Thursday, 09 July

Banking sector crisis and ethical corporate governance practice

Feature Article
The development partners advised the government then to commit to banking sector reforms.

The health of every economy’s financial sector is of great concern to policymakers and practitioners.

 

A healthy financial sector applies guidelines and micro-policy instruments to ensure corporate accountability and more credible investment environment for safeguarding invested resources (Agyemang et al, 2013).

 

A financial system that is replete with dysfunctional corporate behaviours where participants knowingly violate established control system rules and regulatory procedures of operation cannot be a healthy one.

 

This paper assesses Ghana’s financial sector in the light of the ongoing banking sector reforms with respect to the extent of ethical corporate governance practices observed.

 

Ghana’s banking sector is currently in credibility crisis. The cracks in the financial sector started in 2015.A stress test conducted by the World Bank and IMF some years back revealed that the sector was sitting on a time bond with infractions.

 

The development partners advised the government then to commit to banking sector reforms.

 

In 2017, Bank of Ghana (BoG) identified that the sector was plagued with weak quality assets, weak management, poor corporate governance, insider trading abuses and weak capital base. Thus emergent insolvency problems were staring.

 

The BoG ordered the banks to raise their capital base from GH¢120 ­million to GH¢400 million. The BoG further undertook to reform or clean up the banking sector and sanitise same.

 

Its approach was to revoke the licences of the non-performing or struggling financial institutions and appoint a receiver to take over the assets and liabilities of the affected institutions to be sold to pay depositors.

Measures

 

Further to the above measures, the BoG has taken a series of actions towards reforming or cleaning up the mess in the banking sector. In 2017, the licences of Capital and UT banks were revoked and their operations taken over by the GCB Bank Ltd. Some five non-performing banks were merged into the Consolidated Bank of Ghana (CBG).

 

So far, the licences of the institutions revoked include nine universal banks, 347 microfinance companies of which 155 have already ceased operations, 39 micro credit companies, 16 savings and loans companies, eight finance houses and two non-bank financial institutions.

 

The BoG has also created the Ghana Amalgamated Trust (GAT) as a special purpose vehicle to support five other banks, including ADB, NIB, merged Omni/Bank Sahel Sahara, Universal Merchant Bank and Prudential Bank with GHS2 billion.

 

Scandals

 

The flurry of high-profile corporate scandals and failures in the financial sector of Ghana is a manifestation of unethical practices and depraved tendencies inconsistent with the applicable regulatory frameworks.

 

There was lack of prudent banking practices in the midst of poor corporate governance practices that rendered some 420 financial institutions insolvent.

 

The BoG notes that some of the struggling financial institutions, while fully aware of their capital inadequacy position, still granted huge unrecoverable loans and engaged in excessive high risk dealings. Some even acquired operating licences and permits through fraudulent manoeuvres inconsistent with the stipulated capital requirements.

 

Legislation of the SEC

 

The enabling legislation of the SEC of Ghana can hardly inflict punitive sanctions on individuals and institutions that flout SEC laws. SEC can impose a maximum of GHS54, 000.00 as opposed to SEC of US which fined HSBC some millions of dollars.

 

Parliamentary evidence indicated that the State of the Nation Address in 2016 identified lack of effective supervision and monitoring by the BoG for partly contributing to the crisis plaguing the banking sector, especially the microfinance sector.

 

A systemic failure plaguing the financial sector manifests in the poor gate-keeping function of some auditing firms.

 

The auditing firms engaged in a variety of malpractices and auditing infractions that bordered on improper definition of cash and cash equivalents in financial statements and non-agreement between items stated in financial statements and documentary evidence in the working papers. ICAG slapped a fine of GHS2.2 million on four auditing firms that audited five collapsed banks.

 

The auditing firms included Deloitte & Touche, PKF Chattered Accountants, J. Mills Lamptey & Co and Morrison & Associates.

 

The situation in the financial sector of Ghana can be likened to the US case in 1929 when the Stock Market experienced a crash and was described as chaotic.

 

The non-existence of controls on issuing and trading of securities opened the system to abuse and fraudulent practices.

 

Indeed, mal corporate behaviour resulting in scandals and failures are virtually a common place occurrence in the business world globally.

 

These dysfunctional practices include budgetary slack, information manipulation, gaming, dubious accounting practices, corruption etc. Corporate America was plagued by a daisy of high-profile scandals and failures that included Enron, WorldCom, and Arthur Anderson among others. The accounting fraud at WorldCom caused the largest collapse in US history.

 

As auditing firms for Enron, Anderson unethically certified the bogus and dubious sales by Enron and later destroyed auditing documents to eliminate incriminating evidence of wrongdoing (LaPalombara, 2004).

 

Senior executives of Enron, Anderson and WorldCom, were found guilty of accounting fraud and corruption.

 

While there is some consensus that Ghana’s financial sector is in credibility crisis, opinions differ on the mode of reforms. Others believe in a bailout as done by Osama in the US or Gordon Brown in the UK or even consolidation.

 

The unfolding bank scandals and failures may seem that corporate governance is efficacious but others view it as an indication of serious defects with the current governance frameworks, hence the need for reforms (Sullivan, 2009).

 

Just as the Stock Market Crush prompted reforms in the governance arrangements of the US with the enactment of the Securities Act of 1933 and SOX after Enron, Ghana’s corporate governance arrangements need urgent and fundamental reforms.

 

Legal compliance

 

Most corporate governance relies heavily on legal compliance mechanisms that are clearly proven inadequate in dealing with fraudulent practices. The business world is full of unethical conducts and practices that undermine effectiveness of legal compliance.

 

The minds of people are too inventive and ingenious in devising schemes to harm systems. What is needed is approriate enforceable legal framework to ensure success of corporate governance practice. Punitive sanctions must be exacted on erring executives. Thus the CEO of Parmalat, Calisto Tanza was jailed for conspiracy to generate fake profits for Parmalat and its subsidiaries.

 

The corporate governance arrangements do not see ethical issues as being central to the problem of governance of corporations. Officers and board members are not guided by public morality but by a legal set of rules and there is lack of moral compass with a cross-section of corporate players.

 

No matter how good a country or company’s corporate governance structure is, the impact of effective governance cannot be realised unless the people practising it have sufficient ethical and moral inclination to do right without prompting.

 

The skills, knowledge and ethical competence of board members are critical otherwise, the best system of corporate governance will still appear frivolous and ineffective. There should be code of ethics and ethical charters on stakeholder conduct with ethical committees at the board level to monitor and control the implementation.

 

 

Summarising, the current credibility crisis faced by Ghana’s financial sector requires reforms in terms of the structure of industry players and the enabling corporate governance frameworks. Governance systems may, however, fail to be effective if ethics in corporate governance arrangements are not upheld.

 

 The writer works with the Internal Audit Department of Nick Scan Limited at the Tema Port.

 

Contact: [email protected]

 

 

 

 

 

Source: Dr Kingful Kobena Acquah