As the year draws to a close, 2019 can best be described as “the climax” of eventful happenings for Ghana’s financial sector in the past 3-years.

The years 2017-2019 have unfolded a raft of financial regulatory measures that have led to the revocation of licenses, forced mergers, winding up of institutions as well as stranded depositors. This piece is not meant to continue the blame game, as this will not solve the current predicaments in the industry.

Contrary to blame, this piece is set to reveal a side to the discussion that may have eluded most individuals (employees, depositors, general public) and institutions (regulators, regulated).

One thing is sure, the dust will definitely settle, and the key takeaways should be the lessons learned. Going forward, this piece suggests some measures aimed at preventing reoccurrence of this unfortunate incident.

The Entrepreneur

A number of Political Scientists and Economists have contributed immensely to helping us understand who an entrepreneur is and what entrepreneurship entails. Notable amongst these names are Richard Cantillon; an Irish-French economist, Jean Baptiste Say; a French Economist, Joseph Schumpeter; an Austrian-American political scientist and Peter Drucker; a US business consultant. As many as the contributors to this area of learning may be, there are some foundational facts that run though the writings of almost all these great minds.

First and foremost, entrepreneurs identify opportunity or situations through which profits can be generated. Secondly, entrepreneurs are set out to almost always do something different rather than follow the natural order. Lastly, taking on risk is a necessity for an entrepreneur. As positive as these qualities may be to the success of any entrepreneurial venture, the extremities are the self-same reasons for collapse of many of these ventures.

Entrepreneurship Boost in Ghana’s Financial Sector

The “do something different” drive of entrepreneurship is the major driver of innovation in many entrepreneurial pursuits. Ghana’s financial sector is testament to this innovative growth spurt, as entrepreneurs have contributed significantly to the development of the sector. The innovation seen in this sector spans the emergence of various individually-owned financial institutions, the repackaging of product offerings as well as the adoption of new services.

Entrepreneurial Innovation in Ghana’s financial sector has contributed immensely to the gradual transition from the early days where commercial banks were the mainstay of the industry. The sector now has a variety of active players which includes both Commercial and Rural banks, Insurance Companies, Savings and Loans Institutions and Non-Banking Financial Institutions (NBFIs). 

Figure 1 below gives a fair representation of the proportion of active participants in Ghana’s financial sector.

Regulatory effort at keeping pace with Entrepreneurial Innovation

Development in any sector, as witnessed in the financial sector, warrants that regulatory measures and where necessary, reforms be put in place to better protect market participants. Needful to mention that regulators cannot pre-empt happenings within an industry. Hence, though ideally one would wish regulation advances with entrepreneurial innovation, it’s a different case in the real-world scenario.

As put by Deloitte Global, “Regulation traditionally lags innovation, since in the real-world regulators often struggle to keep up with tech-enabled innovation”. Model global cases of regulation trying to keep up with innovation include the Cryptocurrency space and On-demand car services (Uber, Bolt, Yango, etc.).

Ghana’s financial industry is evidence to the lagged nature of regulatory reforms in some areas, with a number of regulatory measures coming into force after key violations have already occurred. Key amongst some lagged regulatory measures include:

FIT & PROPER, MERGERS & ACQUISITIONS DIRECTIVE. -JULY 2018 FINANCIAL HOLDINGS DIRECTIVE-JULY 2018 ESTABLISHMENT OF THE ETHICS AND INTERNAL INVESTIGATIONS UNIT- AUGUST 2018 FINAL CORPORATE GOVERNANCE DIRECTIVE- DECEMBER 2018

The aftermath of lagged regulation and other regulatory inefficiencies lead to the abuse of institutional mandates placing the entire industry at risk. 

Table 1 below gives a summary of the revocation of licenses of various financial institutions following various regulatory breaches.

Lines of Defence Besides Regulation

From the foregoing, entrepreneurship thrives on innovation as a foundational fact to success. Albeit the positive sides to Entrepreneurial Innovation, one downside could be the inadequate nature of industry regulation in keeping up with the times. This creates a system where industry participants exercise personal discretion in dealing with situations rather having systems and structures that enforce compliance. In the long-term, abuse and systemic crises are inevitable. This stands to reason that regulation by itself cannot be the only means of keeping institutional players in check. Moreover, leaving all responsibility at the doorstep of regulators absolves other institutional and individual stakeholders of their contribution to maintaining stability in Ghana’s financial industry.

Just as trees serve as windbreaks to heavy winds, so do financial industries require “Lines of Defence” to serve as a barricade in the event of potential financial instability. 

Figure 2 is an adaptation of the CFA institute’s risk management model for companies. This risk management model has been finetuned to better suit the approach in ensuring stability in Ghana’s financial industry.

Industry Regulator: Industry regulators such as the Bank of Ghana (BoG), National Insurance Commission (NIC), Securities and Exchange Commission (SEC) exist to ensure equilibrium within the financial sector. In maintaining stability in the financial system, regulation must take a much more proactive stance. Proactive in the sense of formulating laws and policies, but much more importantly, in enforcement of regulations. Table 1 above is evident of initiatives taken by regulators in picking up the pieces in a fragile financial sector. In the words of the IMF country representative to Ghana, Dr Natalia Koliadina, “Although the BoG clampdown is belated, the timing is still right”.

A key observation in the industry is the large number of market players. This warrants more work in monitoring and supervision. Regulators may, therefore, need to consider hiring more professionals with the requisite skills to make for better monitoring and supervision going forward.

Professional Bodies: Industries like the financial sector predominantly hire professionals (Individuals with specialised knowledge and skills governed by a shared code of ethics with a commitment to serve others). These professionals belong to professionals’ bodies bound per a code of ethics and most often standards of professional behaviour. The likes of such institutions are; Chartered Financial Analyst Society (CFA), Institute of Chartered Accountants (ICA), Association of Chartered Certified Accountants (ACCA), Chartered Institute of Taxation (CIT), Chartered Compliance Analyst (CCA) and many more.

These professional associations need to further highlight the role of ethics in the discharge of duty by its members. This is important because ethical conduct goes beyond what the law requires and encompasses what is morally acceptable by different societal groups and communities including professional associations. Additionally, punitive measures must be enforced on members found culpable of violating the code and standards of their respective associations. The more prevalent and public such sanctions are, the more likely members are to abide by their respective codes and standards.

The most recent publicly known sanction by a professional society in Ghana was that of the Institute of Chartered Accountants (ICAG). The ICAG fined the four auditing firms (Deloitte & Touche, PKF Chartered Accountants, J. Mills Lamptey & Co. and Morrison & Associates) a total of over GH¢2.2 million (US$ 393,352) for shortfalls in their professional duties, leading to the collapse of five (5) banks in Ghana.

Individuals: Finally, but by no means least, is the role of the individuals in the industry. Individuals in the industry encompass professional employees, non-professional employees and investors. Individuals have a sense of duty to speak up and where necessary, act to ensure that the right action is taken. The major hindrance for many individuals is that speaking up and acting upon it comes with its own risk to the individual. A recommended action is to undertake a proper cost-benefit analysis which may just reveal that the risk to the individual may be a better option than the risk to an entire industry, which will include the said individual. “One (1) firm out of business is better than Four Hundred and Fifty-Seven (457) firms out of business. One (1) job loss is better than thousands of job losses in the industry.”

In summary, financial entrepreneurs are bound to take risk to ensure success. However, when the risk endangers the entire industry, financial entrepreneurs need some restraint even when the said entrepreneur is unaware of the need for such restraint. This restraint can be provided by the Industry Regulator, Professional Bodies and lastly individuals. The key lesson for all industry players, especially the individual is best captured in the words of Martin Luther King, Jr “Evil only succeeds when good people do nothing.”