For the first time since the collapse of UT Bank and Capital Bank in August, this year, the Governor of the Bank of Ghana (BoG), Dr Ernest Addison, has spoken extensively on circumstances leading to their collapse, with an assurance that the mistakes that brought the two banks down will not be entertained under his watch.
After enumerating the causes of the banks’ fate which included directors shirking their responsibilities in return for favours and some perks, Dr Addison said: “Some may ask, what were the supervisors doing all this time with such gross violations going on in the banking sector?
“Upholding the highest ethical standards and professionalism in the performance of our supervision function cannot escape my watch, going forward, and I demand same from you all,” he told members of the Chartered Institute of Bankers (CIB) Ghana on December, 2.
“We shall employ an appropriate mix of both on-site supervision and off-site surveillance to implement the risk based supervision framework,” he said, in what could signal a new era of central bank supervision in the country.
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He was addressing members of the CIB at its annual dinner in Accra, the first by him after he took office in March. The event brought together seasoned bankers to deliberate on trending industry issues on the theme: ‘Building a sustainable banking system in Ghana.’
Business class tickets
The licences of UT and Capital banks, which graduated from financial houses at different times to banks, were revoked on August 14 after they were each found to be heavily illiquid and deficient in capital.
Subsequently, the BoG approved a purchase and assumption (P&A) agreement for GCB Bank to assume ownership of selected assets and liabilities of the defunct lenders.
Since then, some people have propounded various theories as reasons behind their demise, with the central bank governor being an exception.
However, speaking on the issue for the first time, Dr Addison said although the failure of the two banks was due to significant capital deficiencies, the underlying reason was poor corporate governance practices which gave rise to various degrees of “recklessness” by management and the board of directors.
He explained that while the demise of the two banks was caused by a litany of errors by various actors, the dominant culprits were shareholders, “who exerted undue influence on management of the banks, leading to poor lending practices.”
“This was also reinforced by weak risk management systems and poor oversight responsibility by the boards of directors,” he added.
Generally, Dr Addison said some of the directors traded their independence, oversight and fiduciary duties for rewards that included business class air tickets doled out to them annually.
A case in point, he said, was the decision by directors of boards to double as consultants to the two banks, giving rise to conflict of interest situations.
Other directors, he noted, interfered with the day-to-day administration of the banks and that “weakened the management oversight function of executive directors.”
“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 granted to them annually,” he added.
Additionally, he said the defunct banks operated “very high executive compensation schemes” that “were not commensurate with their operations.”
He, however, fell short of saying what sanctions the central bank had prescribed or would prescribe against the culprits, whose inactions led to the laying off of more than 1,300 workers.
Diversion of funds
Still on some of the irresponsible acts by management and boards of directors, Dr Addison said the BoG found that the banks were co-mingling their activities with their related holding companies.
“For instance, one bank was paying royalties for the brand name, even at a time that the bank’s financial performance was abysmal and could not pay dividends.
Interestingly, the royalties were approved by four out of seven members of the board without the consent of the other significant minority shareholders, including an international financial institution,” he said.
“As a result, the international institution placed a notice on its website abrogating all relationships with the bank and this led to most of the foreign lenders cutting off their credit lines to the bank and recalling their credits, thereby creating serious liquidity squeeze to the bank,” he said.
Another issue, he said, was the widespread diversionof funds to holding companies and their related parties.
In the case of one bank, he said placements could not be traced to the bank’s records “although some customers showed proof of their investments with the bank.”
“In all of these cases, one thing was clear, and that is, the banks could not delineate themselves from their past practices as finance houses,” he stated, referring to the migration from UT Financial Services and First Capital Plus Savings and Loans Company to fully fledged banks.
“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,” he stated.
Having learnt its lessons, the governor said the central bank was now seeking to, among others, enhance corporate governance practices, as well as risk assessment frameworks across all banking institutions.
This should contribute significantly to improve overall performance and reputation of banks, as well as the credibility of the entire financial sector, he added.