The uniqueness of banking business

Mr. Serebour is a wealthy spare parts merchant in Kumasi Suame Magazine, a hub of the automotive industry in Ghana. He started as a heavy -duty truck mechanic. By dint of business acumen he now has investments in real estate and transport businesses. These companies employ several young graduates, although he himself could not even complete his elementary school education.

He has a strong desire to be a significant shareholder in a banking business. He confided that his ulterior objective is to avail himself of cheap and ready funding for hospitality business which he now fancies so much.

Who can blame him when he has watched with keen interest how previous bank shareholders have siphoned depositors’ funds to engage in several unrelated sectors and created illiquidity that eventually ruined their banks?

When he consulted me about his aspirations and I explained to him that he may be a bank shareholder but cannot hold more than five percent of the bank’s share capital without Bank of Ghana approval, he almost lost his cool. He boasted about how he had labored to earn his wealth and how somebody could sit somewhere and determine how, when and where he invests.

Mr. Traboulsi, formerly a petty retailer in electronic wares in Beirut also emigrated to Ghana from Lebanon, having been appraised of the favourable investment climate and the peaceful nature of Ghanaians. After making a fortune in Ghana, beyond his wildest expectations, he too became hungry to invest in banking but became bewildered when told about how he could not hold more than five percent of a bank’s shares without regulatory approval.

I have recounted the experiences of these two wealthy gentlemen and their investment aspirations and their respective risk appetite to explain further the uniqueness of banking business, following my earlier publication.

An accountant friend also called to express his delight in how the first article had given him more insight beyond the financials of banking business. He however opined that the script appeared technical and would wish that I explained the peculiarities of banking business further for the “the average person”.

This write-up is therefore my attempt to elucidate on why banking business under current regulatory architecture, cannot be run by just anybody, however wealthy, famous or powerful they appear to be in the community.

For very good reasons, banking business is one of the most regulated sectors in any modern economy. Banking thrives on the trust and confidence of customers, shareholders and other stakeholders. The failure of one bank can have a spiraling effect on so many other stakeholders and may even cause a recession, unless existing systems and structures are robust enough. The sector requires strong ,coherent, fairly intrusive  regulation, complemented with  deposit and fidelity insurance.

I must confess my admiration for some extremely powerful scripts some Chartered Institute of Bankers’ students presented when we examined them in Risk Management on the topic, “A bad bank anywhere is a threat to banks everywhere- Discuss”.

Per their peculiar nature, banks must prove and maintain a strong foundation of trust and sustainable performance. This trust must be engendered in their employees, their investors, the regulators, and the general public in order to be successful.

Cultivating and nurturing any degree of trust requires that the business of the bank (both internal and external) is conducted in a professional, fair, transparent and legal manner. This must be anchored on acceptable behaviours from all stakeholders, including even outsourced agents.

Any break in this trust can spell catastrophe as we have witnessed in the banking landscape in Ghana lately.

Perhaps a brief excursion into the genesis of banking would help us all to understand how trust and confidence became the fulcrum around which banking business revolves.

Historically banks started as money changers….‘banco’ or ‘banca’, the Italian word for a bank, which refers to the bench used by money changers to display their currencies. The merchants who had started exploration into other lands needed different currencies for these voyages.

This money changing activity naturally led early bankers to also provide deposit facilities to merchants using the vaults and safes already in place for storing their precious coins and metals.

The operators soon realized that the specie and gold deposited in their vaults could be profitably reinvested in other commercial and industrial activities. It was observed that not all the depositors came for their monies at the same time.

The early bankers therefore, started giving out portions of these deposits to others as loans for a profit. This birthed the modern -day credit management upon which the wheels of the economy now revolve.

This was the beginning of the fractional reserve system in which a fraction of demandable deposits is used to finance long-term illiquid loans, using the credit creation multiplier.

As long as the bank keeps enough reserves to cover the withdrawals of the depositors who actually need their money, which is usually much less than the total amount of the deposits, the system can operate efficiently. The cycle can go on for as long as the borrowers also fulfil their repayment obligations on time.

Thus, the system thrived mainly on trust and confidence of the depositors that they could have their withdrawals whenever they desired.

As expected, some bankers went into risk overdrive in their ambition to make excess profits. Illiquidity set in and caused the collapse of many of these overly risk insensitive operators. Such losses had negative systemic consequences on other innocent operators.

Over time, regulation of the industry became necessary to stem the tide of bank collapses caused by avarice and naked abuse of trust. This complex web of regulation birthed the Basel Committee on Banking Regulation to this day.

The attempts to sanitize the financial system has given rise to a raft of new regulations  from the Basel Committee. This has culminated in the introduction and implementation of various conventions/accords on Basel 1 which regulated credit management, Basel 11 centred on Operational risk, Basel 111 covered Liquidity and Solvency. Basel IV now seeks to complete the preceding reforms to bolster banks’ capital but has come under grave objections, key among which is the perception of stifling innovation and carrying “excess capital”.

For the likes of Messrs Serebour and Traboulsi in this script, it will be helpful to explain why they cannot just buy any significant holdings in any financial institution and run it according to their own whims and caprices.

With the benefit of hindsight, the Central Bank has responded to the need to ensure that competent persons with integrity should be involved in the running of banks from purely proficiency and character/ethical dimensions.

This aspiration resulted in the promulgation of the “Fit and Proper Person Directive 2019”. Set against the new Companies Law (Act 992) and Banking and Specialised Deposit Taking Institutions’ Act 930,the enhanced powers of the Central Bank as expressed in the Bank of Ghana Act 2002 and the Amendments of 2016, persons wanting to be involved in the management of banks as board members, key management personnel or significant shareholders of banks and financial institutions must conform to certain requirements.

Per the interpretation of the “Fit and proper Person Directive”,

“Fit and Proper Person means a person who is suitable to hold the particular position which that person holds or is to hold as regards;

  • The probity, competence, and soundness of judgment of the person for purposes of fulfilling the responsibilities of that person
  • The diligence with which that person fulfils those responsibilities
  • Whether the interest of depositors or potential depositors of the entity are threatened by the person holding that position, and
  • That the integrity of the person is established and the qualification and experience of the person are appropriate for the position in the light of the business plan and activities of the entity which the person serves or is likely to serve, taking into account the size, nature and complexity of the institution”.

Part 111 of the same  Directives also provide that “the fitness and propriety of significant shareholders are assessed against the following criteria;

  • financial integrity
  • reputation
  • demonstration of sufficient appreciation of the business of banking and the rules that pertain”.

From the above requirements, therefore, it may be difficult for the businessmen named above to become the significant shareholders that they dream of, much less obtain the capacity to apply the bank’s funds or control the bank’s business strategy  as they wish.  Besides, a bank is now precluded from engaging directly in non-financial subsidiaries which run counter to their motives.

Lending to related parties has also come under intense supervisory review by a regulator now endowed with even stronger powers and also buoyed by the award of “Central Bank of the Year 2019”. The determination to exorcise themselves of the ghosts that haunted them in past bank failures stands out strongly.

Generically corporate governance permeates the conduct of all businesses but in the environment of banking, this assumes different dimensions requiring various metrics. Banking business is extremely complex and cannot be left in the hands of pedestrian speculators and ethically bankrupt persons.

The opportunities for misconduct are vast both for insiders and outsiders on account of the sheer nature of money which is the commodity banks deal in.

The recent cybersecurity glitch by which a universal bank’s vault was hacked and GHS. 46 million transferred out instantaneously is a typical risk.

The need for  the protection of depositors and the systemic implications that a bank failure can generate are critical economic and political considerations.

Bank failures can have huge systemic implications than other companies. They are more damaging  for the economy and for society, as was demonstrated vividly by the global financial crisis of 2006-2008 and the current problems in Ghana’s financial market.

These and Ghana’s recent financial history, therefore, call for bank governance to be  addressed with specific recommendations which  focus on “internal governance” particularly conduct and culture risk in the  strategic and oversight responsibilities of the board and risk management .

The powers conferred on the Central Bank per Act 930 and the responsibilities of board members enshrined in the new Companies Act impose onerous obligations on these stewards. One of these is the requirement to understand the business of banking thoroughly and avail oneself of their time towards the efficient running of the bank. Failure to execute these functions properly may empower the Regulator to withdraw the director from the board, irrespective of shareholders’ wishes.

In addition to these onerous responsibilities, the general public is expectant of high standards of due diligence, loyalty and duty of care from banks’ board of directors, given the unfortunate experiences that the financial sector has witnessed of late.

For bank board members, perhaps it is not out of place to remind them that the possibility of jail terms looms large under current laws if they fail in their fiduciary duties and cause subsequent bank liquidations, unless they can prove their innocence.

It is also clear from the above that irrespective of how wealthy a person may be or the source of such wealth, controlling a bank by way of significant shareholding can only arise with the approval of the Central Bank.

Thus if a person has been known to be a money launderer, convicted by a court for financial crimes, or has been involved in the collapse of other financial institutions locally or elsewhere, such a person’s chances of owning a bank  or financial institution may be as difficult as finding a pin in a hay stack.

The writer is a Fellow of the Chartered Institute of Bankers and an adjunct lecturer at the National Banking College, and the Chartered Institute of Bankers, a farmer and the author of “Risk Management in Banking” textbook.

Email; koriginal59@gmail.comTel. 0244 324181 / /0576436414

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