“But we should expect more mergers which will be fast tracked by the proposed increase in the capital requirement yet to be announced.” These are the sentiments of banking analyst, Roderick Okoampah Ayeh. This is in wake of the UT Bank and Capital Bank insolvency. In this interview with Ghana Talks Business, the banking analyst shares his insights on the revolving saga.
Roderick Okoampah Ayeh: ROA
Ghana Talks Business: GTB
As at the time of this posting, the Central Bank has frozen the accounts of key management and board members of the two defunct banks.
GTB: Do you think the sentiments of the public is being well managed in the wake of this takeover?
ROA: The reaction and sentiments of the public is expected. People have high trust for banks and therefore anything that creates a situation of bank mismanagement surprises the public and this will directly lead to some informed sentiments and surprises within the banking sector and can change people reaction to the banks in question and the entire industry. In the case of the GCB takeover clearly the ‘voice’ of the Central Bank behind the whole takeover has in someway controlled the the negative sentiment that could have accompanied a situation like this. Largely, the public seem to be a bit more relaxed but are very surprise about the happenings
GTB: The takeover had been a bit too abrupt, we woke monday morning to be hit by this. Could this have cause some panic in the banking industry?
ROA: The abrupt nature of the takeover seem to suggest that it was planned and executed. And as I indicated earlier the Central Bank’s involvement in the whole excercise I think helped in creating a level of calmness. I don’t think there has been so much rush on GCB and the entire banking sector. The reaction of the general public to this takeover gives me a sense that majority of the banking population have a high level of trust for our financial sector especially our banks. Without this trust, the situation would have been more different.
GTB: How better could the regulator and all the other players managed this?
ROA: I must commend the Central Bank for the role it played in ensuring that the takeover did not create too much panic.The exercise was well executed and all the needed relevant information was quickly made available to explain the takeover and to further assure the public that no depositor was going to lose their investments. I think that was assuring enough and the weight of the Central Bank got people to believe in the message. The rate at which information regarding the takeover was made available to the public did not give any room for anybody to peddle any false news that could have also led to panic withdrawals. May be, we may also have to be thankful for having various options and platforms to carry important message and those mediums were adequately used.
GTB: What are the possible causes that make banks insolvent?
ROA: Bank insolvency can be caused by several things. Some of them I will term as direct and some are indirect. The direct ones are the things that affect the cashflow of the bank. One key cause is the quality of the loan books of the any bank. The quality is mostly influenced by the procedures and methodologies adopted by banks in granting and monitoring loans. All banks have policies for loan administration but not all of them are committed to following what is documented in the policies. So if bank’s invest deposits and other borrowing in loans it is expected that these loans will generate adequate income to enable a bank to pay the depositors and other borrowings so as to stay in business. Bank loan only means that cash is tied up somewhere which cannot be used to take care of the expenses as they come up. The issue of insider borrowing where loans are granted to board members and their relations is one way of growing bad loans. We can also talk about high expenses without adequate income generation options.
The indirect for me is the issues of leadership or more appropriately, governance. This are not money issues but it involves the drafting of policies and implementing policies. Bad leadership or governance has the potential of eroding liquidity and causing huge insolvency for banks . For example bad decision to invest in fixed assets without estimating the cost benefits on the operations of the bank can negatively affect the cashflow of the bank. Poor oversight of management activities by the board is also an indirect way that can be very costly.
5. Are we likely to have more of such happenings in the banking sector in the next few weeks/moths?
ROA: Till the end of this year I don’t think we there will have any news of merger or takeover like the one we just saw. My observations for now is that the banks that have their original nature as savings and loans seem to be more under stress due to their desire for expansion and growth which is not backed by proper efficiency analysis. But we should expect more mergers which will be fast tracked by the proposed increase in the capital requirement yet to be announced.
GTB: UT Bank was seen to be widely diversified could this diversification be blamed in part to the insolvency?
ROA: Diversification in itself is not a bad thing. For lack of adequate information detailing how the diversification was financed, it will be very difficult to say it contributed significantly to the UT problem. However, if for instance UT properties was largely financed from the UT Bank and matching the cashlow received from the sale of mortgages which is a long term investment to the short nature of funds received from UT bank; that can create a liquidity problem which can lead to insolvency.
GTB: Government is pulling all government funds from banks into single treasury and therefore withdrawing liquidity from the banks. How could this affect the industry as a whole?
ROA: Well in the first place I don’t think it will affect the industry in anyway. The money will still stay within the economy.The only difference is that it will not be part of a bank’s deposit as it use to be. What may happen is that banks that have these accounts as one of their largest top 10 depositors will surely have a challenge on the side of their deposits but that will not be the case for majority of the banks in Ghana. Are we saying that government accounts forms let say half of the entire deposits of banks in Ghana? That cannot be the case so I don’t think the single treasury account will have any drastic effect on the industry as a whole. It may affect certain banks as I indicated but only if that is their largest or part of their top depositors.
GTB: In terms of staffing, what would be the likely outcomes?
ROA: Is this in relation to the takeover? If yes, it is very obvious that some staff will have their contract of employment terminated. This is because the banks that were taken over were not performing so it means that their respective system and size are not relevant in the takeover and must therefore be reviewed. The takeover bank will have to ensure that the takeover yields the needed results. GCB will therefore undertake an audit of its current state and streamline the “new” GCB so as to be profitable. This will mean some of the operations will have to be suspended which also means that some staff will be affected.
Credit: Ghana Talks Business
