There are fierce battles raging in the plush hallways of Ghana’s newly minted Development Bank Ghana (DBG).
On one side is a plucky internal audit unit. On the other side are arrayed the well-heeled executives and board members supervising over the disbursement of tens of millions of dollars invested in DBG. To understand this fight, the reader must bear with me as I take a long detour to chronicle the journey of DBG. Impatient readers may skip to the concluding sections.
Why another development bank, seriously?
DBG was set up, in part, to address the appallingly low private sector credit levels in Ghana. Credit to private sector actors in Ghana as a share of GDP was, at the time, lower than the level in Ivory Coast, only a little above a quarter of the benchmark for its global peer group, and lower than half of the level in Kenya.
Measured historically, private sector credit as a share of GDP had, compared to 2014, fallen by a third at the time of DBG’s conceptualisation in 2019. Things are actually worse today; the figure is just a little above a third (~7.4%) what it was in 2014 (~19%).
Causes identified for this sad state of affairs included the ridiculously high interest rates (currently ranging between 30% and 60% on the market, except for the few blue-chip companies that have successfully raised bonds on the Ghana Stock Exchange for less than 25%); weak domestic capital markets; shallow pensions and asset management pools; the “crowding out effect” of excessive government borrowing; and the historically high risk of failure of significant sections of the financial industry.
Unsurprisingly, only 8% of small enterprises can meet their investment needs through the banking sector, and medium-sized enterprises, at 15%, fare only a little better. It was said at the time of setting up DBG that the share of Ghanaian respondents to the Findex Survey, who reported access to credit for starting up or expanding their business, had declined from 10.2% in 2014 to 7.5% in 2017.
Distortions in the allocation of capital also featured as a strong justification for DBG’s setup. Despite agriculture’s 19% GDP contribution in 2019, only 5% of bank credit went to the sector. The PwC feasibility study for DBG’s setup was said to have identified a $28 billion financing gap in 2020 for manufacturing and services that existing financial institutions would be hard-pressed to fill. The small and medium enterprises (SME) financing gap had, around the same time, been pegged at $6.1 billion.
Even where funding is available, it is often short-term and, thus, less useful for capital investments in sectors with long payback periods, such as manufacturing and advanced services. Furthermore, the demand for adequate collateral virtually rules out the majority of SMEs, especially those run by women, who already suffer an 82% gap in capital investment versus their male colleagues.
Development banking is a path Ghana has tread quite a bit
It was acknowledged that the government of Ghana has attempted to address some of these problems in the past using the “development bank” concept. In the mid-sixties, for instance, the National Investment Bank (NIB) and Agricultural Development Bank (ADB) were set up to enhance access to credit to producers and private sector operators with a “national development” and “financial inclusion” focus.
The abject failure of these institutions, and others created later in the 1970s like the Bank for Housing & Construction (BHC) and Ghana Cooperative Bank (GCOB – whose roots were actually in the 1940s), was attributed by the World Bank in its review of the DBG concept to:
“[L]ack of term funding, poor financial performance, and change of business models”.
The only development finance institution (DFIs) created in recent times, Ghana EXIM, was said to be in regulatory limbo until the passage of Ghana’s DFI Act in late 2020.
Meanwhile, the recapitalisation of ADB and NIB was a matter of priority for the government, and funds would soon be set aside in the budget and borrowed from the World Bank and elsewhere for the purpose. Ghana’s political opposition had been adamant that priority be given to the state-owned banks in the use of funds from the World Bank’s “financial stability” loan.
Even though World Bank reviewers saw clearly that the medley of DFIs in Ghana needed synergy and coherence, and that the coordination among these entities and the incoming DBG was unclear, they were still content to parrot the government’s line about the role the DBG would play in the “structural transformation of the economy”, job creation, unlocking of medium and long-term capital, and the addressing of “market failures”.
A PwC feasibility study was used by the World Bank to justify the setup of brand new DFI in Ghana that would be run according to international best practices, equipped to operate with a fundamentally new market mindset, and with a sharper focus on SMEs (especially those without access to collateral), agribusiness, manufacturing, and high-value services.
(As a side note, claims that DBG would be the “only wholesale” DFI in Ghana were not practically true, since several institutions were in the wholesale market and the fact that such institutions are not exclusively wholesale did not make wholesale/on-lending (as well as guarantee programs) a novelty in Ghana.)
DBG’s Business Model
A lot of emphasis was placed on new guardrails to ensure that DBG does not go down the bankrupting paths of the DFIs before it. “Corporate governance” was mentioned several times. Comfort seemed to have been placed in the fact that a new DFI Act is now in place to aid the Bank of Ghana in its supervision.
On account of all the above, the World Bank pledged $250 million for the establishment of the new bank with the funding components segmented as depicted in the diagram below.
The chain of funding, typical of World Bank projects, was to flow through the government, which is injecting $250 million into the Bank from its own resources, into banks (PFI means “participating financial institution”) through the intermediation of DBG.
The overall logic is that using relatively cheap finance lent to the government of Ghana by the World Bank, DBG will on-lend at low interest rates to local banks in the hope that these banks will then give loans at affordable rates to small businesses, as much as possible, without collateral.
To underline the inclusivity and sustainability agenda, at least 10% of funds lent must go to women-led businesses and 5% to climate-related enterprises. DBG’s line of credit-guarantee products (initially capitalised with $50 million of World Bank funding) would, additionally, crowd in $300 million of funding from the private sector by reducing the perceived risk of lending to SMEs.
All in a all, a theory of change was laid out as in the diagram below.
If all goes well, DBG is expected to channel $475 million to 12000 SMEs by 2030 (original timeline: 2027) with a loss rate of about 10% (~$47.5 million).
Europeans step in
On the back of the work done by the World Bank, European DFIs stepped into the fray. The European Investment Bank (EIB) and the German development bank, KfW, pledged about $180 million and $50 million respectively in today’s money. KfW also provided a $3 million technical assistance grant.
(Separately, the African Development Bank offered $38.3 million in grant funding. A loan was not possible since DBG did not yet have 3 years of operational history.)
Procurement culture
In the earliest stages of the project when it was still incubated at the Ministry of Finance, well established consulting entities were procured to undertake preparatory activities for the setup of DBG in order to convince the World Bank to disburse more money.
It was clear, however, that the Ministry of Finance only wished to do the barest minimum under World Bank supervision. The reason is not far-fetched. The World Bank rules established competitive procurement as the baseline approach with tight thresholds. In their own words,
“[to] reduce the risk of political interference and conflict of interest, the default procurement process will be open competition.”
Thus, Finance Ministry Directors responsible for DBG’s setup kept on lamenting to government auditors about the difficulties they were having finding qualified consultants locally and internationally to undertake various assignments.
Multiple rounds of procurement were terminated or deferred either because, according to them, none of the consulting firms from around the world expressing interest had the requisite qualifications or that it was best for DBG to fully commence business first.
Free at last!
By 2022, DBG was fully operational and the incubation process could thus be terminated. On paper, strict governance procedures and independent directors were to serve as a bulwark against waste, inefficiency, and procurement abuse.
As spending ramped up from 2022 to 2023, the bulwark started to tremble. Then, in 2023, two of the most outspoken and unflinching independent directors left the board.
According to insiders, whistleblowers, and documents we have reviewed, their departure is linked to a massive tussle between the management and the Bank’s internal audit function that mysteriously appears to have escaped the radar of the external auditor, KPMG.
Mysterious spending on consulting and technology
The 2022 and 2023 financial statements of the Bank show that spending on professional services was by far the largest expenditure category, amounting to over 60% of total spending. Next on the list is “information technology” and “investor relations” spending.
The nearly 130 million Ghana Cedis spent on various consultants, and much more disclosed under other obscure headings, has set off a train of disputes with internal auditors that have dragged on throughout 2023. How DBG even managed to get a clean audit report from KPMG puzzles some insiders.
Most contentious is a $17.12 million contract to an obscure Mauritius-domiciled company called, Kulana, to procure licenses for the Temenos Tranzact (plus the Data Lake business analytics add-on) core banking solution (in order to migrate DBG from the CBG’s Temenos instance, on which it had been perching); buy subscriptions for Microsoft Dynamics 365; update licenses to an Oracle Database; acquire project management tools; and wire the ERP, analytics, and core banking solution together into a unified system through middleware design and execution.
The contract sum is said by internal auditors to have been 59% higher than budgeted for, and Kulana’s advance payment guarantee only covered 4% of the amount at risk.
Usually, a new Temenos implementation is a highly celebratory affair that banks trumpet with press releases. The deathly silence surrounding this project has good reason.
Multiple independent IT analysts, DBG insiders, and whistleblowers insist that the costs of the project have been so inflated and the process of engaging the consultants, who are barely known in a crowded Ghanaian and regional market of core banking and bank IT project integrators (not a single bank in the region has ever used them), so opaque, even within DBG, that the enforced silence could only have been deliberate.
One analyst was dumbfounded when he saw the $3 million-plus price-tag of the Microsoft Dynamics 365 solution for a wholesale bank with just 61 personnel. The author of this essay has himself served on the boards of organisations with many multiples of that number in staff strength that have implemented Dynamics (with even more modules than indicated in the DBG specification) at a total cost of ownership of less than 10% of the amount spent by DBG.
Also baffling is the nearly $4 million agreed as the cost for middleware integration when the vendors of Temenos have already provided an extensive suite of APIs and other services that should ensure seamless integration with Microsoft tools in the cloud and also, as in the case of DBG, for on-premise implementation.
For the Oracle database implementation, we used the Oracle open-list as our pricing guidance. We then carefully scoured LinkedIn to estimate the user list for DBG. We chose the enterprise edition and added all the relevant modcoms, including middleware elements. No matter how much we egged the pudding, our analyst could not see how DBG could justify even a $450,000 cost.
Regarding Temenos, a CBG whistleblower claims that they offered to assist with introductions to their own integrator but that DBG rebuffed any attempt at cooperation. Whilst they did not disclose the exact financial terms such cooperation would have entailed, they insisted that DBG should not have spent even 30% of what was spent given that they had legacy infrastructure and systems that were being leveraged.
Accounting gymnastics
Given all of this murkiness, one wonders what KPMG made of the whole affair. A clue lies in the financial statements.
The value of software (at less than $80,000) owned by the bank disclosed in its intangible assets ledger on Page 42 of its audited financial statements for 2023 grossly undervalues the purchases. The amount indicated is not even up to 2% of the advanced payment made to Kulana (~$6.36 million) within 30 days of the engagement, as stipulated in the May 29th 2023 agreement with DBG.
The question is: given the timelines for deliverables stipulated in the contract (example: 6 months for ERP implementation) and the advanced purchases of the Temenos, Oracle, and Dynamics licenses, as also indicated in the contract, how exactly did KPMG accountants treat this multimillion expenditure?
Why would two directors leave a company paying them nearly 100,000 Ghana Cedis a month (the average fee per Director at CBG) if they did not feel the situation to be particularly egregious? How could KPMG have missed such a red flag?
Internal Auditors step into the breach
Interestingly, as hinted throughout this piece, the internal auditors did not miss the evident risks posed by the management’s spending habits.
They explain the accounting gymnastics as follows. DBG first debited ~148 million Ghana Cedis (~$14 million) to the Assets Under Construction/Capital Works in Progress ledger. Then right after the financial year was over, in January 2024, its accountants placed the amount under Assets in the “Computer Software” category.
This is notwithstanding the fact that the purchased licenses were for fully usable software, and that customisation and additional integration works did not involve the building of custom software but mere enhancements to valuable product. Somehow, by doing things the way DBG did, external auditors could skip the deep-dive into the software project that may have led to questions about procurement and due diligence on the contractors.
The small problem with this whole arrangement is that the licenses have an expiry date, so the approach used impacted depreciation. More than half the value of one package, for instance, was due to expire in 2024 (about ~$887,000 worth). The internal auditors thus questioned the 5-year depreciation timeline used in preparing the accounts. Questioning depreciation led to a finding of material misstatement of DBG’s profit by a significant amount of more than 8.4 million Ghana Cedis for the financial year.
Similar depreciation quibbles (and the effect on revenue estimation) also came up in respect of a 170.3 million Ghana Cedi contract to Linkcom to purchase servers and other equipment for the DBG datacenter and offices.
Strange advanced payments
Then the issue of advance payments reared its head. Another boutique consultancy, Asamoah & Williams Consulting (AWC) was advanced $320,000 out of a $400,000 contract to onboard banks onto the DBG’s on-lending program. It is absolutely unclear why anyone would need to pay a consultant $400,000 to approach 19 banks (as four banks were already on board from the outset) to sign up for low-cost money in a highly competitive and capital-deficient market such as Ghana.
The auditor’s job, though, is not to question the business judgement of management. That is for the 1.2 million GHS-a-year board directors. The auditor’s concern here was that AWC took the money in July 2023, promised to deliver the banks by the contract deadline of December 2023, yet as of April 2024, neither hair nor hide of a bank had been seen in the onboarding corridor.
Internal Auditors then took aim at the ~$3.8 million contract given to Kulana for “Project Management Office” and “Business Analysis Support” in February 2022 and July 2023, for which 35% was paid in advance; and, also, the $1.075 million awarded to AWC in May 2023 to “manage” and “quality-assure” the relations between DBG and its investors. Again, deliverables failed to manifest.
During the term of AWC’s engagement, DBG’s only investors were the same that signed on at the very beginning, in 2020: the government of Ghana, KfW, EIB, and the World Bank. Still, by close of contract deadline of December 2023, AWC had failed to fully deliver on the contract even though it had pocketed the advance. To reward AWC for this performance, the contract was extended in May 2024 at a higher price of $1.89 million with $472,000 to be disbursed in advance.
The internal auditors lamented the fact that the stated capital of both entities was less than $10,000 and that no due diligence report was available on them. They had been fished from mysterious waters and handed the contract. Somehow, DBG management had missed the teeming ranks of well-established IT consultants and integrators in Ghana to find two highly undercapitalised, virtually unknown, contractors to bless with juicy, multimillion dollar, contracts.
Atrocious cost variations
Another instance of the cost variations seen in the lofty technology and management consulting planes was the strange case of the interior decor for the executive floor of DBG’s headoffice (floor five), a contract awarded to CPM Africa. The $600,000 budgeted for fine drapery and furniture was said to have somehow ballooned to $991,000, a 65% increase.
Costs for the Bank’s datacenter were also said to have escalated by 70% above the approved budget.
As one analyst who reviewed some of the documents flowing from the internal bust up said, “they are blowing cash like water!” One wonders what EIB, which as at the end of 2023 hadn’t disbursed any of its pledges, thinks of what it has been hearing.
The governance bogey
After reading all the briefings and the transcripts of conversations with analysts, whistleblowers, and unhappy insiders, one cannot escape the feeling that DBG is definitely on the same path that took NIB and ADB, and some other development banks in Africa, into the abyss of chronic insolvency.
As already discussed, the World Bank did take into account the historical corporate governance challenges in Ghana’s development bank landscape. My assessment, however, is that the evaluation was rather shallow against the background of Ghana’s political economy (check my premonition when DBG was announced).
Formality is overrated
For example, despite all the elaborate architecture of independent directors, internal audit safeguards, and greenfield governance manuals hyped in various DBG project manuals, the Management had very little difficulty appending a supplementary agreement to a $17.2 million dollar deal that even an SME would baulk at.
Unlike the main agreement, the supplemental has schedules signed solely by the CEOs of Kulana and DBG. Curiously, they are unwitnessed.
More importantly, the supplementary agreement, which has all the appearances of an “undercover” agreement differs in material respects from the main agreement.
For one thing, it has different intellectual property terms, vesting as it does product enhancements developed by the consultants whilst engaged on the project in Kulana instead of DBG, in contradiction with the terms in the main agreement.
Another example: the limitation of liability clause in the supplementary agreement is far more favourable to Kulana than the provisions in the main agreement. Instead of liability being capped at double the contract price, it is capped at par.
Ample evidence that not only were the risk functions in the organisation overridden, so also was general counsel.
Formal vs informal layers in the public accountability governance system
In exercises such as the one conducted by the World Bank ahead of its approval of the $250 million loan, there is, quite often, an overemphasis on formal mechanisms and how they interact with the goals in view. Even Ghanaian scholars tend to do the same when evaluating the political economy contexts of projects like DBG.
In my experience, there is always an underlying sprawl of informal realities that truly drive governance outcomes. I call it the adhocracy. That chaotic underbelly of formal institutions cannot be tamed by governance of the formal layer alone.
The only way one solves the conundrum is by ensuring that when approving any public project one infuses the governance mechanism with counteracting forces within the political economy to provide checks on power.
In simple terms, there should have been an ongoing stakeholder engagement process that ensures availability of information to civil society activists and other “non-formal” “reverse-chaos” agents within the Ghanaian political economy space. Any reliance on the formal mechanisms alone, as is the practice of the likes of the World Bank, shall be steadily overridden by the sheer grinding force of the informal power dynamic.
In this case, while it is true that the formal internal audit system has done its work, the truth is also that it has been more than a year and half since this struggle commenced, and more than a year since two independent Directors resigned. The World Bank even committed to send observers to attend board meetings of DBG during project design. And, yet, the murkiness, opacity, lack of frontal engagement with adverse audit findings, the cost inflation, and the widespread disgruntlement continues unabated. The culture of DBG is being eroded from within and the organisation is being set to fail.
Already, there are complaints of some SME beneficiaries of the funds disbursed by DBG getting the money at rates no different from the prevailing market rates, an outcome that completely invalidates DBG’s mandate.
Clearly, if the formal internal audit function had been complemented with informal civil society watchdog mechanisms, the large amounts of public money would not be facing the risks reportedly surfacing.
Dissonance in the goals of governance
Power-owners and office-holders in Ghana are rarely unalloyed supporters of the sound governance agenda. Many years after the shutdown of BHC, one of Ghana’s legacy DFIs, a former Finance Minister insisted that the World Bank was being deceitful then when it counselled closure (“resolution”) of BHC, and that he had never supported the move. Decades after the fact. And clear evidence of the level of trust between the likes of the World Bank and local senior political actors.
Yet, BHC’s internal culture was wholly rotten. Its own staff had colluded with a borrower to scheme a massive cheque fraud that thoroughly depleted the capital of the bank. Not only were lessons not learnt, as other Ghanaian DFIs like NIB and ADB continue to totter, it would seem that there has never been any real agreement among political actors and external funders all along.
When one looks at the DFI Act that is meant to serve as guardrails for DBG and other DFIs, the concept seems to be that, somehow, private individuals would choose to build development banks rather than commercial banks, and that they would be happy committing more than double the capital they would need for establishing commercial banks. All this for the privilege of being able to lend at lower interest rates over long-term horizons to finance national development. Seriously, how can this be serious policy logic?
Hiding from public accountability
The simple, unalloyed, truth is that development banks are nothing more than public interest organisations. They cannot be neoliberalised into anything else. They would very likely continue to be backed primarily by public actors. Their governance setup should acknowledge this and make provision for the same kind of intrusive public accountability that all public institutions require.
I suppressed a fit of rage when I saw that in the Kulana – DBG contract, DBG referred to itself as a private limited liability company. How does any entity hold itself out as a private entity when the government is a 100% shareholder?
Why, in the name of all that is holy, did the Public Procurement Authority reportedly approve the use of a commercial procurement process for DBG, for which reasons all the above impugned procurement activities were not subjected to public procurement laws? Readers familiar with the public policy context in Ghana would know that Civil Society activists have sued the state-owned electricity utility and a big commercial bank over very similar procurement issues. Here too, large amounts of World Bank money is involved. Which is why I have been on the World Bank’s case for a while now. But it is not the only global DFI that gets into these knots, as my recent tussle with IFAD demonstrates.
It is always the same pattern when you look closely: powerful institutions – such as the World Bank, state-owned enterprises, government agencies, big banks- all like to talk a good game about governance, until rubber meets the road.
I guess the speed with which all the named entities respond to this essay would be a good gauge as to how seriously we should take the whole “strict corporate governance pledges” made at the onset of DBG’s operations.
IN ANY EVENT, THIS IS A DEVELOPING STORY.