic situation for businesses to grow and expand so that they can pay their debts when they fall due. The right financial environment is key for the private sector to bring economic growth to our country.
The author is a financial & Economic expert