There is no universally accepted definition of corruption. As a result, there is considerable disagreement over which specific acts constitute corruption. Many people would agree that the embezzlement of public assets or the acceptance of bribes by a public official constitutes corruption; but if an employee of a private company is bribed by a contractor of the company, is this also a question of corruption?
Most would still regard it as a corrupt act. However, there is a minority who believe that the term ‘corruption’ is limited to acts that take place within the public sector.
Such differing ideas about what constitutes corrupt practices have resulted in different definitions of corruption. Today, probably the most commonly cited definition of corruption is the one adopted by the anti-corruption organization Transparency International: “corruption is the abuse of entrusted power for private gain”.
TI’s definition affirms the fact that corruption can also take place within the private sector. It is now widely accepted that corrupt practices within the private sector do, in fact, have a place within the spectrum of corruption; and have the capacity to destroy the economy of any country. This explains why many organizations currently working to fight corruption deal with corrupt practices in the private sector; mainly with the understanding that to effectively combat corruption and design appropriate policies, it is necessary to include private entities.
On that score, the banking and financial sector scandals Ghana is enmeshed in should be a wake-up call to all of us. It is now clear that the public sector is not the sole headache for Ghana’s governance, but also the private sector. It is even more serious when it is the fault of a public institution like the Bank of Ghana, whose failure to supervisor the sector has caused the massive looting of private capital.
The point I am driving home is how I am redefining corruption after what has been unfolding in the banking and financial sector over the last three-four years. Gone are the days when we ordinarily thought corruption was only conceived and actualised by political office-holders and public servants in the form of sole-sourcing for contracts and purchases, over-invoicing and under-invoicing, bloated contract fees, favouritism, cronyism, and nepotism, etc.
The ongoing revolutionary cleaning of the banking and financial sector by the Bank of Ghana has revealed different dimensions of corruption that many Ghanaians had considered serious. In the past, we described those who collapsed the banks as successful business people.
To start with, it is mind-boggling that the Bank of Ghana between 2012 and 2015 granted banking and financial sector licenses to people and organizations that did not have wherewithal and requisite expertise to operate a bank. It is equally incredible that the same Bank of Ghana supervised those individuals and organizations to use their licenses to bilk billions out of unsuspecting depositors.
What’s most disturbing is that the central bank, within the period under review, continually doled out millions of the taxpayers’ money in the name of ‘liquidity support’ to the errant banks and financial institutions to keep them in business – only for the shareholders of the banks to divert the money into allied businesses. It is on record that as early as 2014, some of the collapsed banks could not pay the salaries of their workers.
Not unsurprisingly, the Bank of Ghana could neither bark nor bite – simply because the individuals and groups that owned those financial institutions were politically connected to both the party and government of the time. That was how low corporate governance had sunk. In fact, the bar of financial regulation had been lowered so low that microfinance companies were mushrooming even in bedrooms of politicians and phony businessmen and women.
In fact, the ongoing financial crisis is turning out to be the biggest headache of this government, which is caving in to a deep financial hole. The deep hole has engulfed virtually every strata of Ghana’s financial system -commercial banks, savings and loans companies, and microfinance companies. So far, the government has spent more than GH¢13billion to resuscitate the ailing financial system – with the potential to reach GH¢21billion by the time interventions end.
What went wrong?
Some financial experts attribute the financial crisis dating back to 2014 to two factors. First is what’s described as ‘connected lending’. This is the illegal and imprudent practice of banks channeling a large portion of their lending portfolio to companies created and owned by shareholders, their families, or business and political cronies.
The second factor is termed ‘mismatched or unrealistic lending’. This is when deposits are taken from poor traders and workers and invested in long-term businesses, like real estate, land acquisitions or long-term lending to contractors. These types of investments or lending do not yield immediate returns and defy traditional lending practices of diversifying lending portfolios.
The danger is that locking depositors’ money into these short-sighted investments prevent small depositors – like small-scale businesses, petty traders and salaried workers – from accessing their deposits to meet family emergencies. Inability to access small deposits sent a signal that the banking sector was under stress, and nearly resulted in bank-runs.
A ‘bank-run’ happens when the majority, if not all, of depositors besiege banks demanding their money. Sadly, virtually all the commercial banks and saving and loans companies that collapsed engaged in ‘connected lending’ and ‘mismatched lending’ as major activities prior to their insolvency. It is imprudent banking practice, if not criminal, to use depositors’ money for private interests.
One of the cornerstones of Ghana’s banking laws is that no bank should commit 70 percent of its lending portfolio to one company. But, and as the Bank of Ghana found out lately, shareholders of all the failed commercial banks created several companies and transferred various amounts to those companies in the name of diversifying lending.
By doing this, they outsmarted the Banking Supervisions Department; which some ways could be complicit in the scandal. Once the connected lending went into businesses that were not viable, it was clear that they would default in repaying depositors. As these bad and unrecoverable loans piled up, the errant banks demanded more liquidity support from the Bank of Ghana as a cover-up. One financial expert described what happened as ‘contributory negligence’.
One key conditionality of the Extended Credit Facility the IMF imposed on Ghana in 2014 was a rigorous reform of the banking and financial sector. The other conditionalities are: a net employment-freeze in the public sector, and restrictions on wage increases. In fact, data indicate that by 2014, 48 percent of Ghana’s commercial banks had collapsed. The records indicate that soon after signing onto the extended credit facility, the Mahama-led administration implemented the banking reforms for two years (2014-2016), during which time it doled out GH¢8.1billion.
Three options were available for the banking reforms: the first was to allow the banks to collapse naturally, as happened in some jurisdictions. But this option came at a huge political cost. The Mahama-administration employed this option in the DKM and God is Love cases in the Brong Ahafo Region.
The second option is the liquidity support, which was the dominant approach used by the previous government between 2014 and 2016 and was abused by both the commercial banks and the Bank of Ghana. It is on record that some of the banks received more liquidity support than their assets and capital.
The question is, didn’t the Banking Supervision Division of the BoG notice this? This poor supervision emboldened some owners and shareholders to dissipate the taxpayers’ money on reckless ventures. There is a story circulating that one owner of a collapsed bank bought and evicted an entire village to make room for his ‘galamsey’ illegal mining investment. Such was the recklessness with which the taxpayers’ money was misapplied. In fact, liquidity support became the main avenue for money laundering.
The third option was what is named ‘purchase and assumption’ – in other words, an attempt at recapitalising the banks in a bid to save the banking sector. This was the option adopted by the Akufo-Addo administration. It led to mergers and acquisition, with state-owned Ghana Commercial Bank acquiring two banks (UT Bank and Capital Bank) in August 2017. The second batch of banks, comprising five banks (Beige, Sovereign, Construction, Unibank and Royal Bank), were absorbed into the current Consolidated Bank of Ghana in August 2018. The remainder with no capital to build on had their licences revoked and were completely shut down.
Both the Ministry of Finance and Bank of Ghana have underscored the significance of bailing out the failed banks to protect more than one million depositors. Every economy depends on the contribution of taxpayers and depositors. In terms of significance, depositors come second only to taxpayers.
Interestingly, it is the same taxpayers who are also depositors. While the government can do without some categories of taxpayers, it cannot do without depositors. Therefore, economically, the significance of depositors cannot be underestimated. It is depositors’ money that oils the wheels of the banking sector, which by in turn oils the wheels of economic development.
In normal banking terrains, deposits are put to judicious use by lending to the private sector – which is touted as the engine of growth. Where the private sector is starved of the needed credit, economic growth and job creation suffer. So, those complaining that the closure of banks has caused 4,000 job losses, have no case. In fact, they should weigh the economic cost of 4,000 job losses against more than one million people losing their deposits, with the attendant consequences from lost trust in the banking system.
No one should lose sight of the fact that every economy revolves on confidence in the banking sector. Banking is one industry based on trust in the ‘fact’ that industry players will act with utmost responsibility in handling depositors’ money. Banks invite all categories of depositors to deposit their hard-earned money, believing that the next day they can have unhindered access to their money. So, if any depositor had to go to the banking hall three times before accessing their money, it sent the real signals of a failing system.
The banking sector scandal calls for strengthening the legal regime that governs banking. It also calls for strengthening corporate governance for the Bank of Ghana and commercial banks, and the financial sector generally. Suggested areas of review must include fraudulent breach of trust and negligent breach of trust, if we are to make ‘unrealistic’ and ‘connected’ lending criminal offences.
Perhaps critics of the Free SHS policy should rather be worried at the government’s use of taxpayers’ money (estimated at GH¢21billion) to resuscitate the banking sector, thanks to negligent and fraudulent banking practices.
My personal view is that investing any amount into education is justifiable, especially compared with financing the ostentatious lifestyles of owners and shareholders of banks and microfinance companies. By the way, when will criminal prosecutions of those involved commence? The taxpayer and electorate want to know.
(***The writer is a Development and Communications management Specialist, and a Social Justice Campaigner. All views expressed in this article are my personal views and do not represent those of any organisation(s).