The financial intermediation role is one that runs on integrity, professionalism and trust. These values are necessary for the financial system of any country to properly function and grow. Without them, the system will soon crumble. Banks will fail. Depositors will lose money. Job losses will spill unto other sectors. In extreme cases, where the interventions of the regulator is unsatisfactory, there could be social unrest and systemic chaos.
The business of banking is simply accepting funds (deposits) from the public (depositors) and adding it to what the bank owners (shareholders) have provided and then lending these to credible businesses and individuals and/or investing it in safe assets such treasury bills. The people responsible for this seemingly simple task are the board and management of banks. A third party, the central bank, is also responsible for effective and efficient operation of this system. We have identified 3 players so far; the depositors, regulator, and shareholders/board/management of banks on one side. I put board, management and shareholders together because these three would normally be expected to have their primary interest aligned: the maximization of shareholder wealth.
Profile of bank depositors range from the financially sophisticated who understand how financial institutions run and are even able to determine which institutions are strong or weak, to those who have no knowledge at all about the very basic banking products such as current and savings accounts. And this range of depositors is not present in Ghana alone or just the African continent. It’s important to remind ourselves that full understanding of banking is not a pre-requisite to accessing banking services. Although customers are solely responsible for the determination of which financial institutions to bank with, they unconsciously do so with the understanding that the banks and its directors and managers will display to the letter full professional competence and integrity.
Given this background, it will be harsh to fault a customer for choosing to bank with a bank which collapses soon after a banking relationship is initiated, and much less in later years. It’s true that often the signs may be clearly written on the wall, but not every depositor can read the language and signs. They’d rather put their trust in perceived capable hands; a licensed institution regulated by a Central Bank and whose board and management have been approved by the regulator.
It will be harsh to blame depositors of the failed banks (UT Bank, Capital bank, Unibank, Sovereign bank, Beige bank, The Royal bank and Construction Bank ) for banking with those banks without foreseeing their imminent collapse.
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The regulator of banking activities in Ghana is the Bank of Ghana. From licensing to liquidations and all that lie in between. The first screening that seeks to protect depositors and preserve the sanctity of a financial system is licensing. To grant an institution a banking license means you are comfortable with the source of the capital, the people providing the capital, the competence and integrity of the members nominated to form the board, the management team running the actual day-to-day banking activities and importantly, their strategy (short, medium and long-term).
The regulator is also responsible for continuous monitoring and evaluation of the bank’s performance, strategy and other factors. To carry out this function, they receive several reports daily, weekly, monthly and annually. These reports are expected to present important information to the central bank to enable effective decisions for the interest of the depositors and other stakeholders. The accuracy of such reports submitted by banks is not easy to determine. And that’s why we leave it in the hands of a competent oversight body and also a reason why the regulator can undertake on-site examination. The Regulator, unlike depositors, is expected by all standards to be competent enough to detect deceitful reporting, earnings management, and able to read and interpret all the warning signs on the wall, as they appear. The regulator has several tools and options at its disposal to deploy in the event that it detects weaknesses and violations by a bank. Deploying the right tool at the right time is what makes the financial system strong and trustworthy. Any shortfall here is almost unforgivable. Depositors trust banks to be managed well, but even bigger is their trust in the regulator to make sure that their deposits are safe with the banks.
The Board and management of a bank have so much power and are deemed (at least by the regulator) to be competent enough to exercise their discretion prudently in the management of the bank. They are responsible for the banking products rolled out. They are responsible for the amount of deposit mobilized at what costs (interest rate) and how much loans to disburse to who under which terms. They ‘run the show’ all the time. And for such power, commensurate responsibility is attached.
If management and board give out loans to related parties or any other business or individual, they should be responsible for the recovery of those loans. Ultimately, its shareholders who are expected to bear the risk. It is not taxpayers who must bear the responsibility. However, if it gets to that stage, the misuse of liquidity support from the Central bank is quite unpardonable. It communicates one of two things: clear case of incompetence or deliberate act to squander funds for personal gain.
Among the three players identified in this article, it is the board and management that must bear the greatest responsibility for the collapse of their respective institutions. Whilst people argue that the Central Bank is weak and unfit to discharge its role, we must remind ourselves that it took the same Central Bank to unmask these dealings. And when they did, they deployed good take-over and consolidation strategies that have eased the otherwise turbulent effect such revelations would have caused Ghana’s banking industry. The timing of their actions is however a bit too late and for that reason, it’s fair to apportion them a part of the blame.