Following the recent shake-up in the financial industry, most institutions in the Savings & Loans sector have suffered distress. Some have practically folded up, or are in dire need of financial assistance and unable to meet depositor’s demand. Ghanatalksbusiness.com had a chat with Mr Kwaku Duah Berchie, the President of Ghana Savings & Loans Association (GHASALC) to throw light on the way forward for institutions in the sector.
GTB: As President of Ghana Association of Savings and Loans (GHASALC), what is your view on the comment made by the Governor of Bank of Ghana (BOG) on the savings and loans shake-up.
Well, it is something that has been on the radar of the BOG for quite a while. This issue affects the economy, the whole nation and the financial sector so I think it is a step in the right direction. I only hope that they will do it in such a way that it does not negatively affect institutions and employees as it has happened with some banks. My take is actually to look very well and ensure that if there are some (S&Ls) who need capital injection they can help them with it, give them the required capital and then probably let a representative of the government sit on the boards or some key management positions so that they will turn the companies around instead of just getting rid of the institutions entirely.
GTB: With the amount stated by governor of the bank of Ghana, do you think the Ghs700 million pledged by the BOG is enough to cleanse and revive the sector?
Well, the GHs 700 million is for the Micro finance sector. If I heard him correctly, about USD 1 billion (GHs 5.7 million) has been earmarked for the Specialized Deposit-taking institutions (SDIs) of which the S&Ls feature prominently. Of course, there have been issues with it, but it will serve the nation well if we can help those institutions who can survive, to turn them around instead of leaving them to collapse entirely.
GTB: How much do think will be needed to shore up the Savings and Loans sector to make it vibrant again
Nobody knows, it’s only the Bank of Ghana that has the figures. I don’t know how much will be needed.
GTB: In your view, aside the cash injection from Bank of Ghana, what are some of the changes that must occur to revive the sector and make it more vibrant
The first thing to look at is Corporate Governance. If you have good corporate governance, you will not make certain mistakes, or you will not do certain things that will be detrimental to customers and their deposits. If you have good corporate governance, you can implement a good loan processing system in which you give out the best of loans, so that when the loans go out they will come back. If you have good corporate governance system, you will recruit, train and retain good staff, ensuring top notch human capital.
For me that’s the most crucial, and the Association has started it. A few days ago, we went through corporate governance training in collaboration with GIZ from Germany, in which Boards and key management staff of all the Savings and Loans companies registered with the Association were trained.
GTB: Generally, it could be noted that confidence in the financial sector has waned, what is your sector doing to restore the lost confidence?
The only way we can restore public confidence is to ensure we are doing the right thing. The right thing, implying that there is good corporate governance systems in place where rules are heeded to. This is what is needed to restore public confidence.
GTB: The policy rate is maintained at 16%; is it enough to reduce the cost of borrowing in the S &L
The policy rate affects the Savings and Loans sector differently. Usually the policy rate has a minimal effect on cost of funds in the sector. This is so because looking at what do we do as savings and loans, we buy money and sell money. If the cost of mobilizing the deposit is high, then I would like to get a margin when I sell the loan.
Mostly the lending interest rate S&L institutions charge has nothing to do with the policy rate. Lending rates usually depend on how the S&Ls are able to generate and mobilize funds at a cheaper cost. The S&L would need to look at their deposit mix; which is their CASA (Current Account, Savings Account) ratio and ensure that they don’t get a lot of fixed deposits which require that they pay depositors high interest rates as returns, thereby increasing the cost of deposits for them.
Currently the 182-day T- bill rate is around 15%. Even if it increases to 17%, the public needs to be sensitized in their expectation of higher returns on deposits. For instance, in spite of the current situation, we get people coming in and asking us to give them a rate of 30% per annum on their deposits. That is not realistic! If we accept to pay such customer what he has asked for, there is no way we can peg our lending rates to the policy rate. Policy rate may be 16%, but if the cost of getting our deposits is more than the policy rate, there is no way we would price our loans within the policy rate.
GTB: Has the lack of confidence affected borrowing and the repayment performance of customers in the sector?
It has not affected borrowing per say but some individuals who may want to take advantage of the system. Such individuals take loans with a clear intent of duping the banks, and do not pay. Before they pay up, the S&L would have resort to the legal system which is expensive because you must use the services of a lawyer and so on. In respect to loans, those who need them are still taking them and they make repayments. The non-payment comes from those who just have dubious character and thus refuse to pay. There are those who may genuinely default in payment because their business might have gone wrong, or some incident might have occurred.
You also might have heard over the years, even before the collapse of some banks and the financial sector clean up, that Non-Preforming Loans (NPLs) within the Ghanaian sector was going up every year. One reason again is bad governance practice where related parties of owners, board or management members give themselves loans and never pay back. However, the greater majority of the NPLs are the public who take loans and default on them or never pay back.
GTB: As President, what would be the steps you will recommend to managers of savings and loans to follow to retrieve their money from defaulters and also what steps should they follow before giving out loans
If you have a good corporate governance structure, you would most likely have the right structures in place. You would ensure that before you give out the loans you conduct credit check on applicants and follow the proper due diligence process. Once you give out a bad loan, no matter how much it is monitored, a bad loan will always be bad loan and may never be repaid. The loan initiation process is important, most of the times the signs are there, but in some instances people turn to ignore them until the person has defaulted. Of course, for someone with a very bad character, you may not be able to determine their intent, which is to take the money and not pay.
The advice is that you would have to stick to the rules and regulation of lending and consider the 5 Cs of lending, to make sure that to some extent you have determined the character of the person. You will also to need establish that the person has the capacity and the willingness to pay, the conditions are right; there is sufficient collateral for the loan, and sufficient capital to support the business. Once you satisfy yourself with all these, and apply a bit of common sense you should be okay. If every institution is reporting their monthly credit results to the Credit Reference Bureaus, just as we have in the developed world, the financial institutions can easily share information on credit worthy and credit defaulting businesses or institutions. It would be a useful reference point in loan granting decisions.
GTB: As the Savings and Loans shake-up looms, What is the GHASALC doing to ensure more workers are not rendered jobless?
Well, if the savings and loans shake-up leads to the institution being closed down, that is it; the Association will not be in a position to resist the BOG. That is why the Association is creating the awareness with the regulator that some of the institutions should rather be provided with financial injection instead of shutting them down. The regulator would then ensure that the right people are placed to manage the company until such a time that injected money could be recouped.
If you look at the US, when they had the financial crisis, they did the same for Bank of America amongst others and within a matter of two to three years they had turned the institutions around. Government pulled back his capital and the institutions are working now. We are trying to get them to implement something similar. But of course, there are some institutions whose financial position may not make it possible to be revived so those are on a different scale.
GTB: From where you sit do you foresee possible mergers coming in?
Well the BoG has recommended, it could be that some institutions are in talks to merge, because remember they want to do the clean-up, then a reform will follow after that. It is likely that the minimum capital requirement will move from the current GHC 15 million cedis to a higher level and those who do cannot recapitalize will have to look at either downgrading themselves or merge in order for them to meet the capital requirement.
GTB: What should S&L companies look out for before merging
The key point is due diligence. You don’t go and merge with just anybody, you have to first look at their financials; you have to even go to the extent of looking out for their annual inspection report from Bank of Ghana to establish that the company is in good standing. For instance it wouldn’t make sense if you have about 15 million cedis as your capital and the other company also has 15 million cedis. A merger will give you GHC30 million. This will be inadequate if the new minimum capital requirement is say GHC60 million, meaning it won’t be advisable to go ahead with the merger.
Also once you merge you cannot have two Managing Directors and in fact for all roles. Potential merger candidates must consider all these including the quality of the staff, their recruitment process, training and others. First look at the financials, and also consider the non-financials such as human resource, branch network and reach. All these should be factored in the decision to merge or to acquire.
GTB: Generally, what is your opinion about GAT?
I think it is a good initiative because without the GAT, the banks who required financial injection would not have survived. This is also in line with what I mentioned earlier about what the US government did for some struggling financial institutions during President Barack Obama’s time in office. Instead of taking their businesses from them, they injected some capital.
Now the minimum capital requirement is GHs 400 million for the banks, let’s say bank A has 120 million and they need 400 million, that means that GAT is going to provide them with a capital injection of 280 million, now the 280 million will automatically put GAT to 70% of the ownership. With this, they even have the right to sack the top management if need be. But I am hoping that it would not be the intent.