ANALYSIS OF THE FINANCIAL STATEMENTS

A ratio analysis is a quantitative analysis of information contained in a

company’s financial statements. Ratio analysis is used to evaluate various
aspects of a company’s operating and financial performance such as its
efficiency, liquidity, profitability and solvency.

Ratio analysis involves evaluating the performance and financial health of a

company by using data from the current and historical financial statements.
The data retrieved from the statements is used to - compare a company's
performance over time to assess whether the company is improving or
deteriorating; compare a company's financial standing with the industry
average; or compare a company to one or more other companies operating in
its sector to see how the company stacks up.

Below are some of the ratios discussed relative to the financial statements of
The Bank.

1. PROFITABILITY RATIOS: These are a class of financial metrics that are

used to assess a business’ ability to generate earnings relative to its associated
expenses.

a) Return on Capital Employed (ROCE)

ROCE = (Profit Before Interest & Taxes ÷ Capital Employed) * 100

 2014 = (16,665 ÷ 356,356) * 100

= 4.67%

 2013 = (13,418 ÷ 279,342) * 100

= 4.80%

The Return on Capital Employed Ratio measures how efficiently a company

can generate profits from its capital employed by comparing net profit to
capital employed.
 From the above computation, ROCE fell by a little margin over the years.
This could have been as a result of an increase in the amounts the Bank may
be owing to other banks, interests, as well as an increase in the deposits made
by customers and current accounts.

Also, computation of the Net Interest Income growth, which is the difference
between the revenue generated from a bank’s assets and the expenses
associated with paying its liabilities, from 2013 to 2014 was 0.93%, a figure
far below the industry average. This means that The Bank is unable to
generate enough revenue from its assets to pay the expenses associated with
paying its abilities.

b) Operating Profit Margin (OPM)

OPM = (Operating Profit ÷ Sales) * 100

 2014 = (143,551 ÷ 226,346) * 100

= 63.42%

 2013 = (124,573 ÷ 187,888) * 100

= 66.30%

The Operating Margin indicates how much of each cedi of revenues is left
over after both cost of sales and operating expenses are considered.

From the computation, operating margin fell from 66.30% to 63.42% in

2014. This could have happened even though operating profit increased in
2014 because, The Bank incurred more interest expenses or increased
operating expenses which might have gone into advertisement among other
things to cause the increase in revenue as well as a less proportionate increase
in operating profit.

c) Net Profit Margin (NPM)

NPM = (Profit After Tax ÷ Sales) * 100

 2014 = (10,955 ÷ 226,346) * 100

 = 4.84%

 2013 = (9,757 ÷ 187,888) * 100

= 5.19%

Net Profit Margin is the percentage of revenue left after all expenses have
been deducted from interest income (sales). It reveals the amount of profit a
business can derive from its total sales.

Net Profit Margin over the period declined by a little margin and this may
have occurred as a result of general increase in expenses and a decline in the
Net Fees and Commissions Income figure, year-on-year. Again, the Profit
after tax, year-on-year saw an increase of 12.28% compared to the industry
average of 66.5% indicating that The Bank did not run efficiently hence,
providing less value, in the form of profits, to shareholders.

d) Return on Equity (ROE)

ROE = (Profit After Tax ÷ Shareholders’ Equity) * 100

 2014 = (10,955 ÷ 138,421) * 100

= 7.91%

 2013 = (9,757 ÷ 128,670) * 100

= 7.58%

The Return on Equity ratio as part of profitability ratios, measures the ability
of a firm to generate profits from its shareholders’ investments in the
company. It shows how much profit each cedi of common stockholders’
equity generates.

RoE had a slight increase in the year of analysis and this may be attributed to
the increase in the business’ profits year-on-year which can be made available
to shareholders, stemming from the boost in sales revenue and attempts made
to decrease the various expenses for the period.
2. LIQUIDITY RATIOS: These are a class of financial metrics used to
determine a debtor’s ability to pay off current debt obligations without raising
external capital. They measure a company’s ability to pay debt obligations
and its margin of safety.

a) Current Ratio

CR = Current Asset ÷ Current Liabilities

 2014 = 1,459,961 ÷ 1,272,056

= 1.15 times

 2013 = 1,288,417 ÷ 1,056,994

= 1.22 times

Current Ratio measures a company’s ability to pay short-term liabilities from

its efficient current assets. The norm used to be 2 or more but now it is 1.5 or
more.

From the above computation, it is evident that The Bank might have had
some hard time meeting its current liabilities from its current assets. This may
be the case because there was a proportionate increase in current liabilities
just as current assets and even more. Also, The Bank had Current Ratios
which fell below the norm for both years which means that it is performing
below the required standards in terms of it managing its liabilities in the short
– term.

b) Quick Ratio

QR = Current Assets - Inventory ÷ Current Liabilities

 2014 = (1,459,961 – 128,818) ÷ 1,272,056

= 1.05 times

 2013 = (1,288,417 – 103,835) ÷ 1,056,994

 = 1.12 times

The Quick Ratio is an indicator of a company’s short-term liquidity and

measures a company’s ability to meet its short-term obligations with its most
liquid assets. The norm is 1:1 which indicates an acceptance ratio.

The Bank exhibits a positive quick ratio over both periods which suggests
that it is in the better position of meeting its short-term obligations using its
most liquid assets. However, efforts should be made to boost it in order to
avoid it from falling further or even below the norm. This can be done by
putting measures in place to reduce the number of days intended to claim
most of the amounts due from other Banks and financial institutions.

3. EFFICIENCY RATIOS: These ratios typically analyze how well a

company uses its assets and liabilities internally.

a) Inventory Turnover

= Cost of Sales (Interest Expense) ÷ Average Inventory/Closing

Inventory

 2014 = 154,022 ÷ 128,818

= 1.20 times

 2013 = 116,231 ÷ 103,835

= 1.12 times

Inventory Turnover is a measure of the number of times inventory is sold or

used in a time period. It is computed to know if a business has an excessive
inventory in comparison to its sales level.

From the computation, more inventories have been sold over the period to the
analysis period. This is confirmed noting that there was sales boost of 21%
over the period.
b) Asset Turnover

= Sales (Interest Income) ÷ Total Assets

 2014 = 226,346 ÷ 1,628,412

= 0.14 times

 2013 = 116,231 ÷ 1,336,336

= 0.14 times

Asset Turnover is a ratio that measures the efficiency of a company’s use of

its assets in generating sales revenue/interest income to the company.

The Asset Turnover is same for both years even though profit margins
differed for both years. This might have arisen due to a proportionate use of
the Bank’s assets in generating its interest income over the years.

However, the Asset Utilization for 2013 and 2014 were 0.68% and 0.74%
respectively, meaning that in general, everything from inventory to accounts
receivable, and any other tangible asset seemed to make no profits to the
company as compared to the industry average of 8.80%.

c) Cost to Income Ratio

= Operating Expenses ÷ Operating Income

 2014 = 99,962 ÷ 143,551

= 70%

 2013 = 87,045 ÷ 124,573

= 70%

This is a metric used to measure the cost of running a business compared to

its operating income. It’s a useful metric for gauging the efficiency of the
operation of the Bank.
 However, from the computation, the Cost-to-Income Ratio has been on the
high side of 70% for both years and even in comparison to the industry
average of 56%. This means that The Bank has been ineffective in its
operations hence showing how unprofitable it has been.

4. SHAREHOLDER RATIOS: These are measures used to assess the level of

returns received by the shareholders of a company.

a) Earnings Per Share (EPS)

EPS = [Earnings (Net Profit) – Preferred Dividends] ÷ Number of

Ordinary Shares Outstanding

 2014 = [10,955 ÷ (138,421-10,955)]

= 0.09 per share

 2013 = [9,757 ÷ (126,670-9,757)]

= 0.08 per share

Earnings Per Share, also called net income per share, is a market prospect
ratio that measures the amount of net income earned per share of stock
outstanding. In other words, this is the amount of money each share of stock
would receive if all of the profits were distributed to the outstanding shares at
the end of the year.

From the computation above, it is evident that in both years EPS had stayed
positive and increased by 0.01 per share over the period. However, in the
absence of dividend payments having been made, there should be a cause for
worry since payment of dividend may cause the EPS figures to change hence,
efforts need to be made to ensure that profit generation is boosted so as to
earn higher EPS and also, facilitate reinvestment.

b) Price Earnings Ratio (PE)

PE = Price Per Share ÷ Earnings Per Share

 2014 = 0.30 ÷ 0.09

 = 3.33 per share

 2013 = 0.28 ÷ 0.08

= 3.50 per share

The Price Earnings Ratio indicates the cedi amount an investor can expect to
invest in a company in order to receive one cedi of that company’s earnings.

An investor, per the analysis period will have to invest Gh¢3.33 per share in
order to reap a cedi on earnings. However, the amount to investor is reducing
compared to the previous year which may be an indicator of poor
performance of The Bank, making it overly expensive to invest in.
Management must therefore work harder in boosting the earnings per share of
The Bank by engaging in activities to generate and report higher profits.

5. CAPITAL STRUCTURE RATIOS: This is how a firm finances its overall

operations and growth by using different sources of funds. It provides insight
into how risky a company is over a given period of time.

a) Gearing Ratio

= [Debt ÷ (Debt + Total Equity)] * 100

 2014 = [217,935 ÷ (217,935 + 138,421)] * 100

= 61%

 2013 = [150,672 ÷ (150,672 + 128,670)] * 100

= 54%

Gearing Ratio is a measure of financial leverage that demonstrates the degree

to which a firm’s operations are funded by equity capital as against credit
financing.

From the computation, The Bank seems to be considering more debts to

finance its operations – it is highly geared. The previous year had a gearing
 ratio of 54% which is quite normal. However, the debts may be the only
source of its growth.

b) Proprietary Ratio

= [Shareholders’ Fund ÷ (Total Assets – Intangibles)] * 100

 2014 = [138,421 ÷ (1,628,412 – 16,528)] * 100

= 8.59%

 2013 = [128,670 ÷ (1,336,336 – 17,493)] * 100

= 9.76%

Proprietary Ratio is the proportion of shareholders’ equity to total assets and

as such, provides a rough estimate of the amount of capitalization currently
used to support a business.

From the computation, The Bank may be making use of too much debt rather
than equity, in supporting operations which may place it at risk of bankruptcy.
 The Ghanaian banking industry has seen changes and suffered some shocks
over the last decade and several factors had accounted for this. These factors
can broadly be categorized into four (4) main factors, especially looking at
the rapid fall of The Seven (7) banks in the last One (1) year in Ghana. They
include:

RISK MANAGEMENT/CREDIT APPRAISAL AND NON -

PERFORMIMG LOANS (NPL)

 Risk Management: This is a very important tool in finance which refers to

the practice of identifying potential risks in advance, analyzing them and
taking precautionary steps to curb or reduce those risks. Banks should be
sturdy in their market and segment, thereby knowing which markets are more
or less risky.
It should be noted that, not giving due importance to risk management while
making investment decisions might wreak havoc on investment.

 Non-Performing Loans: Lending is one of the main incomes generating

activities of banks in Ghana. This is evidenced by the volume of loans that
constitute banks’ assets and the annual volume of credit granted to borrowers
in the private and public sectors of the economy. This can be said to be the
blood stream of the bank and thus must be treated with keen interest. A non-
performing loan is a sum of money upon which debtor has not made
scheduled payment, for a period of 90 days as per International Monetary
Fund (IMF) standards. Loan performance relates to the business cycle
therefore a default will distort business. In order to control NPL and keep
bank at float, banks credit computation, security practices and supervision
should not be undermined. Banks should not give loans against high risk
security.
Loans should also be approved on grounds of ambitious skills, credit
competency of the lender as a substitute for debt to equity ratio.
NPL is harmful to the economy of the whole world so it’s important to
analyze and know the root cause of loan defaults and by this we can control
NPL. However, to battle NPLs, banks should consider the following:
 • Charging low interest rate to increase the tendency of repayment
• Banks should hire specialized persons on merit basis to deal with credit
risk efficiently
• Conduct counseling programs and follow up on lenders business etc.

 Credit Appraisal: This denotes evaluating the proposal of a loan to find out
the repayment capacity of the borrower. It shows the credit worthiness with
the major focus on his/her ability and intentions to pay back the loan. The
process involves an appraisal of the market, management, technical and
finance. This assessment is done basically by checking;

• Past credit history - assessing if past or present loans of the borrower

have a clear repayment track and trying to know reasons for any
misconduct in repayment. This can be done through credit bureau.
• Customer profile - knowing to which segment of the society the
customer belongs to. i.e. whether he is salaried or business class.
• Trying to know the character of the borrower through physical
interactions and understanding of their needs.
• Assessing the financial position of customers at present and in the past
i.e. through financial statements at the bank and other banks, banking
pattern and any other source, if any.
• Another interesting thing to look out for is facial expression at the time
of interviewing the customer, managers can tell a lot from the
customer’s demeanor. Customer’s financials and everything about it is
top notch but certain questions bring a lot of strain which might
ultimately tell whether the customer will really use the loan for the
purpose for which the loan is been taken and whether the customer is a
delinquent. These banks failed to do proper credit appraisal before
giving out loans to customers.
• Do not give loans out of pity and personal comfort
• All KYCs and proper due diligence must be fully completed before
disbursing a loan.
 LIQUIDITY/ CAPITAL ADEQUACY & INSOLVENCY
 Liquidity is the measure of the ability and ease with which assets can be
converted to cash quickly without loss of time and money. Liquid assets are
those that can be converted to cash quickly if needed to meet financial
obligations e.g. Cash, central bank reserves etc. To remain viable, a financial
institution must have enough liquid assets to meet its near-term obligations
such as withdrawals by depositors. This in effect means a bank’s assets must
outweigh its liabilities to keep it afloat.

 Capital Adequacy Ratio (CAR) & Insolvency

This is the measure of a bank’s available capital expressed as a percentage of
the bank’s risk weighted credit exposures. The reason minimum CARs are
critical is the fact that it makes sure that banks have enough cushion to
absorb a reasonable amount of losses before they become insolvent and
eventually loose depositors’ funds. This ensures the efficiency and stability of
a nation’s financial system by lowering the risk of banks becoming insolvent.
During the process of winding up, funds belonging to depositors are given a
higher priority than the bank’s capital, so depositors can only lose their
savings if a bank registers loss exceeding the amount of capital it processes.
Thus, the higher the banks CAR, the higher the degree of protection of
depositor’s assets.

CORPORATE GOVERANCE
Basel committee on Banking supervision Guidelines – on the corporate
governance principles as presented by KPMG.
The primary objective of corporate governance should be the safeguarding of
stakeholders’ interest in conformity with the public interest on a sustainable
basis. The following guidelines reinforce the board’s responsibilities for
oversight and, risk governance.

• Principle 1: Board’s overall responsibilities – the board has an overall

responsibility of the banks, including appointing and overseeing
management’s implementation of the bank’s strategic objectives,
governance framework and corporate culture.
• Principle 2: Board qualification and composition – Board members
should be, and remain qualified, individually and collectively for their
positions. They should understand their oversight and corporate
governance role and be able to exercise sound, objective judgment
about affairs of the bank.

Composition of The Board.

 Audit committee
 Risk committee
 Compensation committee
 Other specialized committees such as nomination, human resources/
governance and ethics & compliance committee are recommended.

• Principle 3: Boards own structure and practices – the board should

define appropriate governance structures and practices for its own work
and put in place the means such as practices to be followed and
practically reviewed for ongoing effectiveness.

• Principle 4: Senior Management – under the direction and oversight of

the board, senior management should carry out and manage the bank’s
activities in a manner consistent with the bank’s strategy, risk appetite,
remuneration and other policies approved by the board.

• Principle 5: In a group structure, the board of the parent company has

the overall responsibility for the group and for ensuring the
establishment and operation of a clear governance framework
appropriate to the structure, business, and risks of the group and its
entities. The board and senior management should know and
understand the bank group’s organizational structure and the risks that
it poses.

• Principle 6: Risk management function – Banks should have an

effective independent risk management function, under the direction of
a Chief Risk Officer (CRO), with sufficient stature, independence,
resources and access to the board.
• Principle 7: Risk identification, monitoring and controlling – Risks
should be identified, monitored and controlled on an ongoing bank-
wide and individual entity basis. The sophistication of the bank’s risk
management and internal control infrastructure should keep pace with
changes to the bank’s risk profile.

• Principle 8: Risk communication – An effective risk governance

framework requires robust communication with the bank about risk,
both across the organization and through reporting to the board and
senior management.

• Principle 9: Compliance – The bank’s board of directors are

responsible for overseeing the management of the bank’s compliance
risk. The board should establish a compliance function and approve the
bank’s policies and process for identifying, assessing, monitoring and,
reporting and advising on compliance risk.

• Principle 10: Internal audit – The internal audit function should

provide independent assurance to the board and should support the
board and senior management in promoting an effective governance
process and the long-term soundness of the bank.

• Principle 11: Compensation – The bank’s remuneration structure

should support sound corporate governance and risk management.

• Principle 12: Disclosure and transparency – The governance of the

bank should be adequately transparent to its shareholders, depositors,
other relevant stakeholders and market participants.

• Principle 13: The role of supervisors – Supervisors should provide

guidance for and supervise corporate governance at banks, including
thorough comprehensive evaluations and regular interaction with
boards. Also, senior management should require improvement and
remedial action as necessary and should share information on corporate
governance with other supervisors.
Nigerian equivalent
In 2010 the Nigerian banking sector faced a similar financial crisis, which
compelled the Central Bank of Nigeria (CBN) to crack down on the failed
banks. In a lecture, as a prelude to sanitizing the situation in Nigeria, Sanusi
Lamido Sanusi – then Governor of Central Bank of Nigeria – identified
governance malpractice within banks as the cause of a huge surge in capital
availability. According to him, failure in corporate governance at banks was a
principal factor contributing to the financial crisis.
Sanusi (2010) indicated that poor corporate governance became the norm
because boards ignored these practices for reasons which included being
misled by executive management, besides the boards themselves participating
in obtaining unsecured loans at the expense of depositors.
Some banks even engaged in manipulating their books by colluding with
other banks to artificially enhance financial positions and therefore stock
prices. Also, CEOs and boards set up Special Purpose Vehicles to lend
money to themselves. One bank in Nigeria is reported to have borrowed
money and purchased private jets, which were later discovered to be
registered in the name of the CEO’s son. Without doubt, these are the same
irregularities the BoG cited for closing the banks.

BANK OF GHANA AS REGULATORS

The Bank of Ghana has overall supervisory and regulatory authority in all
matters relating to banking and non-banking financial business with the
purpose to achieve a sound, efficient banking system in the interest of
depositors and other customers of these institutions and the economy as a
whole.

The regulatory and legal framework within which banks, non-bank financial
institutions as well as forex bureau operate in Ghana are the following:
• Bank of Ghana Act 2002, Act 612
• Bank of Ghana (Amendment) Act, 2016 (Act 918)
 • Banks and Specialized Deposit-Taking Institutions Act, 2016 (Act
930)
• Non-Bank Financial Institutions Act, 2008 (Act 774)
• Companies Act, 1963 (Act 179)
• Bank of Ghana Notices /Directives / Circulars / Regulations

The Bank of Ghana is therefore, charged with the responsibility of ensuring

that the financial system is stable to ensure that it serves as a facilitator for
wealth creation, economic growth and development.
The functions and responsibilities of the Central Bank as a Regulator are
defined in Act 612 and Act 673 as follows:
• To regulate, supervise and direct the banking system and credit system
to ensure the smooth operation of a safe and sound banking system.
• To appoint an officer designated as the head of Banking Supervision
Department who shall be appointed by the Board.
• To consider and propose reforms of the laws relating to the banking
business.

Consequently, the Central Bank exercises its mandate to ensure that:

• Depositors' funds are safe.
• The solvency, good quality assets, adequate liquidity and profitability
of banks are maintained.
• Adherence to statutory and regulatory requirements are enforced.
• Fair competition among banks exist.
• The maintenance of an efficient payment system.

In summary, the laws governing banking operations have provisions

regarding licensing, withdrawal of license, and arrangement for examining
and monitoring banks, powers, and duties as well as protection of the
supervisor.

Finally, to enhance the legal and regulatory framework, the Bank of Ghana
supervisory functions are designed to be consistent with the Basel Core
Principles for Effective Banking Supervision.
Over the last 12 months, the Bank of Ghana (BoG) has cracked the whip at
the banking industry in a bid to restore sanity in the industry. In August 2017,
the UT and Capital Banks were liquidated for failing to meet the BoG’s
minimum capital ratio.
Few weeks later, the operations of uniBank, Royal Bank, Beige Bank,
Sovereign Bank, and Construction Bank ended. In their place the BoG
announced a new bank called the Consolidated Bank, as part of measures to
ensure the banking sector maintains a strong indigenous presence.
It will be recalled that in the run-up to the 2016 election, then-running mate
and current Vice-President Dr. Mahamudu Bawumia predicted that eight
banks were under threat of collapse and needed life support. The closure of
the five banks brings to seven the number of banks that have been closed in
one year. Which is the eighth bank?
Dr. Ernest Addison, governor of the Bank of Ghana, said the Central Bank
rolled out such measures “to strengthen the financial system to protect the
interests of depositors. Some of the reasons why the BoG collapsed these five
banks to form the Consolidated Bank Ghana are enlisted below:
1. The Central Bank in their statement said Beige Bank, Sovereign Bank
and Construction Bank all obtained their licenses under false pretense.
2. Also, these five local banks breached the BoG's cash reserve
requirement.
3. Unable to meet their daily obligations.
4. Inaccessible paid-up capital and declining loan portfolio
5. Over 89% of loans non-performing (uniBank).
6. Loans and advances were over stated.

Synopsis
The BoG’s statement on closure of the banks said an Asset Quality Review
(AQR) of banks conducted in 2015 and 2016 found that some indigenous
banks had inadequate capital, high levels of non-performing loans, and weak
corporate governance. Below is a synopsis of the state of financial
irregularities in the five banks which compelled BoG to crack the whip.

UT BANK
The woes of UT Bank began from the very start of their licensing. It emerged
that the Bank of Ghana failed to enforce its regulations in granting licenses
and supervising the operations of UT. The license was acquired under
fictitious means; therefore, the bank was sitting on a time bomb which was
going to go off sooner or later.

Concentrations
It also came out that Concentrations are probably the single most important
cause of major credit problems. Credit concentrations are viewed as any
exposure where the potential losses are large relative to the bank’s capital, its
total assets or, where adequate measures exist, the bank’s overall risk level.
Relatively large losses may reflect not only large exposures, but also the
potential for unusually high percentage losses given default.
Credit concentrations can further be grouped roughly into two categories:

 Conventional credit concentrations would include concentrations of

credits to single borrowers or counterparties, a group of connected
counterparties, and sectors or industries, such as commercial real estate,
and oil and gas.
 Concentrations based on common or correlated risk factors reflect subtler
or more situation-specific factors, and often can only be uncovered
through analysis. Disturbances in Asia and Russia, in late 1998, illustrate
how close linkages among emerging markets under stress conditions and
previously undetected correlations between market and credit risks, as
well as between those risks and liquidity risk, can produce widespread
losses.
The recurrent nature of credit concentration problems, especially involving
conventional credit concentrations, raises the issue of why banks allow
concentrations to develop. First, in developing their business strategy, most
banks face an inherent trade-off between choosing to specialize in a few key
areas with the goal of achieving a market leadership position and diversifying
their income streams, especially when they are engaged in some volatile
market segments. This trade-off has been exacerbated by intensified
competition among banks and non-banks alike for traditional banking
activities, such as providing credit to investment grade corporations.
Concentrations appear most frequently to arise because banks identify “hot”
and rapidly growing industries and use overly optimistic assumptions about
an industry’s future prospects, especially asset appreciation and the potential
to earn above-average fees and/or spreads. Banks seem most susceptible to
overlooking the dangers in such situations when they are focused on asset
growth or market share instead.
Challenges are linked to its high non-performing loans portfolio, which has
greatly affected the bank’s financial performance.
The inability of the company to disclose its financials also led to a seizure of
its operations temporarily by the Ghana Stock Exchange in January 2017.

CAPITAL BANK
Our investigations indicated that the Bank of Ghana was complicit in the
wrongful issuance of banking license to Capital Bank.
i. Poor governance structure: In Capital Bank, Corporate governance
exist on paper and does not actually work. Most of the Board Members
do not have any strong leadership, in-depth knowledge in the industry
and are not proven to have such skills and knowledge to steer the bank
as required. The Board composition did not bring on board the needed
competencies and skills needed to run the bank. The board
appointments were based on other factors best known to their
appointers. The “tone at the top” is quite problematic and weak to say
the least. Board practices and procedures need to be looked into
seriously if we are to avoid such happenings going forward.
ii. Inadequate Risk Management Systems: Risk management in Capital
Bank was given a backseat with emphasis rather being put on
marketing and deposit mobilization. A risk-based-thinking approach to
 banking has not been rigorously applied and this has created a serious
risk management crisis.
iii. Liquidity Mismatch: Serious problems of liquidity risk exposures and
proper Assets Liabilities Management was not handled competently by
capital banks. Deposit usually obtained at very short tenure are lend at
long tenure with the hope of still being able to mop-up more deposits to
shore up the liquidity gaps. In fact, the bank did not have any credible
liquidity contingency funding plan. A lot of the failures in the Savings
and Loans and Microfinance sector is attributed to liquidity mismatch.

uniBank
The statement said, “in all uniBank had given amounts totaling
GH¢1.6billion to shareholders in the form of loans and advances, without due
process and in breach of relevant provisions of Act 930.
In addition, these shareholders and related parties illegally received
GH¢3.7billion in breach of the normal credit delivery process and were not
reported as part of the bank’s loan portfolio. The loans were also without
collateral and attracted no interest income for uniBank. In all, the BoG
detected that shareholders and related parties of uniBank had drawn an
amount of GH¢5.3billion, constituting 75 percent of the bank’s total assets.
Besides, out of the total customer deposits of GH¢4.3billion, GH¢2.3billion
was not disclosed to the BoG. Loans and advances to customers were also
overstated by GH¢1.3billion in prudential returns to the BoG. As a result, by
31 May 2018 over 89% of uniBank’s loans and advances of GH¢3.74billion
were classified as non-performing.

Royal Bank
Since commencing business in 2012, Royal Bank had experienced solvency
and acute liquidity challenges, arising from irregularities.
A subsequent assessment of the bank’s books revealed that it had suffered
severe capital impairment due to under-provisioning for loans. It also had an
overstated capital on account of fixed assets. This resulted in an adjusted
capital of negative GH¢484million; yielding a capital adequacy ratio (CAR)
of negative 80.53 percent, a capital deficiency of GH¢567.78million and a
net-worth of negative GH¢498.63million as at 31st May 2018.
Since September 2017, the bank has persistently faced serious liquidity
challenges – resulting in the continuous breach of the cash reserve ratio
required by section 36 of Act 930, besides poor liquidity risk management
controls.

Sovereign Bank
BoG’s investigations found that Sovereign Bank’s license was obtained by
false pretenses, through the use of suspicious and non-existent capital. As a
result, the bank became insolvent from day one and was unable to meet daily
liquidity obligations. The BoG says liquidity support granted the bank prior
to its collapse amounted to GH¢21million as of 31st July 2018. That
notwithstanding, the bank was unable to publish its audited accounts for
December 2017 – in violation of section 90 (2) of Act 930.

Beige Bank
Beige Bank commenced banking operations in December 2017, after
operating as a savings and loans company. Subsequent investigations
however revealed that the bank obtained its license under false pretenses.
The investigation further revealed that funds purportedly used by the bank’s
parent company to recapitalize were sourced from the bank through an
affiliate company, which was in violation of regulatory requirements for bank
capital. An amount of GH¢163.47million belonging to the bank was placed
with one of its affiliate companies (an asset management company), and
subsequently transferred to its parent company. The parent company in turn
reinvested the amount in the bank as part of its capital.
The placement by the bank with its affiliate company amounted to 86.86% of
its own net funds as at end June 2018, thereby breaching the regulatory limit
of 10%.
Overall, the quality of the bank’s loan portfolio had seriously deteriorated;
resulting in a Non-Performing Loans Ratio (NPL) of 72.80%. The bank’s
Capital Adequacy Ratio (CAR) was assessed to be negative 17.18% against
the regulatory minimum of 10%; thus, recording a capital deficit of
GH¢159billion and rendering the bank insolvent.

Construction Bank Limited

On its part, Construction Bank was licensed in May 2017 and commenced
operations in December 2017. During uniBank’s official administration, the
BoG discovered that the initial minimum paid-up capital of the bank was
funded by loans obtained from NIB Bank Limited (GH¢34million) and
uniBank (Ghana) Limited (GH¢61million), contrary to section 9 (d) of Act
930.
At the time of its closure, BoG found that an amount of GH¢80million out of
the bank’s paid up capital remained inaccessible to the bank. Thus, the bank’s
inability to inject additional capital to restore its CAR to the minimum capital
of GH¢120million threatened the safety of depositors’ funds and stability of
the banking system.
In arriving at the decision to liquidate the five banks, the BoG said it noticed
a trend of poor corporate governance, poor risk management practices,
regulatory non-compliance, and poor banking supervision. These poor
corporate governance practices had emerged over the years, leading to a
significant build-up of vulnerabilities in the banking sector.

Supervision and enforcement

Like Ghana, the central bank of Nigeria found that weak supervision and
inadequate enforcement played a significant role in exacerbating the banking
crisis in Nigeria. In Nigeria, regulators were ineffective in foreseeing and
supervising massive changes in the industry. The situation in Nigeria in 2010
is a true reflection of the crisis in Ghana’s banking sector in 2017 and 2018.
Many, if not all of the failures in the banking sector should be laid at the
doorsteps of the immediate past-Governors of the BoG. Ghanaians had
complained and continue to complain about poor supervision and
enforcement of banking and financial regulations. One question begging for
answers is: how could the BoG issue licenses to banks based on false and
unverified financial claims?

Weak boards
While blaming BoG for weak supervision, the culture of poor corporate
governance practice permeates indigenous business culture.
In fact, since independence, Ghanaian industries have been grappling with
sound corporate governance practices; largely because a chunk of businesses
are owned by family, friends or political cronies. The common refrain in
Ghana is that “the business belongs to my uncle, my auntie, my father,
mother etc., so I can do what I want with the money”.
The buying of luxury cars and houses, rather than reinvesting into operations,
characterizes management decisions in many local industries, including
banks. Also, failure to diversify ownership and bring on board experts and
new investments also stifles local businesses. Small wonder that local
industries are unable to survive, let alone becoming competitive.

Corporate culture
Culture in a corporate context can be defined as a combination of the values,
attitudes and behaviors manifested by a company in its operations and
relations with its stakeholders. These stakeholders include shareholders,
employees, customers, suppliers and the wider community and environment
which are affected by a company’s conduct.
This underlies the fact that companies do not exist in isolation. They need to
build and maintain successful relationships with a wide range of stakeholders
in order to prosper. These relationships will be successful if they are based on
respect, trust and mutual benefit.
One of the key roles for the board includes establishing the culture, values
and ethics of a company. It is important that the board sets the correct ‘tone
from the top’. The directors should lead by example and ensure that good
standards of behavior permeate all levels of an organization. This will help
prevent misconduct, unethical practices as we are witnessing in the banking
sector of Ghana.
Owners of local industries need to understand that high-quality corporate
governance helps to underpin long-term company performance. In short,
cultural failures damage reputations and have a substantial impact on
shareholder value. Elsewhere, customer base and brand identity now account
for over 80 percent of total corporate value, compared to under 20 percent 40
years ago.

Purpose and strategy

One other area that local industries need to focus on is that of defining their
purpose, strategy and business model. Moving forward, local industries
(including banks) should recognize the value in defining and communicating
a broader purpose beyond profit, which generates wealth and delivers
benefits to society as a whole. This can help create shared goals, motivate
employees and build trust with customers.
Thus, aligning business decisions with purpose and values – and focusing on
how financial targets will be achieved, can lead to more sustainable value
creation. The key lesson for sound business management is that a strong
governance system is essential for a healthy culture. While the processes and
practices in the boardroom are equally important, governance needs to focus
on the substance of what boards do: who they engage with; what information
they are given; and what questions they ask.
Shareholders rely on the board to oversee a healthy culture that is compatible
with the business model, steers the executive and delivers the strategy.
Therefore, boards must be actively engaged in the business of shaping,
overseeing and monitoring culture, and holding the executive to account
where they find misalignment with company purpose and values.
Unfortunately, corporate governance practice in Ghana is at its worst judging
from the banking crisis. If Ghana adhered to international best practices of
corporate governance, competent people with relevant industry knowledge
would be appointed to boards of both private and public enterprises. The
appointment of political cronies and family and friends to boards should be
minimized or stopped if possible.

Conclusion
In conclusion, consolidation of the five banks will not solve the financial
crisis overnight without strengthening corporate governance and banking
supervision. As Sanusi noted, the Nigerian case proved that the
‘Consolidation’ failed to overcome the fundamental weaknesses in corporate
governance in the new bank(s). After consolidation, some banks continually
engaged in unethical and potentially fraudulent business practices. “As a
result, we have now discovered that in many cases consolidation was a sham
and the banks never raised the capital they claimed they did.” he
concluded. Any signals for the BoG?

References
BoG (2018) Statement on the closure of five banks. Bank of Ghana.
Financial Reporting Council (2016), corporate culture and the role of boards.
Sanusi, L. S. (2010) “The Nigerian Banking Industry: What went wrong and
the way forward” CBN.