Ghana Banking Crisis: Understanding the Root Causes

The Ghana banking crisis has been a major concern for the country's economy. Many banks have struggled to stay afloat due to poor management and excessive lending.

The crisis deepened in 2017 when the Bank of Ghana (BoG) took over four local banks, citing their inability to meet minimum capital requirements. This move was a clear indication of the severity of the crisis.

One of the root causes of the crisis is the lack of effective regulation and supervision. The BoG has been criticized for not doing enough to prevent the crisis from happening.

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The banking crisis in Ghana is a complex issue with multiple causes. One of the main causes is poor corporate governance practices, which have been identified as a significant factor in the crisis.

The respondents in the study agreed that severe capital impairment, severe liquidity impairment, high non-performing loan ratio, low profitability levels, and small bank size are also bank-specific causes of the crisis.

These factors can have a ripple effect, making it difficult for banks to operate effectively and maintain customer trust.

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Undercapitalization was a significant factor in the crisis, and it's not hard to see why. In 2015, the central Bank of Ghana's Asset Quality Review (AQR) of banks identified uniBank Ghana LTD as significantly undercapitalized.

The bank submitted a capital restoration plan, but unfortunately, it failed to return them to solvency and compliance with prudential requirements. This is a clear example of how undercapitalization can lead to financial difficulties.

Royal Bank LTD faced a similar issue, with the updated AQR revealing that it was also significantly under-capitalized. This highlights the importance of maintaining sufficient capital reserves to weather financial storms.

The failure of these banks to restore their capital led to them being declared beyond rehabilitation, a stark reminder of the consequences of undercapitalization.

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The banking crisis in Ghana is a complex issue with various causes. Poor corporate governance practices are one of the main bank-specific causes, according to respondents.

Severe capital impairment and severe liquidity impairment are also significant problems. High non-performing loan ratios and low profitability levels contribute to the crisis as well. Small bank size is another factor.

Banking industry-specific causes include poor banking regulation and supervision, which can lead to a lack of oversight and accountability. A high Treasury bill rate and high Ghana reference rate can also exacerbate the crisis.

The central bank's loss has significant ramifications, undermining its moral authority to supervise Ghana's commercial banks. It also damages confidence in the country's financial system.

The bank's accommodative stance on the government's loose fiscal policy is a major contributor to the crisis. By creating money, the bank has allowed the government to live beyond its means.

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The regulatory issues in Ghana's banking sector are a major contributor to the crisis. Regulatory lapses and poor supervision led to a significant build-up of vulnerabilities in the banking sector.

The Central Bank of Ghana is the chief regulator, but they failed to prevent these vulnerabilities. They are solely responsible for reading the provisions of the laws to protect the sector.

Questionable licensing processes were a major problem, with some banks procuring licenses under false pretences. This is evident in the case of Capital Bank LTD, which procured its license under false pretences.

Weak enforcement of regulations allowed these issues to persist. The Central Bank of Ghana's inability to effectively supervise the sector has had severe consequences.

Poor credit management practices are a significant cause of bank failure in Ghana. This is evident in the case of uniBank Ghana LTD, where auditors found "poor credit management practices, poor credit governance and supervision".

The loans approval process at uniBank Ghana LTD was also criticized for being a closely coupled system that didn't allow for diversity of opinion, leading to confirmation biases. This lack of diversity in opinion can lead to poor decision-making.

The bank's high exposure to insiders and related parties also contributed to its poor credit quality.

Poor credit management practices were a significant cause of bank failure in Ghana. This was due to non-adherence to credit management principles and procedures, as well as a high exposure to insiders and related parties.

The loans approval process was run as a closely coupled system, which did not allow for diversity and varying opinion, leading to confirmation biases. This lack of diversity in opinion made it difficult to identify or recognize an increase in credit risks in a timely manner.

Non-performing loans were another key cause of bank collapse, with most of the collapsed banks having huge non-performing loans on their balance sheets. This can lead to a decrease in profitability, increase in operating costs, and financial ramifications for banks.

Credit risk was also a major issue, with large losses generated by defaults of borrowers or issuers of security leading to insolvency and possible bankruptcy. This was due to inadequate income, loss in business, death, unwillingness, and other reasons on the side of the borrower.

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Bad risk management and funds embezzlement were also significant causes of bank failure, with major shareholders treating depositors' funds and public funds as though they were their personal funds. This was seen in the case of Capital Bank, where the liquidity support of GH₵620 million was allegedly mismanaged, leading to its collapse.

The Royal Bank LTD was also significantly under-capitalized, making it difficult to restore it back to solvency. This was revealed in the updated Asset Quality Review (AQR) of the Bank of Ghana.

Loan Against Collateral is a common practice in the banking industry, but it can be flawed. This is according to Samuel Okyere, a former employee of UT Bank and Capital Bank, who observed that loans were granted mainly on this principle.

Banks often rely on loan against collateral to assess creditworthiness, but this doesn't always follow strict credit risk best practices. As Okyere points out in his book, "Fate of System Thinking", small failures can add up over time.

This approach can lead to a systemic failure, which can have devastating consequences. The banking crisis is a prime example of how this can play out.

The financial impact of the Ghana banking crisis was severe. Capital Bank was declared insolvent by the Bank of Ghana in August 2017.

Its liabilities greatly exceeded its assets, resulting in a huge financial burden. Noncollectable debts of GH₵11 billion owed to Capital Bank and UT Bank were a major contributor to the crisis.

This massive debt led to the collapse of the banks, causing significant financial losses for depositors and investors.

Non-Performing Loans are a major concern in the banking sector, with high stock of non-performing loans and non-performing loans ratio remaining a concern.

Banks with huge non-performing loans on their balance sheets are particularly vulnerable to financial difficulties. The BoG has identified this as a key cause of bank collapses.

Non-performing loans increase operating costs, leading to a decrease in profitability. This has significant financial ramifications for banks.

Banks may experience capital reduction due to non-performing loans, leading to undercapitalization. This can have long-term consequences for the bank's stability.

Debt can be a major financial burden, and it's clear that it was a significant factor in the collapse of Capital Bank in August 2017. Its liabilities greatly exceeded its assets.

The noncollectable debts of GH₵11 billion owed to Capital Bank and UT Bank were a major contributor to the banks' downfall. This staggering amount of debt highlights the importance of managing debt effectively.

The collapse of Capital Bank serves as a reminder of the importance of prudent financial management and the need to address debt issues promptly.

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The human impact of the Ghana banking crisis is severe. A staggering 850,000 Ghanaians have been pushed into poverty due to high inflation.

The prices of food, fuels, and utilities remain high, making it difficult for many households to make ends meet. This has eroded the purchasing power of Ghanaians, leaving them struggling to afford basic necessities.

The central bank is now under scrutiny from both within the country and the IMF, adding to the pressure. Under the terms of the IMF loan, if the government demands more bailouts, the bank will have no choice but to refuse.

In 2017, the Bank of Ghana (BoG) announced the takeover of two indigenous banks, UT Bank LTD and Capital Bank LTD, by GCB Bank LTD due to their insolvency. This was a result of the banks' failure to meet their capital requirements after several agreements with the BoG.

The BoG cited the insolvency of the banks as the major reason for revoking their operation licenses, and to protect customers, they were merged with GCB Bank LTD through a Purchase and Assumption transaction.

Over the next year, the BoG announced the consolidation of five more indigenous banks to form a new bank called the Consolidated Bank Ghana LTD, citing the same reason of insolvency. This consolidation was part of a larger trend, with about seven indigenous banks collapsing in a span of two years.

The BoG has identified poor corporate governance as a major cause of the collapse of these banks. This includes inactive or self-serving boards of directors, lack of oversight, and inadequate risk management frameworks.

In August 2017, the Bank of Ghana (BoG) announced the takeover of two indigenous banks, UT Bank LTD and Capital Bank LTD, by GCB Bank LTD, citing insolvency as the reason.

The BoG had previously tried to help the banks increase their capital requirements, but the managers failed to comply. This led to the revocation of the banks' operation licenses to protect customers.

GCB Bank LTD took over the assets and liabilities of the two banks through a Purchase and Assumption transaction. This was a significant move to prevent further financial losses.

The BoG made a similar decision a year later, announcing the consolidation of five indigenous banks to form a new bank called Consolidated Bank Ghana LTD in August 2018.

Corporate governance plays a crucial role in the stability of financial institutions. Poor corporate governance has been cited as one of the major causes of the collapse of banks, as observed by the Bank of Ghana and financial analysts.

The Board of Directors of banks failed to oversee bank accounting and corporate reporting systems, as well as the external auditing system, due to lack of experience or greed. This lack of oversight led to the advancement of non-performing loans to people related to senior board managers.

Most of the non-performing loans were advanced to individuals connected to senior board managers, a clear conflict of interest. The Boards of Directors failed to provide a proper functioning risk management framework, leaving banks vulnerable to collapse.

The lack of independence and integrity among Chief Internal Auditors in most of the collapsed banks led to cover-ups for executive directors during review processes. This lack of accountability contributed to the collapse of these banks.

The general non-adherence to policies of corporate governance has greatly contributed to the collapse of these banks. This highlights the importance of robust corporate governance in maintaining the stability of financial institutions.

Here are some key characteristics of effective corporate governance:

Ghana is currently facing its worst economic crisis in a generation. Last year, the inflation rate hit a record high of 54%, and is still running at more than 40%.

The government's total debt had surged to $55 billion by September 2022. This meant the government needed in excess of 70% of its income to service the debt, something it was unable to do.

Multiple credit rating agencies have downgraded the nation, preventing it from borrowing money internationally. This has forced the government to approach the International Monetary Fund (IMF) for assistance.

The IMF provided a $3 billion bailout, but the government had to agree to reduce the nation's debt interest payments to a manageable level by 2028. This would leave them with enough funds to run the economy.

The government began debt restructuring by renegotiating terms with its creditors, proposing lower interest rates on their loans and longer repayment terms. However, some creditors refused to take part in this debt exchange programme.

The Bank of Ghana issued a statement saying the government had told it that it didn't have enough money to meet the IMF's requirements. Consequently, it would not repay half of the $700 million it had borrowed from the bank.

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Royal Bank LTD was declared to be beyond rehabilitation after the Bank of Ghana's Asset Quality Review revealed it was significantly under-capitalized.

The plans to restore Royal Bank LTD back to solvency could not materialize, just like in the case of uniBank Ghana LTD.

Royal Bank LTD's financial struggles were a significant contributor to the Ghana banking crisis.