The banking crisis that keeps giving
Between 2017 and 2019, the government of Ghana closed down 9 commercial banks, 411 non-bank financial institutions, and 58 investment houses and fund managers (5 in April 2019 and 53 in November 2019). The policy intent was to avoid a disorderly collapse of these institutions in a fashion that could have destabilised the entire financial industry.
The cost to the government of this drawn-out exercise is not clear. At various times, different numbers have been presented.
In a presidential address to Parliament in 2021, a sum of 21 billion Ghana Cedis was mentioned. In 2023, the Governor of the central bank gave a figure of 25 billion Ghana Cedis.
All these numbers represented a dramatic escalation from the 16.8 billion GHS or 16.4 billion GHS that the Finance Ministry said was needed and assured the market won’t be exceeded.
Why we can’t pin down the cost of the crisis
Given that these banks were collapsed at definite moments in time, one would have thought that their liabilities must have been frozen at whatever they were at the point of their resolution. Yet, somehow, the government seems to learn with every passing month the true extent of the financial hole left by their collapse.
It was easy to understand when bailout costs jumped from 8.5 billion GHS in 2018 to 16 billion GHS – plus in 2020 because the exercise continued into and only ended in 2019. From 2020 onwards, however, the shifting numbers become harder to understand.
One explanation that seems reasonable to the objective mind is the state of the books left behind by the exiting bank executives. The detailed receiver reports go to excruciating lengths to explain how convoluted some of the asset-stripping, fund diversion, and round-tripping schemes were. See the below extract from one of the receivers’ lamentations, for instance.
No one knows how to cover tracks better than an insider
A consistent thread in all the complaints about how hard it has been to trace, locate, and recover assets has been the spectre of “insider” or “related party” dealings. See yet another extract from the same report below.
The terms “related” and “connected” parties in this context imply a broad category of actors, including but not limited to “insiders” like directors and managers. Definitions can encompass business associates and relatives of key management personnel and board members of a financial institution; entities with common ownership in a holding structure with the said financial institution; and subsidiaries or other affiliates in which significant equity is held.
Ghana’s insider-triggered bank collapses are a global cause célèbre
It is safe to say that a major common theme across the 2017 – 2019 bank collapses was the role of related parties in various risky transactions undertaken by the financial institutions. So much so that Ghana is now a major case study for the likes of the World Bank and IMF when they look at the role of related parties in banking crises worldwide.
The billions upon billions of Ghana Cedis that the government says were lost through such insider and related party collusion in the banks have increased the appeal of the Ghanaian experience to scholars who have reacted with multiple studies.
What has the Bank of Ghana done about this?
Given the sheer scale of the financial pandemonium wreaked by all this siphoning of billions, one would imagine that the regulators would come very hard on insider dealing and related party collusion. Shutting the stable doors after the horse has bolted, however, won’t be smart. Proactive risk management and prevention would make much better sense. So, what has the Bank of Ghana done in this regard?
In 2021, it issued an “exposure draft” for corporate governance guidance in the financial industry in which it mooted the following regulation.
The draft eventually matured in 2022 into a definite standard on disclosure requirements for financial institutions about their dealings with insiders and related parties.
Sadly, not enough
Just around the time this effort commenced, Ghanaian scholars like John Mawutor of UPSA had provided evidence showing that most banks in Ghana were not complying with related party disclosure rules. In his sample, no bank hit even 50% of the required benchmark.
Meanwhile, the Basel Committee on Banking Supervision, a supranational standards-setting taskforce, has updated its guidance on the related parties matter via its Core Principles for Effective Banking Supervision (specifically, principle 20).
40.47(2) of Core Principle 20 clearly impugns the practice of giving favourable treatment to bank insiders. To the extent that these principles are minimum standards, it can be argued that the proper regulatory practice in Ghana would be to top this benchmark by instituting even more stringent criteria. And certainly not in the flabby way that section 18 of the Bank of Ghana’s Corporate Governance Directive sets even the bare disclosure requirement.
In a recent scan of a disclosure document issued by a Ghanaian bank, I saw some information on the rates at which the bank lends to employees, senior bank executives (including executive directors), and independent directors.
Some banks in Ghana are given loans to insiders at 1% interest rate
I was very surprised to see that some non-executive directors of banks in Ghana are borrowing at interest rates as low as 1% from banks on whose boards they serve.
I can live with low-interest loans to employees because I believe that the accounting standards deal with them in a satisfactory manner. Consider, for instance, the advice below by Grant Thornton, a big accounting firm.
In simple terms, the component of a loan given at below market rates (such as the interest) is simply regarded, according to the relevant standard, as an “employee benefit” and recorded and reported as such.
Such juicy deals for independent directors are very risky from a fiduciary standpoint
My considered view is that such an accounting treatment as allowed for employees becomes untenable in the case of directors, especially independent directors, due to the special risks and conditions attaching to their remuneration.
Section 72(f) of the substantive Corporate Governance Directive (2018) issued by the Bank of Ghana itself emphatically rejects the notion of motivation or performance-based compensation for non-executive directors.
In that light, I simply do not see how below market interest-rate loans to Directors can be justified in terms of the regulations.
It is worthwhile to mention that, in India, such preferential treatments have been more or less outlawed altogether by the famous section 185 of the 2013 Companies Code.
Insider bank loans may even be illegal in Ghana
It could be strongly argued that section 185 of Ghana’s own Companies Act (2019) outlaws the practice of below-market rate loans.
The Act, by making directors’ remuneration fixable only through company resolutions, may well have eliminated the option of providing undercover benefits through direct/bilateral loan agreements between the company and the director.
Why then does the Bank of Ghana continue to tolerate insider-favouring loans of the type being discussed?
When an independent director gets a loan at 1% interest rate from a bank that would normally lend to him or her at 35%, it is as good as getting a benefit worth roughly 35% the value of that loan.
Condoning scratch-my-back culture in Ghanaian banks will lead to another crisis
Such a lucky director would clearly, in such circumstances, be receiving favourable treatment that could impair their judgment when they need to exercise strict oversight over management actions.
Shrewd but crooked managers could actually use such undercover benefits to emasculate the Board and its powerful committees (especially those with influence over the bank’s credit posture) and remove a major preventive screen against other, perhaps larger-scale, underhand dealings.
In the current context in Ghana where disclosure is weak and some banks seem to be flouting the requirement to publish the details of such sweet and juicy deals, the risks are compounded multifold.
If the central bank is genuinely keen on stamping out insider and related party dealings, and thereby to avert another string of bank collapses, it cannot continue to close its eye, as it has done all this while, to one type of such practices that could actually undermine the effort.