Accra, March 20, 2018//-The Governor of Bank of Ghana (BoG), Dr Ernest Addison assumed the position of Governor in April, 2017, following the resignation of his predecessor Dr Abdul-Nashiru Issahaku.
At the time when Dr Addison took over the financial sector had been in a considerable state of turmoil with the DKM crisis in 2016 and nine banks already identified as undercapitalized after the Asset Quality Review (AQR) exercise undertaken by the Bank of Ghana.
He and his team immediately began work and tasked the undercapitalized banks to submit recapitalization plans and worked to implement same.
“In the process we also resolved two Banks through a Purchase and Assumption transaction with GCB Bank. This was a necessary action taken to ring-fence the troubled banks, and also to prevent spillovers to the rest of the banks and the economy as a whole”, Dr Addison narrated in the latest BoG’s state of financial sector in Ghana statement.
“Following these undertakings, we have conducted a comprehensive assessment of developments in the financial sector including the conclusion of an investigative report that sought to outline the underlying causes of the failure of the two banks.
These developments have paved the way for us to outline a comprehensive set of measures which when implemented will address the legacy problems in the sector and ensure sustainable reforms needed to solidly position the financial sector as a major growth driver to support the country’s inclusive broad-based and inclusive growth agenda”.
Before he proceeded further, he first recounted a series of events and policies that has brought the financial sector where it is now. “The background is important as it should help us understand what got us here and how we move forward”.
Financial sector liberalization policies
According to him, Ghana’s financial sector liberalization policies sought to deepen intermediation to support economic growth and integrate the domestic economy with global financial markets.
As a result, a number of key reforms were introduced in the early 2000s which resulted in the entry of several new banks with the expectation of stimulating competition and innovation, especially in financial products and services and drive financial inclusion to promote economic growth.
While these set of reforms promoted growth in the banking sector and some level of competition and production and innovation, the Ghanaian economy was faced with a confluence of shocks and severe macro headwinds from both domestic and external sources.
Starting from 2012 in particular, the economy was characterized by large fiscal and current account deficits, high and volatile exchange rate developments, and high inflation but low real GDP growth, all of which exerted significant pressures on the banking system.
At the same time, the governance challenges in the banking system spilled over and significantly weakened financial sector supervision and regulation, while corporate governance structures were completely disregarded —a situation which exerted undue influence on risk systems and credit delivery in most banks.
It is therefore not surprising that most banks’ balance sheets deteriorated with large non-performing loans and significant capital erosion.
A comprehensive Asset Quality Review (AQR) conducted by the Bank of Ghana in 2016 showed severe deterioration in asset quality in the banking sector. The AQR results also showed substantial provisioning shortfalls in a subset of banks (with a combined capital needs of around 1.6% of GDP).
These toxic balance sheets of banks contributed to a decline in credit to the private sector and higher lending rates and spreads, undermining the transmission of monetary policy rate to the economy through market rates.
In addition, there was unusual forbearance by the Bank of Ghana, which resulted in the extension of significant amounts of Emergency Liquidity Assistance (ELA) to these ailing banks, some of which were uncollateralized with accompanying risks to both the Bank of Ghana, in terms resources to conduct monetary policy operations and reputation risks, and also to the banks themselves.
This official liquidity injection, together with banks’ reluctance to extend new credit, further increased excess liquidity in the economy, which became extremely expensive for the Bank of Ghana to mop in order to support the disinflation process.
It was also clear from BoG’s banking supervisory reports that some banks and deposit taking institutions lacked good corporate governance structures and more worryingly, was the co-mingling of board and management responsibilities which significantly undermined credit and risk management policies.
In fact, there were several owner/management conflicts in a number of banks, in addition to connected lending practices without due processes laid down to guide such practices.
These owner/CEOs and related Executive and Non-Executive Directors were largely responsible for credit extension and consistently breached related party transaction limits by extending credits to themselves and relations, and in some cases approved fictitious placements with related and connected companies.
Unfortunately, these activities were usually rubber-stamped and sanctioned by the boards and board chairs. All these actions have led to the growth of the financial sector.
African Eye Report
