Implications of the Bank Of Ghana clean-up on the economy


It has been almost a vigorous two year clean-up exercise undertaken by the Bank of Ghana in the banking industry with high concentration on the specialized deposit taking institutions (SDI) and non-banking financial sectors.
During the period, a handful of financial institutions which were actively in business had their operating licenses revoked whiles the final nail was knocked on the coffin for some financial institutions which were already distressed and out of business.
The central bank of Ghana began its massive overhauling of the banking industry in 2017 with the commercial banks. After several warnings and grace periods, some banks including Capital Bank and UT Bank lost their operating licenses after failing to meet the minimum capital requirement of GH¢400 million set by the Bank of Ghana. Their assets and liabilities were taken over by GCB Bank Ltd.
Also, Sovereign bank, Beige bank and Construction bank were deemed to have obtained their banking licenses under false pretenses and non-existent capital rendering them insolvent. The aforementioned three banks were consolidated with two others (Unibank and Royal bank) to form the Consolidated Bank Ghana (CBG) with Mr. Daniel Addo as the new CEO.
The Bank of Ghana descended to the Microfinance and Microcredit sector in June 2019, revoking the operating licenses of 386 microfinance and microcredit institutions. The regulator cited reasons for the license revocation that some of these microfinance institutions had already ceased operations. BoG further stated the remaining would have been insolvent in the next sixty days.
On August 16, 2019, the Bank of Ghana also revoked the licenses of 23 savings and loans companies leaving only 25 in good standing.
The Central bank finally declared in a press statement that it has completed its two years financial clean-up exercise and these were done pursuant to section 123 (1) of the Banks and Specialized Deposit-Taking Institutions.
The mind boggling question about this banking industry clean-up is how it will impact on the Ghanaian economy and the banking industry in particular.
It is worth to mention that this cleanup has positives which would be discussed in this article. However, there are some negative impacts to be looked at also.
First, let’s discuss the positives.
1. Stability in the banking Industry
The banking industry has faced turbulence in the last few years with the major headline being customers deposits locked up with some financial institutions. From the troubles of GN Bank to Menzgold down to First Allied Savings and Loans and a host of other financial institutions, thousands of customers have wailed in anguish as their hard earned deposits have been locked up by these financial houses.
Hitherto, these monies remaining locked even though customers have been assured of getting their monies in due time.
The liquidity problems suffered by some financial institutions posed a great danger to the banking industry. With such a precedent, Majority of the Ghanaian populace were afraid to deposit their monies with financial institutions.
With the Bank of Ghana’s clean-up intervention which has resulted in the weak financial houses losing their operating licenses, which would mean that only the financially capable otherwise solvent institutions remain in the system, it provides a financially stable banking environment for the general populace who have been “doubting Thomases” as far as banking is concerned.
This would also help alleviate customer deposit losses in future.
In spite of the above advantages of the financial clean-up, the following are some disadvantages.
2. Job losses
It is estimated that 20,000 people have directly lost their jobs following the shutdown of nine (9) commercial banks, 386 microfinance and micro credit companies and 23 savings and loans companies.
The revocation of the licenses of the institutions in the above categories means that the personnel in those institutions have been rendered jobless.
It must also be noted that there were personnel lay-offs during mergers of banks during the clean-up exercise because the merged banks could not absorb the staff strength of all banks involved in the merger.
The number of job losses could be even higher when you take into account the indirect job losses occasioned by this crisis.
3. Threat to National Security
“A hungry man can’t see right or wrong. He just sees food.” Yes, this is clearly what happens when people suddenly lose their jobs and are hungry. The issue of survival becomes the major priority of some of these folks and would do anything whether right or wrong to put food on their tables.
Job losses are threats to the National security of this country and it is therefore quite not surprising to hear a number of armed robbery and kidnapping cases rising day after day.
The bottom line therefore is the massive job losses caused by the banking industry clean-up is by a far extent threat to National security as the unemployed fight their way through for survival.
4. Struggle of existing legitimate banks
Some existing banks continue to suffer to keep deposits of customers aftermath the clean-up exercise by Ghana’s central bank due to the perception of trust by customers especially when a wide section of Ghanaians continue to have their hard earned deposits locked up by some financial institutions.
Again some customers are a bit panicked and withdrawing their monies from banks. This has therefore resulted in banks committing resources to control panic withdrawal situations which also have direct implications on their profit and loss accounts.
5. Mistrust in the banking industry.
There is no gainsaying that some Ghanaians do not trust banks that much like they used to and their reason is very simple and clear, “Once bitten, twice shy.” Some of these people especially those in the rural areas have resorted to burying their monies in bushes whiles those in the urban places have resorted to Telco banking otherwise known as mobile money rather than mainstream banking. The traditional means of saving money by using a money box is rumored to be on the increase.
6. Increase in unbanked population in Ghana
Government’s quest to reduce the unbanked population in Ghana may be in serious jeopardy following the lost trust by some section of Ghanaians.
Even though Ghanaian adults with access to a formal financial service account increased from 29% in 2011 to 58% in 2017, according to a Global Findex Database report in June 2018, the situation could have an upward turn following the clean-up in the industry.
The report further stated that seven million Ghanaians do not have bank accounts and this could further shoot up in the next few years.