CHAPTER ONE INTRODUCTION
Background of the Study
Banks throughout the world perform a very important financial function in the economy, since they mobilise savings for productive investments and facilitate the circulation of capital from dormant to productive sectors of the economy. The growth of an economy is a function of an effective and stable banking system that mobilises excess liquidity for investment (Yeboah- Mensah, 2015, Tettey, 2017). The relationship between the banking system and rapid economic growth is seen more in the light of banks providing loans to businesses (SMEs) through accumulation of savings. Therefore, factors like poor management of banks (bank factors), Non- performing loans (NPLs), and environmental economic factors (economic shocks) could affect the smooth functioning of banks in a country (Yeboah-Mensah, 2015, Tettey, 2017). If banks are not able to perform these monetary transmission functions, the entire economy suffers through liquidity challenges, hindering financial institutions’ ability to make available depositors’ funds when needed (Amuakwa-Mensah and Boakye-Adjei, 2015).
The Central Bank of Ghana (BoG) is mandated to ensure the smooth running of the banking system. Over the years, Bank of Ghana has taken pride in enforcing stricter regulation and supervision. In this regard, the BoG formulated the Banks and Specialised Deposit Taking Institutions Act, Act 930 in 2016, which empowers it to be more aggressive in dealing with deviations in the sector. The BoG, aside instituting regulations, undertook a clean-up of the
financial sector. This saw the number of universal banks drop from 30 at the beginning of 2018 to
the current 23, as at the end of December 2018. These 23 universal banks were able to meet the minimum capitalisation requirement of GHS 400 million by the end of December 2018 (BoG, MPC reports, 2018).
In 2016, BoG conducted an Asset Quality Review (AQR) exercise, which revealed several challenges that had bedevilled the banking sector in Ghana. These challenges are insufficient capital, increasing levels of Non-Performing Loans (NPLs) owing to poor liquidity and credit risk management, as well as fragile corporate governance structures. The AQR exercise also revealed that most of the indigenous banks in Ghana were vulnerable to these challenges, especially insolvency. In a bid to prevent the total collapse of the financial sector, Bank of Ghana had to liquidate two banks (Capital Bank and UT Bank) in August 2017, and a year later, seven other banks were declared insolvent and combined to form Consolidated Bank Ghana (CBG), after several attempts to resuscitate these ailing banks failed. In total, BoG has, within two years, withdrawn the licences of nine indigenous banks.
One of the seven collapsed banks was uniBank Ghana Limited. The bank was one of the five banks that were initially consolidated into the Consolidated Bank Ghana (CBG) on first of August 2018. The other members of the Consolidated Bank were the Sovereign Bank, Beige Bank, the Royal Bank and the Construction Bank. However, on the 4th of January 2019, Heritage Bank and Premium Bank were added to CBG to increase the number to seven.
Financially, uniBank over the years has performed creditable. According to their 2016 annual report, the bank raised its total assets by 50%, worth GHS 5,743 million relative to the previous
year. Net loans and advances, profit after tax and all other indicators of financial soundness were reported to be doing very well. The report also added that uniBank was the third (3rd) biggest bank in terms of total assets at the end of 2016. It was therefore surprising to find it among the liquidated banks. This study therefore tries to answer the question “what accounted for the collapse of uniBank and for that matter the collapse of banks in Ghana?”
Problem Statement
Notwithstanding the fact that loans are a bank’s main income source and constitutes majority of its assets, it is also a very unsafe area, as far as the banking industry is concerned. One of the main reasons given by the BoG in addressing why uniBank and the other eight (8) banks collapsed in Ghana was the issue of non-performing loans (NPLs). This could be attributed to the fact that banks in Ghana and other parts of the world make most of their profits from interest charged on loans (Interest income). The recovery of loans is always a challenge, not only to the individual universal banks, but also to the BoG as a regulator (Barr and Siems, 1994).
In a speech published by BoG on the establishment of the Consolidated Bank, it was revealed that an Administrator (KPMG) appointed for uniBank found it to be beyond repairs. It also indicated that uniBank was part of the list of banks that the updated AQR in 2016 found to be heavily undercapitalised. According to BOG (2018), the bank’s shareholders and affiliated organisations had absorbed a whopping amount of GHS 5.3 billion which formed seventy-five percent (75%) of the total assets of the bank. In conclusion, insufficient capital, sky rocketing non-performing loans (NPLs) and weak corporate governance were the main reasons given by BoG for the collapse of uniBank. Beyond these regulatory reasons, what are the other reasons for the collapse of the bank?
This present study seeks to find answers for the question raised above, hence fill the gap in the literature on bank failure.
Objectives
In order to determine the actual causes for the collapse of uniBank and for that matter, the banks in Ghana, the following objectives were formulated:
- To delineate some constraints of uniBank from 2011-2016
- To identify the key specific factors that triggered the collapse of uniBank
Research Questions
To achieve the major and specific aims of this work, the following research questions were asked:
- To what extent is the external environment influencing the closure of uniBank?
- What was the constraint faced by uniBank before its closure?
- What are the general reasons for the closure of uniBank?
- Are the reasons for the closure of uniBank limited to only BoG’s reasons?
Significance of Study
The examination of loans and advances is a prominent issue given the degree of impact it has on the management and operations of financial institutions. This study is significant as it deals with the non-regulatory factors that were responsible for the collapse of uniBank as well as the challenges in the banking industry.
This work also intends to enable the existing universal banks, BoG and the government to realise the extent to which NPLs and other factors contributed to the collapse of banks in Ghana. This will therefore bring to light the need to develop stringent measures that will enhance the financial sector to avoid further collapses in the future. For almost three (3) years, the banking sector in Ghana faced numerous challenges leading to the collapse of nine (9) banks with NPLs being a key determinant (BoG 2016). This study seeks to enable the existing banks create more value for their shareholders, employees, the government and the society in which they operate, by offering suggestions as to how to deal with the non-regulatory factors responsible for banks’ liquidation. The study is also relevant for academic purposes and forms the basis for future research. In addition, it will contribute to literature on the causes of banks’ failure.
Research Limitation
The research was designed to investigate the factors responsible for the collapse of nine universal banks in Ghana using uniBank as a case study. uniBank was chosen because it was the biggest local bank that supported most parts of the Ghanaian economy with affordable banking products through a diverse branch network of Fifty-Four (54) branches, among the nine liquidated banks. However, a small sample size of five former employees in Accra limits the generalisation of the study.
