The Ministry of Finance has requested Parliament to approve expenditure of up to GH¢15.6 billion for the bailouts of depositors and investors whose money are locked up due to the recent financial sector clean up by the Ministry. In a memo to Parliament, the Minister for Finance, Ken Ofori-Atta, stated that the amount covers all the fiscal interventions in the financial sector starting 2017.
Request not rejected
Meanwhile, contrary to some media reports that parliament had rejected the request, the Information Minister, Kojo Oppong Nkrumah, who is also a member of the Finance Committee of Parliament has explained that the request has not been rejected.
The committee held a meeting on Thursday 5th December 2019 where the request was received. The report of the committee is expected to be taken to the plenary this week for parliamentary approval.
The President earlier had given executive approval for the ministry to seek for the approval.
Mr Oppong Nkrumah stated that this is an indication of the President’s commitment to ensuring that depositors who were affected will receive their funds and improve liquidity of the financial sector.
Financial Sector Clean up
The Bank of Ghana (BoG) revoked the license of two commercial banks – UT Bank and Capital Bank in August 2017. The action was triggered by the inability of the two banks to turn around their negative capital adequacy position which had lingered on for some time. The BoG said the action had been taken against the affected banks due to their “terrible” financial situation and their inability to perform within the banking industry. The asset and liabilities of the two banks were taken over by GCB Bank in August 2017.
Seven other banks were later consolidated to form the Consolidated Bank Ghana (CBG)
The BoG in 2018/19 also undertook a comprehensive assessment of the Savings and Loans companies (S&Ls) and Finance Houses where it was revealed that capital levels held by some S&L companies and finance house companies were in violation of the minimum regulatory capital required by the SDI Act (Act 930). The violations included excessive risk-taking; poor management of risk exposures; diversion of depositors’ funds to finance personal or related-party projects or businesses on uncommercial terms; weak corporate governance, board oversights and internal controls and poor accountability.
It was also found that some S&Ls engaged in creative accounting practices and under-provisioning for impaired assets among others. The violations led to the revocation of the licenses of 15 savings and loans companies, eight finance houses, and two non-bank financial institutions.
A further assessment of the Microfinance Industry (MFI) and Microcredit sectors also showed signs of distress as a result of severe undercapitalization, high cost of operations largely from high and unsustainable interest rates offered to depositors, poor lending and investment practices leading to excessive losses, diversion of customer deposits into private activities, unprofitable and speculative ventures, general non-compliance with prudential norms, poor corporate governance, weak internal controls and fraud, among others. These breaches led to the failure of 347 microfinance firms and microcredit companies.
The Securities and Exchange Commission (SEC) also in 2018 undertook a forensic review of the industry of the Asset Management Industry and noted that, Fund Managers are investing heavily in fixed deposits within the non-banking sector. The Asset Management Industry in Ghana had a total asset of over GH¢19 billion held up in pension funds, collective investment schemes (CIS) and other funds (discretionary funds).
According to SEC, about GH¢6.3 billion of the funds are locked up in risky investments such as short-term unlisted bonds, direct private-equity stakes and related-party deals for small and medium-sized businesses). Following this, the licenses of 53 Asset Management firms were revoked in November 2019.
Interconnectedness and financial implications
The Ministry in its memo stated that a mapping exercise conducted by BOG on exposures between and across financial institutions in the Ghanaian economy shows that as at September 2019 total exposures of banks to other financial institutions were approximately GHȻ1.54 billion. It stated that total exposures of banks to the securities industry was approximately GHȻ839.42 million with the banks’ total exposure to the insurance industry at approximately GH¢33.44 million.
Total exposures of Banks to SDIs was approximately GH¢ 669.51 million while the Pension Industry’s exposure to banks was approximately GHȻ863.63 million. “Insurance industry have place an amount of GH¢839.33 million with banks. Total exposures of SDIs to the universal banks was approximately GH¢ 933.64 million,” the memo read adding that “total exposure of Savings and Loans institutions to other financial institutions were approximately GHȻ637.61 million and the Savings and Loans industry held approximately GHȻ467.73 million of other financial institutions funds.”
