The recent troubles with financial institutions in Ghana and the losing of trust in the financial system call for urgent measures that will maintain an acceptable level of sanity and dignity in the system that will allow indigenous institutions to compete with their foreign counterparts.
The collapse of DKM Diamond Microfinance Company Limited in 2015, and now Unique Trust (UT) bank and Capital bank, and even the speculation that more banks will be collapsing soon is a wakeup call on the Bank of Ghana (BoG) and other authoritative bodies to go back to the drawing board for effective and fair strategies. According to the International Monetary Fund (IMF), the global financial crises in the 1990s were a result of feeble financial bodies, weak regulations and lack of strong supervision and transparency. These were the same for the recent financial crises. The financial institutions collapsing highlights the prominence of active risk monitoring and management in the Ghanaian economy. The BoG is issuing more licenses to microfinance and other institutions to operate universal banking when some do not have the expertise in terms of employees and top management and more importantly, when they cannot meet the minimum capital required by the BoG, therefore, influencing their books to look good. The Cause The reverse of trends in the Ghanaian economy to an extent may have contributed to the collapsing of indigenous institutions in the country. All developed economies if one looks critically will see the below trend.
The logic here is simple, agriculture will provide the needed basic materials for the manufacturing sector to produce the needed goods, this will boost industrialization, then services come in to make sure the linkage between the sectors are provided and maintained for a continuous cycle in the economy. However, Ghana has over the years engaged its energy and resources into the service sector with total neglect of the Agriculture and the manufacturing sector. So there are more selling and buying of what is less or not produced and this is one of the causes of the influx of foreign inferior goods in the country and high price of even local foods. For example, it is hard for one to find the real GTP fabrics in Ghana nowadays as the Chinese fake fabrics are selling more than the Ghanaian one.
The government must play its role in providing the appropriate infrastructures and incentive choices for Ghanaians to cover all the above three sectors so that the agric sector will sustain the manufacturing sector and the manufacturing sector given the opportunity for financial institutions to finance and hedge the merchandises from the production sector. This is why I am in support of the NNP’s One Factory, One District agenda, which if effectively manage and operated will make sure the agriculture sector provides the needed raw materials for production and even support the National School Feeding Program.
The Bank of Ghana must establish a proactive governance system by reviewing and amending its governance policies, which must at least serve two principal objectives of sufficient earnings and functional trustworthiness of financial institutions.
Data is key in decision-making. Even the BoG does not know how many financial institutions are there in the country. Clear steps must be penned down for people and institutions to follow when they want to venture into the sector. People are running financial businesses without proper licencing, which BoG is aware, but doing nothing may be due to the limitations on its authority or the logistics to crack down such institutions.
The BoG must establish a deposit insurance scheme for the financial institutions. Ghana authorities must not provide guarantees and put the risk on market participants. Trust must be established between the government and the populace, which government will not allow financial institutions to fail or would make delivery on its commitments on banks, even in the collapse in cases of UT and Capital Bank.
The government institution must set an autonomous agency supervisor for the financial institution. The agency must have sufficient autonomy and independence from all interference for quality surveillance over supervised institutions towards sanity and to put trust in the financial system. For example, the agency can setup a first line of defence with operational layers on supervision on banks internal risk and credit management.
Why Ghana need Sound Financial Systems?
Ghana’s financial system (banks, securities markets, mutual and pension funds, insurance firms, market infrastructures and the Bank of Ghana) must provide a framework for the people to carry out economic transactions while adhering to monetary policies and regulations. This will help direct savings into investment ventures for Ghana’s economic growth.
The issues facing the Ghanaian financial system is not only disturbing the role of financial intermediation in the Ghanaian economy, but may to an extend weaken the efficacy of the existing monetary policies, aggravate economic depressions, cause capital and exchange rate burdens which we have seen recently where the Ghana Cedi is struggling to meet up with the US Dollar, Euro and the Pound Sterling. This has created huge fiscal costs linked to saving distressed financial institutions (DKM, Capital, UT Banks and the likes).
The Writer is a Business Development Analyst at The Global Fund to fight AIDS, TB and malaria in Geneva, Switzerland