A professor of accounting and finance at the University for Professional Studies, Accra (UPSA), Isaac Boadi, has admonished the owners of defunct financial institutions to blame themselves but not the Bank of Ghana or the Akufo-Addo government.
In an interview with Gordon Asare-Bediako on his popular Saturday-morning Bɛkyerɛ Mu Show on the Accra-based Movement Television on 20 July 2024, Professor Boadi argued that the owners of UT, Capital and GN Banks should desist from pointing accusing fingers at other people and entities when their banks collapsed because of their own mismanagement.
“The collapse of UT, Capital and GN Banks cannot be blamed on any third party. Their owners were responsible for what happened to those banks. The owners simply became liabilities to those banks they established,” Professor Boadi said.
“The Bank of Ghana gave them more than enough time and opportunities to bring the banks back to safety, but they failed to do so. Even the liquidity support given to some of the banks was not judiciously utilised. So, how can they blame the Bank of Ghana and the current administration for their woes?” Professor Boadi asked.
Ill conceived
Kofi Amoabeng, the owner of UT Bank, has accused the Bank of Ghana on many media platforms of not giving him enough time to right wrongs at his bank. He argues that he had investors who wanted to inject capital into UT Bank but the Bank of Ghana did not wait for this to happen.
Professor Boadi said looking at the financial situation of UT at the time, no investor worth his or her salt would have invested any money in it, and that the issues at UT Bank went beyond investment.
William Ato Essien, the then owner of Capital Bank, which was merged with GC Bank Ltd, did not offer any plausible explanation as to why the bank went under despite the Bank of Ghana giving Capital Bank liquidity support on two occasions. Capital Bank had to be consolidated because of his own mismanagement of the bank’s affairs. This, Professor Boadi argued, caused the downfall of Capital Bank: the government had no hand in it.
Papa Kwesi Nduom, for his part, accused the central bank of not supporting indigenous banks that were facing liquidity challenges but were not insolvent. This, the UPSA don countered, is not a tenable position because the liquidity support that GN Bank required was to take it out of a state of insolvency.
Speaking recently about the banking sector clean-up, John Alan Kwadwo Kyerematen of the Movement for Change said the decision to allow them to fold was ill conceived and that they should to have been saved, not forced to go to the wall. Kyerematen described the decision as a policy failure, but Professor Boadi disagrees.
“It was not a policy failure on the part of the government that sent those banks down the hill,”
Boadi told Bɛkyerɛ Mu. “The owners mismanaged the affairs of the banks.
“I find it curious that Alan was a part of this administration when the decision was arrived at. Why is he saying this at this time? He has got it wrong on this banking sector clean-up issue,” Boadi said.
Reasons for UT and Capital failures
The failure of Capital and UT Banks was caused by significant capital deficiencies, underpinned by poor corporate governance practices in those institutions, the UPSA dean said. There was a dominant role of shareholders who exerted undue influence on management of the banks, leading to poor lending practices.
This was reinforced by weak risk management systems and poor oversight responsibility by the boards of directors. Examples of recklessness that led to the failure of the two banks, said Boadi, included:
• Co-mingling of the banks’ activities with their related holding companies. For instance, one bank was paying royalties for the brand name, even at a time when the banks’ financial performance was abysmal and they could not pay dividends.
• Very high executive compensation schemes were being operated by the affected banks which were not commensurate with their operations. The risk and earnings profile of the banks could not support the compensation schemes.
• Non-executive directors of the banks compromised their independence and fiduciary duties to serve as checks on executive directors. This was because rewards such as business class air tickets were being given to them every year.
• Interference by non-executive directors in the day-to-day administration of the banks weakened the management oversight function of executive directors. Some non-executive directors were also acting as consultants to the same banks with no clear mandate, which gave rise to conflict-of-interest situations.
• Diversion of funds to holding companies and their related parties was widespread. In the case of one bank, placements could not be traced to the bank’s records though some customers showed proof of their investments with the bank.
• Irregular board meetings also accounted for weaknesses in board oversight.
In all these instances, Professor Boadi said, one thing was clear, and that is, the banks could not delineate themselves from their past practices as finance houses. They followed the same practice of borrowing from high-net-worth persons at very high costs, without any plans to bring themselves in line with the industry norm.
Reasons for the revocation of GN Bank’s licence
On 4 January 2019, the Bank of Ghana approved a request to reclassify GN Bank from a universal bank to a savings and loans company following its inability to meet new minimum paid-up capital requirements of GHC400 million by 31 December 2018.
The reclassification was, among other things, to enable the institution to downsize its operations and inject additional capital to resolve the acute liquidity challenges it was confronting. The Bank of Ghana subsequently appointed an advisor to GN to assist in the reclassification process.
In spite of the above, GN Bank was unable to resolve its liquidity crisis and had also not been able to meet most of the conditions the Bank of Ghana imposed on the institution following its reclassification as a savings and loans company. The financial condition of the institution had also deteriorated since the reclassification, with both a negative capital adequacy ratio and negative net worth.
The Bank of Ghana reached the conclusion that GN was insolvent under Section 123 (4) of the Banks and SDIs Act 2016 (Act 930), being in breach of its key prudential regulatory requirements. Its capital adequacy ratio (CAR) was -61%, in breach of the minimum required 13%.
It was also facing a severe liquidity crisis, with numerous complaints received by the Financial Stability Department of the Bank of Ghana from aggrieved customers who had been unable to access their deposits with the institution for several months. It consistently failed to meet the minimum cash reserve requirement of 10% of its total deposits from the end of the first quarter of 2019 onwards.
While GN had argued that government owed it GHC942.98 million in total, of which GHC102.73 million represented Interim Payment Certificates (IPCs), the Bank of Ghana’s assessment was that IPCs totalling only GHC30.33 million had been confirmed by the Ministry of Finance as at 6 August 2019 as owed to contractors that may have been indebted to affiliates of GN.
The Bank of Ghana’s supervisory assessment showed that even when the total outstanding IPC amount of GHC30.33 million was considered, it still did not address GN’s capital deficit of -GHC683.66 million. GN’s insolvency problems were largely attributable to overdraft and other facilities it extended to related parties which were other companies in the Groupe Nduom network of businesses, under circumstances that violated relevant prudential norms.
Of particular interest were funds totalling GHC761.55 million that GN Bank (as it then was) placed with its sister companies Ghana Growth Fund (Gold Coast Advisors) and Gold Coast Fund Management Ltd (now Blackshield Capital Management), both licensed by the Securities and Exchange Commission.
Some of these funds were used by the two related parties to pay customers whose investments with them had matured. Some of the same monies was also used to fund road and other contractors who claimed to have worked on government projects.
The IPCs claimed by GN were not supported by transactions that were entered into directly by GN and such contractors or the government and its entities.
They reflect transactions entered into by Ghana Growth Fund or Gold Coast Fund Management, with these contractors using funds taken from GN under circumstances that violated prudential norms. The failure of the two related parties to pay back these funds to GN affected GN’s capital position, leading eventually to its insolvency and acute liquidity challenges.
In addition to GN’s insolvency and liquidity challenges, the Bank of Ghana found other key regulatory violations such as the following:
- The institution’s adjusted net worth of -GHC30.70 million as at end May 2019 showed that its paid-up capital was impaired, in violation of Section 28(1) of the Banks and Specialised Deposit-Taking Institutions Act 2016 (Act 930).
- The institution’s adjusted capital adequacy ratio of -61.20% as at end May 2019 was in violation of Section 29(2) of Act 930.
- Contrary to Section 64 (2) of Act 930, the institution’s exposure to its related parties had consistently been above the regulatory limit of 25% of net own funds (NOF). Exposures to other affiliates companies were mainly payments made by the bank on behalf of such affiliates.
- The structure of GN’s balance sheet clearly showed that the bank mobilised deposits for its related companies. The inability of these related companies to honour their obligations to GN resulted in serious liquidity challenges and contributed to their insolvency, as all related-party exposures were non-performing. The institution’s high levels of non-performing loans (NPL) were mainly attributed to these related-party exposures, which were never paid, thereby putting the deposits of the bank’s customers at risk.
- A Bank of Ghana investigation conducted at GN revealed that a significant amount (US$62,255,516.93, £718,528.59 and €4,200) of depositors’ funds held with GN had been transferred to International Business Solutions (another company owned by Groupe Nduom and which is based in the US) without any documentation to support such transfers, in breach of Section 19 of the Foreign Exchange Act 2006 (Act 723), Section IV of Bank of Ghana Notice No BG/GOV/SEC/2007/4 and subsequent Bank of Ghana notices issued in August 2014 prohibiting such practices.
- The company was yet to publish its 2018 audited accounts, contrary to Section 90 (2) of Act 930.
“The decision to clean up the banking sector, with specific reference to UT, Capital and GN Banks, was in order,” said Boadi in his concluding remarks. “The owners were solely to blame for what happened to their banks and not the Government of Ghana acting through the Bank of Ghana.”
Reporting by Wilberforce Asare in Accra
