Owners of UT, Capital, GN to blame for the woes suffered by their banks says Professor Isaac Boadi

A professor of Accounting and Finance at the University for Professional Studies, (UPSA), Isaac Boadi, has admonished owners of some defunct financial institutions to blame themselves but not the Bank of Ghana nor the Akufo-Addo government.

In an interview with Gordon Asare-Bediako on his popular Saturday morning program, the Bekyere Mu Show on Accra-based Movement Television on 20th July 2024, Professor Boadi stressed that the owners of UT, Capital and GN Banks should desist from pointing accusing fingers at other people

A1and entities when their banks collapsed based upon their own mismanagement.

“The collapse of UT, Capital and GN Banks cannot be blamed on any third party. Their owners were responsible for what happened to those banks. The owners simply became liabilities to those banks they established.

The Bank of Ghana gave them more than enough time and opportunities to bring the banks back to safety, but they failed to do so. Even the liquidity support given to some of the banks were not judiciously utilized, so how can they blame the Bank of Ghana and the current administration for their woes?” Professor Boadi asked.

Kofi Amoabeng, the owner of UT Bank, on several media platforms had accused the Bank of Ghana for not giving him more time to right the wrongs at his bank. He said that he had some investors desirous to inject capital into UT Bank, but the Bank of Ghana didn’t wait for that to happen.

Professor Boadi said looking at the financial situation of UT at the time, no investor worth the salt would have brought any money, and that the issues at UT Bank went beyond just investments.

William Ato Essien, the then owner of Capital Bank, which was merged with GC Bank Ltd, did not offer any plausible explanation as to why the bank went under despite the Bank of Ghana giving Capital Bank liquidity support on two occasions, yet the bank had to be consolidated due to his own mismanagement of the affairs of the bank. This, Professor Boadi indicated, caused the downfall of Capital Bank, and the Government had no hand in it.

Papa Kwesi Nduom, on his part, had accused the central bank of not supporting indigenous banks which were facing liquidity challenges but were not insolvent. This, the Dean of Accounting and Finance at UPSA, Professor Boadi emphasized, was not a tenable position because the liquidity support GN Bank required was to take it out of a state of insolvency.

On what John Alan Kwadwo Kyeremateng recently said about the banking sector cleanup, he said the decision to fold them was ill-conceived and that they ought to have been saved rather than what was done to them. Alan said it was a policy failure, and this, according to Professor Boadi, he disagrees with him.

“It was not a policy failure on the part of the government that sent those banks down the hill. The owners mismanaged the affairs of the banks. I find it curious that Alan was a part of this administration when the decision was arrived at, why is he saying this at this time? He has got it wrong on this banking sector cleanup issue” he stated.

Reasons for the failure of UT and Capital Banks

The failure of Capital and UT banks was due to significant capital deficiencies, the underlying reason was poor corporate governance practices within those institutions. There was a 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, according to Professor Isaac Boadi, included:

• 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 time that the bank’s financial performance was abysmal and could not pay dividends.

• 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.

• Diversion of funds to holding companies and their related parties was widespread. In the case of one bank, placements could not be traced to the bank’s records 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 very high costs, without any plans to bring themselves in line with the industry norm.

Reasons for the Revocation of GN Bank’s License

On 4th January 2019, the Bank of Ghana approved a request to reclassify GN Bank from a universal bank to a Savings and Loans company following its inability to meet new required minimum paid-up capital of GH¢ 400 million by 31st December 2018.

The reclassification was to among other things enable the institution to downsize its operations and inject additional capital to resolve the acute liquidity challenges it was confronted with. The Bank of Ghana subsequently appointed an Advisor to GN to assist in the reclassification process.

In spite of the above, GN Bank was unable to resolve its liquidity crisis and had also not been able to meet the majority of the conditions the Bank of Ghana imposed on the institution following its reclassification as a savings and loans company. The financial condition of the institution had also deteriorated since the reclassification with both negative capital adequacy ratio and negative net worth.

The Bank of Ghana reached the conclusion that GN was insolvent under section 123 (4) of the Banks and SDIs Act, 2016 (Act 930), being in breach of its key prudential regulatory requirements. Its Capital Adequacy Ratio (CAR) was -61%, in breach of the minimum required of 13%.

It was also facing a severe liquidity crisis with numerous complaints received by the Financial Stability Department of the Bank of Ghana from aggrieved customers who had been unable to access their deposits with the institution for several months. It consistently failed to meet the minimum cash reserve requirement of 10% of its total deposits, since the end of the first quarter of 2019.

While GN had indicated that government owed it a total amount of GH¢942.98 million of which GH¢102.73 million represented Interim Payment Certificates (IPCs), the Bank of Ghana’s assessment was that IPCs totaling GH¢30.33 million only had been confirmed by the Ministry of Finance as at 6th August 2019 as owed to contractors that may be indebted to affiliates of GN.

The Bank of Ghana’s supervisory assessment showed that even when the total outstanding IPCs amount of GH¢30.33 million was considered, it still did not address GN’s capital deficit of -GH¢683.66 million. It must be noted that GN’s insolvency problems were largely attributable to overdraft and other facilities it extended to its related parties who were other companies in the Groupe Nduom network of businesses, under circumstances that violated relevant prudential norms.

Of particular interest were the funds totaling GH¢761.55 million that GN Bank as it then was, placed with its sister companies Ghana Growth Fund (Gold Coast Advisors) and Gold Coast Fund Management Limited (now Blackshield Capital Management), both licensed by the Securities and Exchange Commission.

Some of these funds were used by the two related parties to pay their customers whose investments with them had matured, while some were also used to fund road and other contractors, who claimed to have worked on Government projects.

It is important to note that the IPCs claimed by GN were not supported by transactions that were entered into directly by GN and such contractors or Government and its entities.

They reflect transactions entered into by Ghana Growth Fund or Gold Coast Fund Management with these contractors using funds taken from GN under circumstances that violated prudential norms. The failure of the two related parties to pay back these funds to GN affected GN’s capital position, leading eventually to its insolvency and acute liquidity challenges.

In addition to GN’s insolvency and liquidity challenges, the Bank of Ghana found other key regulatory violations such as the following:

-The institution’s adjusted Net worth of negative GH¢30.70 million as at end May 2019 indicates that its paid-up capital is impaired in violation of Section 28(1) Act 930.

-The institution’s adjusted capital adequacy ratio of negative 61.20% as at end May 2019 is in violation of Section 29(2) of Act 930.

-Contrary to section 64 (2) of the Banks and Specialized Deposit-Taking Institutions Act, 2016 (Act 930), the institution’s exposure to its related party had consistently been above the regulatory limit of 25% of net own funds (NOF). Exposures to other affiliates companies were mainly payments made by the bank on behalf of such affiliates.

-The structure of GN’s balance sheet clearly showed that the bank mobilized deposits for its related companies. The inability of these related companies to honour their obligation to GN had resulted in serious liquidity challenges and contributed to their insolvency as all related party exposures were non-performing.

The institution’s high non-performing loans (NPL) were mainly attributed to these related party exposures, which were never paid, thereby putting the deposits of its customers at risk.

-A Bank of Ghana investigation conducted at GN revealed that a significant amount (USD62,255,516.93, GBP718,528.59 and EUR4,200) of depositors’ funds held with GN had been transferred to International Business Solutions (another company owned by Groupe Nduom and which is based in the U.S.A) without any documentation to support such transfers in breach of section 19 of the Foreign Exchange Act 2006, Act 723, Section IV of Bank of Ghana Notice No. BG/GOV/SEC/2007/4, and subsequent Bank of Ghana Notices issued in August 2014 prohibiting such practices.

-The company was yet to publish its 2018 audited accounts contrary to section 90 (2) of the Banks and Specialized Deposit-Taking Institutions Act, 2016 (Act 930), according to Professor Boadi.

“The decision to cleanup the banking sector, with specific references to UT, Capital and GN Banks was in order. The owners were solely to blame for what happened to their banks and not the Government of Ghana acting through the Bank of Ghana” he stated in his concluding remarks.

Reporting by Wilberforce Asare in Accra

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