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The Case of Ghana’s Disappearing Banks: A Test Of Regulatory Maturity

 In the early hours of Monday August 14th, this year, the Central Bank of Ghana, which is the  main regulator of the banking and non-banking financial sector of Ghana, issued a press statement in which the Central Bank announced the revocation of the banking licenses of two major Ghanaian banks, the UT Bank Limited and the Capital Bank Ltd.

By Mawuse Oliver Barker-Vormawor

The Central Bank explained that this action against these banks resulted from the “severe impairment of their capital”.  The statement also indicated that the Central Bank had approved a Purchase and Assumption transaction under which one of Ghana’s largest bank, the GCB Bank Limited [formerly the Ghana Commercial Bank Limited] would assume “all deposits and selected assets of UT Bank Ltd and Capital Bank Ltd”.  Messers Vish Ashiagbor and Eric Nana Nipah of PricewaterhouseCoopers (PwC) were appointed by the regulator as receivers to marshal the remaining assets and to settle the liabilities of the two now defunct banks.

Acting on cue, the GCB Bank Limited had, within two hours of the announcement of the Central Bank’s action, already moved into the premises of the two defunct banks and rebranded the headquarters and branches of the former banks with its logo.  This rebranding took place just in time for the “former” branches of the two defunct banks to open, by lunchtime, as branches of the GCB Bank. The Central Bank’s release of the statement and the rebranding process by GCB, appear to have been carefully orchestrated and carried out with pinpoint precision.  However, an opacity or lack of transparency continues to hang over the process.  Questions persist about the series of events that led to the downfall of the Banks.  Additional queries surround the seeming uncertainties about the resilience of Ghanaian corporate governance structures.  These lingering issues set up an interesting opportunity to assess the maturity of the regulatory – both legal and institutional – environment of Ghana.

In this note, I explore briefly a number of important legal and policy issues that remain open as a result of this crucial action by the Central Bank.  A number of additional factors make this mini [read “Lehman Brothers-esque” by Ghana’s standards] banking crisis particularly interesting.  First, this is the first time that the Central Bank has revoked the banking licence of a major bank in Ghana for reasons related to an inability to maintain capital adequacy positions.  Second, the Purchase and Assumption transaction, that the Central Bank approved, was executed under powers granted the Bank in a law, which came into force barely a year ago in September 2016.  Third, the announcement by the Bank of Ghana, that it would consider prosecuting officials of both Banks would be the first such action of its kind in Ghana.  Fourth, in a country with no clear antitrust legislation on its books, it will be interesting to see how the potential antitrust issues that the Purchase and Assumption agreement raises are dealt with.  Finally, how did the UT Bank Limited and the Capital Bank Ltd, which in recent years, have, individually, won several notable industry awards, including the coveted Bank of the Year award by the UT Bank in 2011, end up in this situation?  How did industry watchers miss this apparently rapid deterioration in their operations?

The Power of the Central Bank to Put a Bank into Receivership

The Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) was passed in July 2016 as part of a legislative overhaul and consolidation of the regulatory powers of the Central Bank.  The Central Bank gained, under section 106 of this law, the power to place a significantly undercapitalised bank into official administration or revoke its licence or registration and initiate a receivership process.

However, according to Act 930, if the licence of a bank is revoked and a receivership process is initiated for reasons linked to the bank’s significant inability to maintain adequate capital positions, then such revocation and receivership cannot be undertaken unless the Central Bank arrives at a determination that the relevant bank is insolvent or is likely to become insolvent within the sixty days.  In effect, while the press statement of the Central Bank notes without clarifying, that the revocation of the licences of the two banks was due to the “severe impairment of their capital”, this finding alone would not have justified revoking their licenses and initiating the receivership process.  In a way, the Central Bank may have put this issue to bed in a supplemental Frequently Asked Questions (FAQ)  released in tandem with the original press statement, which stated:

“UT Bank and Capital Bank were deeply insolvent, meaning that their liabilities exceeded their assets, putting them in a position not to be able to meet their obligations as and when they fell due. Despite repeated agreements between the Bank of Ghana and UT Bank and Capital Bank to implement an action plan to address these significant shortfalls, the owners and managers of UT Bank and Capital Bank were unable to increase the capital of the banks to address the insolvency.

            Despite this assertion, to date, neither the Central Bank nor the appointed Receiver has disclosed to the public the exact value of the assets and accumulated liabilities of these banks.  The failure of the Central Bank to release this information potentially leaves depositors, creditors, and interested third parties in a limbo that is disruptive of their ability to make critical and informed business decisions.  Though the Central Bank is not legally required under the current law to disclose this information, it is not prohibited from doing so either.  The discretionary power that the Central Bank gains as a result of the law’s silence thrusts it into the sort of policy scenario where the choices it makes are anvils on which its mettle as a regulator is tested.  In an era of rampant “fake news”, the informational void created by the regulator’s tight lip creates room for the sort of mischief reporting that could undermine the stability of the financial industry as well as torpedo the Central Bank’s control over events.

Identity of the Receiver

According to section 123 of Act 930, the Bank of Ghana is required to appoint a Receiver “at the effective time of revocation of the licence”.  To qualify as Receiver, a person must, either hold an office in the private sector or be an official of the Bank of Ghana.  In addition, the law requires that the Receiver must have satisfied other “qualifications” prescribed by the Bank of Ghana.  However, because the Bank of Ghana has not prescribed any such “qualifications”, it is unclear how the Central Bank, in this case, reached its decision regarding whom to appoint as the Receiver.  In a regulatory environment where the actions of policy makers and regulators are routinely viewed with paternalistic skepticism, the Central Bank not only jeopardizes the credibility of its own actions when it acts under hazy, nebulous, or arcane standards but also creates an avenue for industry uncertainty.  Rule of Thumb: Uncertainty is always bad for the markets!

Further, the press statement of the Bank and the subsequent FAQ document appear to contradict each other as to whom the appointed Receiver is.  Whereas the press statement indicates that “Messers Vish Ashiagbor and Eric Nana Nipah of PricewaterhouseCoopers (PwC) have been appointed as receivers” the FAQ document notes that “’the Receiver is PricewaterhouseCoopers (PWC).”  Which is the Receiver — these individuals or PwC?  This contradiction should not be glossed over.  For instance, under the law, the Receiver is given significant powers, which include “succeed[ing] the rights and powers of the shareholders, the directors and the key management personnel of the bank” [section 127].  Placed in such a position, the Receiver assumes, by law, fiduciary duties, which can expose the person to significant legal liability for any improper discharge of her duties as a fiduciary.  It is thus important to determine clearly, who bears ultimate legal responsibility for actions taken during the receivership.  While, “Messrs Vish Ashiagbor and Eric Nana Nipah” may work at PwC, they are not PwC.  Neither is there a legal basis to hold PwC liable for any [mis]conduct of these individual in the performance of their fiduciary duties.

What’s more, a careful reading of section 124 of the law shows that only a natural person can be appointed as a Receiver.  According to section 124, a person is only qualified to act as Receiver if that person either (a) holds an office in the private sector; or (b) is an official of the Bank of Ghana who meets the qualifications prescribed by the Bank of Ghana.  In both cases, it is clear that neither an institution nor a legal entity can “hold an office in the private sector” or be an official of the Bank of Ghana.  It is true that the law uses the word “person”, which under the law of interpretation of Ghana [Interpretation Act, 2009 (Act 792)] includes, unless the context otherwise indicates, both a physical and legal person.  However, in this case, such exclusionary context clearly exists.

If the intention of the Bank of Ghana were to appoint PricewaterhouseCoopers, “a legal entity”, as the Receiver in this case, it is evident, as shown, that this would offend the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930).  However, if the intention of the Bank was to appoint the two senior officials of PwC, in their individual capacities, as the Receiver, questions abound as to what role PwC would play in the process.  For instance, would the Receiver be in the legal wrong if it engaged “PwC” to assist them in the discharge of its functions as Receiver.  What conflict of interest issues arise if the Receiver purported to ‘employ’ its ‘employer’?

Procedural Irregularities in the Approval of the Purchase and Assumption Agreement

In the FAQ document, the Central Bank states that it has undertaken the following actions: “Revoke the licenses of UT Bank and Capital Bank; Possess the banks and appoint a Receiver; Execute a Purchase and Assumption Agreement (P&A) allowing GCB Bank to take over all the deposits and purchases of selected assets.  The rest of the liabilities would be settled by the receiver through the realisation of the assets.”  [Emphasis added].  In the press statement, published on its website, the Central Bank also records that it has “approved a Purchase and Assumption transaction with GCB Bank Ltd that transfers all deposits and selected assets of UT Bank Ltd and Capital Bank Ltd to GCB Bank Ltd”.  Yet, in the version of the press statement published in the newspapers, on the same day, the Central Bank indicated that “through a Purchase and Assumption transaction, the [Joint Receivers] passed control over the operations to GCB Bank”.  In effect, the processes leading to the P&A transaction remains unclear.

            Because of the seeming disparities in the three documents made available to the public by the Bank of Ghana, it is difficult to pinpoint the exact nature of the Central Bank’s role in the Purchase and Assumption transaction through which GCB Bank came to cherry pick selected assets of the two Banks.  Suppose, arguably, that the Bank of Ghana, as it stated in its FAQ document, execute[d] and approve[d] a Purchase and Assumption Agreement on its own initiativeSuch an action would be fraught with significant procedural irregularities that could possibly open the actions of the Bank, to multiple legal claims by the affected creditors and shareholders of the two banks.  According to the relevant section 123 of the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930), the only action that the Central Bank must undertake at the time of the revocation of the licenses of the affected banks is to appoint a Receiver.  However, the power to initiate and execute a Purchase and Assumption transaction is exclusively vested in the Receiver.  [Section 127]  This is without prejudice to the Central Bank’s power to “approve” the transaction.

A combined reading of section 126 of the Act, which provides that the Receiver “shall act in accordance with the directives, instructions, and guidelines given by the Bank of Ghana in the course of the liquidation”, and Section 127(10) which, provides “that the receiver may, upon the prior written approval of the Bank of Ghana and according to its guidelines, inter alia, dispose of the assets and liabilities of a bank or specialised deposit-taking institution through a purchase and assumption transaction”, shows that the autonomy of the Receiver is significantly whittled down to the point of being quasi inexistent.  However, the fact that the law grants limited autonomy to the Receiver does not ipso facto translate into a grant, to the Bank of Ghana, of the power to suo motu, initiate, execute and approve a Purchase and Assumption agreement.  To bring the point home, one can analogize this to the relationship between the President and Parliament in the law making process.  The fact that a law passed by Parliament only becomes effective upon the assent of the President does not mean that the President can elect to do without Parliament in the process.

It is true that the law effectively makes the Receiver a puppet of the Central Bank, however, the puppeteer cannot then be her own puppet.  In executing and approving the Purchase and Assumption transaction on its own initiative, the Bank of Ghana would not only have acted without legal authority but would have also usurped legitimate rights of shareholders of the banks and of the banks themselves.  This creates a legal situation that could make both the Central Bank and the GCB Bank, which purported to acquire the assets of the affected Banks, extremely vulnerable to a lawsuit.

It could be argued that an action by the Central Bank to proprio motu, execute and approve the Purchase and Assumption transaction is grounded in the Central Bank’s power under section 133 of Act 930 to determine claims against banks by prescribing “the liquidation of the asset[s] of the banks”.  However, this argument falters or is at least weakened by a number of reasons.  First, and perhaps more importantly, the scope and import of that section is very imprecise.  The explanatory memorandum that accompanied the law explains the provision thus:

“Clause 133 empowers the Bank of Ghana to prescribe the procedure for determining the validity and priority of a claim the liquidation of the asset of a bank or a specialised deposit-taking institution, and the return of the property of a customer of a bank or a specialised deposit taking institution.”

However, short of summarizing the provision, the explanatory memorandum does not aid much in giving substance or clarity to the provision.

An ordinary reading of section 133, which takes account of the heading of the provision [“Determination of Claims”] would suggest that, the section gives the Bank of Ghana adjudicatory powers [or quasi-judicial functions] over claims brought against banks operating in Ghana.  In that sense, creditors of a bank, rather than resort to the regular judicial process, may elect to present their claim against a bank operating in Ghana, to the Bank of Ghana.  Section 134 of the Act, which requires that the Central Bank, when considering claims relating to “eligible financial contracts”, give effect to the “termination provisions of those contracts”, reinforces this reading of section 133.

Second, it is implausible that this is what happened in the case of the two Banks because nowhere does the Bank of Ghana claim to have relied on section 133.  The fact that the Bank of Ghana does not attempt to ground its actions on section 133 is perhaps the clearest indication that the said actions cannot fall under section 133.  If our reading of section 133 is correct, what this means is that, it would offend natural justice for the Bank of Ghana to purport to act, simultaneously, as the complainant, adjudicator, and executioner.  In effect, the Bank of Ghana can only exercise its powers under section 133 if a proper complaint or claim has been made against a bank operating in Ghana by a third party.  In the case of the Capital Bank and the UT Bank, there has been no suggestion or indication that this was the case.  However, suppose, for the purpose of argument, that third parties had in fact brought claims against the two banks, then the Bank of Ghana as an adjudicator can only “prescribe the liquidation of the asset[s] of the banks.”  The enforcement of the “prescription”, -if any- of the Bank of Ghana would have to be pursued by the claimants independently in a court of law.

Finally, Act 930 defines a Purchase and Assumption transaction as “an agreement in which a part or the whole of the assets of the failed bank are purchased and all or some of the liabilities are assumed by an acquiring bank” [Section 156].  The fact that Act 930 purposely defines the Purchase and Assumption transaction means that it qualifies as a “term of art”.  As a result, a Purchase and Assumption transaction for the purposes of Act 930 can only be brought into effect in the manner directed by the Act.  Moreover, a prescription by the Bank of Ghana for “the liquidation of the asset[s] of the banks” does not amount to “an agreement”.

However, is it possible that the Purchase and Assumption transactions in the case of the two banks emanated exclusively from the Receiver, and that, all the Bank of Ghana did was to approve the resulting agreement?  According to the notice placed, by the Receiver, in the print version of the Daily Graphic on 15 August 2017, the Receiver was appointed at 7 o’clock in the morning on 14 August 2017.  However, the FAQ document and the press statement of the Bank of Ghana were uploaded to the website of the Bank of Ghana, according to the time-stamp on the Bank’s website, at 7: 50 am and at 8 o’clock am respectively on 14 August 2017.  This would mean that, within 50 minutes after having been appointed, the Receiver, went through the books of account of the two major banks [see section 129]; prepared a new inventory of assets, determined the liquidation values of the assets of the banks, and established a new financial position of the banks based on that information [see Section 130];  and reviewed all pre-receivership transactions of the two banks  [Section 132].  In addition, that during the same period, the Receivers invited bids from interested banks to conclude a Purchase and Assumption agreement, received these bids and reviewed them “on the basis of purchase price, cost of funding, branches to be retained, staff to be employed and impact on the acquiring bank’s capital adequacy ratio”.  [See press statement of the Bank of Ghana]

It is not the proper place nor scope of this note to question whether these series of events did in fact occur.  Moreover, nowhere does the law expressly require that the Receiver undertake all these actions before arranging the Purchase and Assumption transaction.  However, gaining a full and considered understanding of the books of account of the defunct banks before executing the Purchase and Assumption transaction is not only de rigueur but also crucial to properly discharging one’s functions as a Receiver.  It is thus not fortuitous that the law expressly requires that a Receiver undertake those actions in the course of her duties as Receiver.

Unfortunately, we are left with a transaction clouded in a haze and uncertainty that is enough to raise a presumption of legal irregularity, or at the very least cause questions to be asked of the Bank of Ghana’s regulatory maturity.  Worse, the ‘[in]actions’ of the Receiver could spark a series of legal claims for a failure to discharge its duties diligently.

How did industry watchers miss this?

According to the Central Bank, “[d]espite repeated agreements between the Bank of Ghana and UT Bank and Capital Bank to implement an action plan to address these significant shortfalls, the owners and managers of UT Bank and Capital Bank were unable to increase the capital of the banks to address the insolvency.  Also, a leaked 2014 memo signed by the CEO of the Capital Bank at the time warned that Capital Bank had capitalisation issues and may not be able to meet its obligations to its clients.  In addition, within 15 minutes of the revocation of the licenses of the two banks, the Ghana Securities and Exchange Commission which has oversight of the Ghana Stock Exchange announced that the Commission had, following the revocation of the licenses of the Banks, delisted UT Bank ltd from the Ghana Stock Exchange.  It subsequently emerged that the UT Bank had since 2015 not filed its financial statement in breach of exchange rules.

It is curious however that, despite all the signs on the wall, no major media outlet had any knowledge of, or reported on the likelihood of the revocation of the licenses of the banks, the first of its kind in Ghana.  As a result, the Central Bank’s actions before and after the revocation of the licenses of the banks, have not received the level of public and industry scrutiny that would have ultimately enhanced the Central Bank’s regulatory effectiveness.

One of the key challenges for developing countries in attaining economic competitiveness is the chronic lack of information that depreciates investor confidence in the economy as well as the severe unpredictability of the regulatory and business environment in general.  For instance, in its 2017 assessment of the “Risk-based minimum regulatory capital regime” in Ghana, the PwC, had cause to complain about the Bank of Ghana’s ineffective communication regarding whether or not the Central Bank planned to increase the minimum capital requirements for Banks.  As the PwC noted on that occasion

[W]e also perceive the measure of uncertainty that the lack of guidelines from the regulator is engendering among bank executives. There has been occasional snippets of information from the regulator over the last year, hinting at attempts to adjust the minimum capital requirements of banks but there has been no firm communication as to the nature and form of the change. This presents planning challenges to the banks. While some banks may overestimate the nature of the change, others may also be well underprepared when the directive eventually comes, if it does. We therefore urge the regulator to expedite any ongoing reviews and consultations to enable it to swiftly communicate its plans. This will ease uncertainty and provide much needed clarity to the banks and other industry participants.

            The manner in which the revocation of the licenses of the two banks in Ghana occurred also reveals how this is still a chronic concern for many investors looking to Africa.  In addition, the sequence of events, if nothing at all, reveal the slumber of regulatory institutions, notably the Securities and Exchange Commission, and the inefficacy of corporate governance watchguards in Ghana such as the Registrar General’s Department.

Any Positives?

During the recent two decades or so, we are witnessing a gradual-yet-intensive diversification of many developing economies across Africa.  In many of these frontier markets, including Ghana, business decision makers, and regulators are, increasingly confronted with novel situations that challenge, and sometimes even displace, their grasp on their economies.  Admittedly, it is easy sometimes in assessing the policy measures taken by regulators and business leaders alike in these emerging markets to lose sight of the fact, for the most part, economic and regulatory decisions are being taken with no homegrown guiding precedents.

In a country still adapting to life in its recently gained identity as a middle-income economy, the failure of two major banks in Ghana throws an unpredictable gauntlet to regulators across the board.  So far, there is both reason to be encouraged and many positives to be drawn from the manner in which the Central Bank and other regulators have ‘stepped up to the plate’.  For instance, the Central Bank deserves credit for the swiftness in which customer deposits were safeguarded and for ensuring that, within a couple of hours, the customers of the defunct banks could access their deposits without any serious fear of dispossession.  Through its actions, the Bank of Ghana managed to avert the sort of cyclical bank-run contagion that most western economies have experienced, and which could have undermined long-term efforts to gain the trust of the country’s largely underbanked population as well as torpedoed the Ghana’s policy aspiration for a cash-less economy.

Further, following the failure of the two banks, there have been strong indications that the Bank of Ghana is eager to go back to the drawing board and relook at a Banking Sector Stability Report, which was conducted earlier this year.  In addition, there appears to be a strong incentive to, significantly, revise the Central Bank’s roadmap for recapitalization, which is currently being implemented to reduce risk concentration in the banking sector.  Luckily, the recent Banks and Specialized Deposit-Taking Institution (SDI) Act provides the supervisory and resolution framework that would be critical to succeeding in this endeavour.

Already, we are seeing the Bank of Ghana go on a new offensive.  On 11 September 2017, the Central Bank formally directed banks in the country to raise their minimum capital by 233 percent to GH¢400 million [roughly equivalent to US$100 million].  This move not only constitutes the biggest increase in the minimum capital requirement for banks in Ghana but could also represent the death knell for several other domestic banks in the coming months.

What’s more, the case of Ghana’s disappearing banks seems to have already served a necessary jolt to regulatory institutions across the board.   For instance, on 28 August 2017, two weeks after the delisting of the UT Bank from the Stock Exchange, the Securities and Exchange Commission has announced the suspension of five companies for failing to organize annual general meetings and for failing to file audited financial statements.  In addition, on 5 September 2017, it was announced that the Parliament of Ghana would soon consider two proposed legislation: a Corporate Insolvency Bill, which is expected to provide a framework for restructuring viable but temporarily distressed businesses and a new Companies Bill, which will repeal the current legislation, in force since 1963 and modernize corporate governance in Ghana.

What Lessons Going Forward?

In the memorandum accompanying Act 930, the Bank of Ghana disclosed that the financial system in Ghana is now relatively diversified and the number of financial intermediaries and the scale of operations have increased notably in the banking sector.  Currently, the banking sector constitutes over seventy percent of financial sector assets in Ghana.  However, according to the Central Bank, “even though the banking sector in Ghana is competitive, and has grown rapidly in recent years, particularly with respect to domestic banks, the banking system is fragmented, and concentration of banking assets is relatively low”.  [See Explanatory Memorandum to Act 930]

These developments challenge the vigilance and prudence of the Central Bank as well as demand a growth in regulatory sophistication and maturity.  It is true that many regulators in Africa are only now “getting their act” together and that for the Bank of Ghana; this is the first time, in its history, that it has had to revoke the licenses of banks in Ghana as well as to oversee the process of their liquidation.  The seeming procedural irregularities associated with the Central Bank’s and inconsistencies in the Central Bank’s communications with the public may raise more questions than they answer about the Central Bank’s readiness to confront modern challenges of the supervision and regulation of the banking sector.

The fact however, is that, in regulation as in navigation, smooth seas never make a skilled sailor.  The failure of the two banks offers the Bank of Ghana an excellent opportunity to fine-tune domestic supervisory and regulatory processes in order to address liquidity risks and rising levels of non-performing loans that loom over the banking sector in Ghana.  In addition, in a fast-paced global economy where the margin of error is edging closer to zero and the learning curve for regulators is in constant remission, regulatory precision and efficient communication is critical to retaining investor confidence in the economic and policy choices of developing countries.

Already, we are witnessing a flurry of regulatory activity that could, depending on the assiduity of the Central Bank augur well for sanitizing the banking and financial sector of Ghana.  It would be interesting to see how the Bank of Ghana and other regulators manage the process going forward.

Mawuse Oliver Barker-Vormawor – LL.M, Harvard; Incoming Doctoral Student at Cambridge University, UK.  The author recently joined Covington & Burling LLP as a Global Visiting Lawyer.  The views expressed in this paper are those of the author, not Covington & Burling LLP and IMANI’

[*] LL.M, Harvard; Incoming Doctoral Student at Cambridge University, UK.  The author recently joined Covington & Burling LLP as a Global Visiting Lawyer.  The views expressed in this paper are those of the author, not Covington & Burling LL


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