ANNUAL DINNER OF THE CHARTERED INSTITUTE OF
BANKERS (GHANA)
ADDRESS BY
DR. ERNEST ADDISON,
GOVERNOR, BANK OF GHANA
THE STATE BANQUET HALL, STATE HOUSE, ACCRA
DECEMBER 02, 2017
The President of the Chartered Institute of Bankers,
Chief Executive Officer of the Institute of Bankers,
Fellows of the Institute,
Members of the Banking Fraternity,
Distinguished Guests,
Ladies and Gentlemen
Introduction
1. Good evening to you all. It is an honour and a great pleasure
to be here tonight. Not to forget, it is also my first time in my
role as Governor of the Bank of Ghana to address this
annual event which brings the finest banking professionals
and other stakeholders in the financial industry. Certainly,
this joyous occasion should provide us the opportunity to de-
stress from our very busy schedules and a rather challenging
year for the banking industry.
2. We do have sumptuous meals to eat tonight, and while doing
that, I will crave your indulgence over the next few minutes to
the central bank's
discuss two key issues deemed critical for
vision of building stronger and resilient banks in the
economy. These are building a stronger economy for robust
and resilient banks and strenghtening the corporate
governance structures of our institutions within the broader
financial sector plan.
3. We have started seeing some recovery in the economy after
a period of slow growth attributed to challenging domestic
and external conditions, with a sharply deteriorated fiscal
position due to weak revenue mobilisation and unconstrained
spending in the round up to the elections. The large fiscal
imbalance impacted on the current account balance leading
to a significant deterioration.
By the end of 2016, the macroeconomic risks in the economy
4.
with inadequate international reserves, a volatile exchange
rate, high inflation and rapid accumulation of public debt was
a source of concern. These developments were
compounded by the energy crisis and disruptions in oil
production. The weak economy and problem in the energy
sector affected the banking industry with high non performing
loans. The environment of high inflation and high
depreciation eroded the capital base of banks in real terms
and coupled with the impact of the required provisioning due
to non performing loans, led to a need for several banks
needing to rebuild their capital buffers. The decline in the real
capital base of banks when macroeconomic environment is
weak provides ample reason why macroeconomic stability
must be of utmost priority for building a strong and
sustainable banking sector.
5. Ladies and gentlemen, this is exactly what the first order of
business of the new government sought to do. The
macroeconomic framework of the 2017 budget was
anchored on unwinding the large economic imbalances to
restore stability. These included bold policy initiatives aimed
at fiscal consolidation focusing on tightening expenditure
controls and plugging revenue leakages as well as re-
profiling short-term debt into long-term instruments to create
some fiscal space. These were complemented by monetary
policy management strategies to lower inflation and ensure
exchange rate stability.
6. The results are clear for all to see: In the year to date, these
policies have started gaining roots-inflation has fallen from
15.4 percent at the end of 2016 to 11.6 in October 2017. As
a result, the policy rate has been lowered by about 550 basis
points with commercial bank lending rates also coming down
by some 150 basis, although banks are expected to do
better. In addition, there has been relative stability on the
foreign exchange market with the cedi depreciating against
the US dollar by 4.6 percent since the beginning of the year
compared to the same period average of about 17 percent
depreciation over the last three years. In addition, economic
growth is gradually rebounding supported by significant
improvements in electricity supply, higher crude oil
production and some government initiatives targeted at
boosting agriculture and manufacturing activities. In the
second quarter of 2017, real GDP growth was estimated 9.0
percent as compared with 1.1 percent same period of 2016
and projected to reach 7.9 percent by end 2017.
7. There is no doubt that the current policy debate is about how
to move from stability to accelerated growth and employment
generation. This is the new paradigm shift we are targeting.
However, Madam President, there is no doubt about the fact
that macroeconomic stability must remain the necessary
condition to facilitate the growth and development objective.
For instance, reduction in inflation helps to reduce
uncertainty, and helps economic agents to extract
information from relative prices. This leads to more
investment and efficient resource allocation and higher
growth.
8. Ladies and Gentlemen, strong financial institutions operating
in a stable macroeconomic environment are the bedrock of
financial stability. Such financial institutions typically have a
strong capital base well aligned to their risk profile; with a
high quality portfolios of assets, high accounting standards,
and robust balance sheets; and they have a culture of timely
disclosure of information and submit to the discipline of the
market. Such institutions are less vulnerable to external
shocks and are therefore a source of resilience for an
economy.
9. Madam President, this year has been quite challenging and
as supervisors, we have been working assiduously to
implement measures that would change the recent narrative
associated with the banking sector as fragile and poorly
supervised. In so doing, we have identified weak corporate
governance practices as one of the underlying causes for the
challenges facing the sector.
Corporate governance plays an important role in
10.
promoting a sound financial system-contributing
significantly to improving overall performance, not only profits
but more importantly reputation of banks and credibility of the
entire financial sector. Good corporate governance
mechanisms revolve around the basic tenets of fairness,
transparency and accountability. Good corporate
governance is critical to the proper functioning of the banking
sector and the economy as a whole.
11. Ladies and Gentlemen, banking is a business and a good
business at that but one that demands integrity and
unquestioned reputation. Let me repeat a story once shared
by a former Governor of the Bank to this fraternity. The
Goldsmiths, who originated banking, saw a business
opportunity after realizing that people who deposited gold
with them only withdrew a fraction at a time, while others
placed more deposits. They then deduced the possibility of
profit making by lending out a proportion of the gold deposits
and hoping that all the gold would not be recalled at the
same time.
12. But, the goldsmiths were not experts in the theory of
probability. Hence, their credbility and reputation became the
most priced asset. They became acutely aware that if at any
given time the public lost confidence in their ability to
safeguard the deposits, a run on them would bring certain
calamity. Over time the business of banking has grown in
complexity but the basic tenets of credibility and reputation
has fundamentally remained the same. Your own Institute,
the Chartered Institute of Bankers Ghana has as its motto,
Honesty and Integrity.
13. All over the world, the history of banking crisis indicates
assurance
that without the public's of well-capitalized, liquid
and sound banks, the intergrity of the financial system, just
like the Goldsmith, would be at risk. The system would be
unstable, prone to a run, resulting in closures and financial
distress for depositors. This will spillover to economic
challenges and weaken growth prospects in the long run.
14. Globally, there are several examples of corporate
governance failures in the financial sector which had adverse
economic consequences. Indeed, the global economy is still
recovering from the contagion effects of the US financial
crises, which occurred about a decade ago.
15. In our own history, the banking sector has witnessed its
fair share of corporate scandals and bank failures. Looking
back to the 1980s, the Ghanaian economy experienced one
of its worst performances which spilled over to the banking
sector. Signs of financial distress emerged as public
confidence in the financial sector waned, aggravated by a
demonetization programme, and negative real interest rates
on bank deposits. The loan books of banks became severely
impaired and eroding the capital base of the affected banks.
16. Over time, the economic difficulties coupled with poor
corporate governance structures resulted in the eventual
collapse of four banks and restructuring of others. These
failures prompted the need for extensive policy measures
and reforms to strengthen the legal and regulatory
frameworks. Several laws were enacted to enhance
business practices and risk management systems in the
banking industry. As time progressed, other pieces of
legislature were enacted in response to the changing
dynamics and in line with international standards.
17. Ladies and gentlemen, in recounting this history, I am
seeking to draw attention to the adage that 'history repeats
itself'.
Despite the improved regulatory environment and
supervisory frameworks, we have witnessed the resolution of
two banks this year. While no systemic challenges to the
financial sector arose from the resolution, it is useful to
understand the underlying factors and reposition the sector
to avoid the same mistakes in the years ahead.
18. Let me be upfront and say that though the failure of the
two banks was due to significant capital deficiencies, the
underlying reason was poor corporate governance practices
within these institutions. In this instance, we saw the
dominant role of shareholders who exerted undue influence
on management of the banks, leading to poor lending
practices. This was also reinforced by weak risk
management systems and poor oversight responsibility by
the boards of directors. Some of the examples of
recklessness that led to the failure of the two banks include:

Co-mingling of the banks' activities with their related
holding companies. For instance, one bank was paying
royalties for the brand name, even at the a that the
bank's financial performance was abysmal and could not
pay dividends. Interestingly, the royalties were approved
by four (4) out of seven (7) members of the Board
without the consent of the other significant minority
shareholders including an International Financial
Institution. As a result, the international institution placed
a notice on its website abrogating all relationships with
the Bank and this led to most of the foreign lenders
cutting off their credit lines to the Bank and recalling their
credits thereby creating serious liquidity squeeze to the
bank.

Also, very high executive compensation schemes
were being operated by the affected banks which were
not commensurate with their operations. The risk and
earnings profile of the banks could not support the
compensation schemes.

Non-Executive Directors of the banks compromised their
independence and fiduciary duties to serve as checks on
Executive Directors. This was because rewards such as
business class air tickets were being granted to them
annually.

Interference by Non-Executive Directors in the day-to-
day administration of the banks weakened the
management oversight function of executive directors.
Some non-Executive Directors were also acting as
consultants to the same banks with no clear mandate,
which gave rise to conflict of interest situations.

Non-adherence to credit management principles and
procedures as the banks were heavily exposed to
insiders and related parties. There was also no evidence
of interest payments on these investments. The
investments were therefore impaired, but some members
of the Board at the time accepted the responsibility to pay
off the said amount through a board resolution.

Diversion of funds to holding companies and their related
parties was wide-spread. In the case of one Bank,
be traced to the bank's records
placements could not
though some customers showed proof of their
investments with the Bank.

Irregular board meeting also accounted for the
weaknesses in the board oversight.

In all of these cases, one thing was clear, and that is, the
banks could not delineate themselves from their past
practices as finance houses. They followed the same
practice of borrowing from high net worth persons at a
very high costs without any plans to bring themselves in
line with the industry norm.
19. Certainly, it is for these numerous reasons that the central
bank is seeking, among others, to enhance corporate
governance practices as well as risk assessment frameworks
across all banking institutions. This will contribute
significantly to improve overall performance as well as the
reputation of banks and credibility of the entire financial
sector.
20. Some may ask, what were the Banks supervisors doing
during all this time with such gross violations going on in the
banking sector.
Upholding the highest ethical standards and
21.
professionalism in the performance of our supervision
function cannot escape my watch going forward, and I
demand same from you all. We shall employ an appropriate
mix of both on-site supervision and off-site surveillance to
implement the Risk Based Supervision Framework. The
Bank's supervision
examiners have built capacity on the
subject and will assess banks' risk management
frameworks
for effectiveness, responsiveness and timeliness in dealing
resources and in protecting depositors'
with risks, deploying
funds.
As part of the Bank of Ghana's regulatory mandate, we
22.
are working on for the
corporate governance directives
banking sector. Among others, these directives will focus on
oversight responsibilities of the Board of Directors and bank
management, prioritize risk management systems, and
ensure independent audit roles, among others. In particular,
the guidelines will impose the tenure of Chief Executive
Officers and Non-Executive Directors of banks, the size of
bank Boards, the retiring age for Directors and disclosure of
attendance at Board meetings by Directors in annual
accounts.
23. These initiatives are underscored by the fact that banks
need sound corporate governance practices to build
public trust and confidence, as well as operational credibility.
Without these, banks stand the chance of eroding public trust
and ultimately jeopardizing shareholders investments and
depositors' funds
and most importantly weakening economy
activity.
24. Another guideline which will strengthen corporate
governance structures in the banking sector is that on
financial publications. This has been updated to include
detailed corporate governance disclosures by banks and the
inclusion of provisions on corporate governance under the
Banks and Specialized Deposit taking Institutions Act, 2016
(Act 930). The guide for financial publications seeks to
ensure that International Financial Reporting Standards
(IFRS) are adopted in the preparation and presentation of
financial statements. It also seeks to clarify and provide
direction as well as bring uniformity in the financial reporting
process across the industry.
25. In addition, the Bank has issued the Basel Capital
Requirement Directive (CRD) for feedback from the
banking industry as part of preparations towards the
implementation of the Basel Capital Accord. All these seek to
achieve fairness, transparency and accountability, which are
core tenets of good corporate governance.
26. These notwithstanding, there is also a role for the financial
institutions even as the central bank updates the role
corporate governance plays in its approach to supervision.
Financial institutions must embrace these efforts with a
strong internal governance culture committed to the highest
standards of integrity, transparency and proper controls.
2018 and beyond
27. Madam President, in the year ahead, our banks will be
Basel II/III compliant. As we speak, all banks have the
and I implore your active
Capital Requirement Directive
participation in the implementation process.
28. Following the passage of the BSDI Act, 2016 (Act 930),
the Bank of Ghana has reviewed existing directives and
regulations to align with the Act. This, together with the
Internal Capital Adequacy Assessment Process (ICAAP),
will strengthen the supervisory review process, which is a
requirement under Pillar II of the Basel accord.
29. We are also driving the disclosure requirements in
conformity with Pillar III of the Basel accord to enhance
appropriate information flow to market participants.
Consequently, the Bank will ensure strict adherence to the
Guide for Financial Publication and the BSDI Act particularly
with regard to publication of financial statements (both
audited and unaudited), and other regulatory breaches.
30. In 2018, Banks will be required to strenghten their capital
base with the
revision to the minimum capital
requirement. The GH¢400.00 million minimum capital
requirement is in line with the broader financial sector reform
plan which seeks to develop and strengthen the banking
sector to support the government's transformational agenda.
We will aggressively ensure that banks comply with this
directive.
reviewing banks' capital
31. In view of this, we shall start
build-up plans for compliance to the directive and assist
banks which would consider the option of mergers and
acquisitions. We would also engage the Ghana Stock
Exchange to facilitate processes for banks seeking long term
equity financing to list on the exchange.
32. The key risk in the banking industry today, is the
increasing level of impaired assets. This has heightened
bank's risk aversion to credit delivery. Our immediate
response is to reduce some of the structural bottlenecks in
the credit process. Currently, we are reviewing the governing
legislations on the credit reference and collateral registry
systems. These are to ensure that banks submit both
positive and adverse findings on borrowers to the bureaus
and also address some thorny foreclosure issues.
33. I have requested in my last quarterly meeting with the
Chief Executives of Banks, detailed plans on how each bank
will resolve its non-performing loans on a loan by loan basis.
We shall enforce our directive on loan write-off going
forward, and require appropriate disclosure of written-off
facilities in the published financial statements of banks. It is
our expectation that the national identification program
coupled with the improved economic prospects would
support these measures and help in reducing the incidence
of loan defaults in the banking sector.
34. In the coming year, Madam President, crisis
management would be a more concerning issue, more
especially the crisis response capacity of banks. This is a
lesson I learnt the hard way when I assumed office earlier in
April this year dealing with 2 banks nearly on the verge of
collapse and it is a sure way for enhancing customer
confidence in the system.
The is expected to come on
35. deposit protection scheme
stream next year in line with the BSDI Act and the Ghana
Deposit Protection Act, 2016 (Act 931) to provide a safety
net for vulnerable depositors in the event of a bank failure. I
entreat banks to study the Ghana Deposit Protection Act to
know the requirements for enrollment on the scheme.
36. The management of potential threats to financial stability
and the avoidance of systemic crisis would also preoccupy
our attention in the coming year. To ensure the safety and
soundness of individual banks, our risk focus supervisory
frameworks will gauge cross sectoral interactions among
financial players. The financial boundaries are increasingly
becoming blurred, hence there is need to adopt a holistic
macro-prudential approach and implement consolidated
supervision in line with the BSDI Act, 2016 (Act 930).
37. To this end, we shall continue to engage other
regulatory bodies, both domestic and external, and share
information and experiences. In particular, we shall continue
our collaboration with the Central Bank of Nigeria (CBN) to
conduct joint examination on banks with Nigerian parentage
under the framework of the College of Supervisors of the
West African Monetary Zone (CSWAMZ).
38. In recent times, there have been increased activities in the
payment ecosystem as a result of innovation and its role in
promoting financial inclusion which is a global goal. The
Bank in order not to stifle innovation and also create the
enabling environment drafted the Payment Systems and
Services Bill to replace the existing Payment Systems Act
2003 (Act 662) and the Guidelines for Electronic Money
Issuers (2015). The Bill is expected to enhance electronic
banking, agency banking, and payments and also provide
support for a strong and resilient banking sector.
39. I have noted that banks have formed various strategic
alliances with Mobile Money Operators (MMOs) and financial
technology firms to transform the way banking products are
delivered. Through these partnerships the unbanked are able
to purchase Government debt through the use of mobile
phones, receive inward remittance on mobile device and link
bank accounts to mobile money wallets for access to micro-
loans.
40. Another form of partnership between the banks and
MMOs is the holding of mobile money customers' funds by
the commercial banks. All mobile money float currently
resides with commercial banks as MMOs are not authorized
to hold funds. The top 5 banks holding these float as at
October 2017 included Fidelity Bank, Ecobank, CAL Bank,
Stanbic Bank and HFC Bank. We encourage all banks to
take advantage of the telecos platforms to further support the
financial inclusion efforts.
41. The Bank of Ghana is reviewing its licensing procedures
when lower tier institutions such as savings and loans
companies want to migrate to banking institutions. We are
also reviewing definitions around fit and proper test in
approving Directors of financial institutions including possible
annual certifications of their knowledge of key banking risk
assessments. We may impose requirements for directors
and senior management of banks to certify related party
transactions. We will impose swift sanctions to individuals
and institutions that infringe or breach our regulations. We
will scrutinize interbank borrowing and placements and
review the manner in which we provide emergency liquidity
support. We will advocate a whistle blower provision to
protect individuals who raise alerts to the Bank of Ghana on
malpractices by the banks.
42. To conclude Ladies and Gentlemen, the aim of the
Institute of Bankers is to heighten professional excellence in
the Banking Industry in Ghana. Your motto of Honesty and
Integrity needs to be jealously guarded to positively project
the profession of banking. Despite the daunting odds facing
the profession, successive leaders of the institute have made
significant strides to make the institute what it is today. I
charge the Institute and current executive of the institute to
up its game and conduct the necessary training and
awareness programmes required to ensure high ethical and
professional standards in the banking fraternity.
43. Madam President, on this note let me thank you for the
attention and wish you all compliments of the coming festive
season. Thank You.