Last week Friday was the day the Central Bank said it has brought to an end the unprecedented clean-up or reforms of the banking and special deposit-taking sector. Since August 14, 2017, the sector has seen nine banks, 23 savings and loans and finance houses, and 347 microfinance licences revoked.
So far, it is on record that GH¢12billion has been spent on only the banking and microfinance companies – with Ghanaians yet to know how much of their taxes are being spent on the clean-up of the savings and loans and finance houses. Analysts believe that sector alone will require at least GH¢5billion, with a source close to the central bank pegging it at GH¢7billion. That means, the clean-up has cost the taxpayer at least GH¢20billion.
But the clean-up of the whole financial sector is not done. The financial sector in any economy consists of deposit takers such as banks and specialised deposit-taking institutions, insurance, investment banking and the capital markets and pensions.
Currently, the insurance sector, which is regulated by the National Insurance Commission (NIC), has seen its stated capital increase significantly. The increment is expected to see consolidations and allow for the creation of bigger insurance companies that will improve on their contribution to GDP and deepen penetration.
But another sector that has seen challenges and needs urgent attention is the investment banking and capital markets sector, which is regulated by the Securities and Exchange Commission (SEC).
With the central bank’s job completed, the SEC – which, also requires funds from the Finance Ministry to undertake a proper clean-up – has already revoked some licences and placed some institutions on a watch list, and is getting ready to undertake comprehensive reforms in the sector.
The problem
With 140 fund or asset managers, total Assets under Management (AUM) in the investment banking industry grew by 54.07 percent from GH¢20.16billion in 2016 to GH¢31.06billion, the SEC said in its 2017 annual report. Total AUM of the collective investment schemes developed for retail investors also increased, by 11.04 percent within the same period.
In the same report [it is yet to release its 2018 annual report], the SEC noted that the crisis in the microfinance industry and, to a lesser extent, the savings and loans and finance houses has had a contagion effect, to some extent, on some of the assets in the asset management sector of our market.
As at the end of 2017, a total of GH¢183million and GH¢1billion were placed respectively with microfinance and savings and loans and finance. This implies that a total of 7.09 percent of total Assets Under Management (AUM) in the asset management industry have been placed with microfinance and Savings & Loans financial institutions – many of whom are in trouble and have insolvency issues.
Due to the increased risk of defaults, the Commission received numerous complaints – the highest recorded since its establishment. After receiving only 55 complaints in 2016, the commission received a total of 223 investor-complaints in 2017 – all relating to the inability of some asset management companies to pay clients their investments on maturity.
The total principal amount invested for these complaints in 2017 was GH¢116.6million minus accrued interest. Cumulatively, the SEC noted that as at the end of the first quarter of 2019 it had received 1,091 complaints with only 270 resolved.
What is being done?
The SEC noted that it has introduced corporate governance, investment and financial resources guidelines to ensure properly capitalised and well governed asset management firms. Also, supervision and enforcement is being strengthened to ensure that the licencees deliver on their mandate to the investing public.
The SEC introduced these comprehensive guidelines after its investigations showed that over GH¢1.18billion of assets under the management of investment banks were locked up in virtually insolvent savings and loans and microfinance companies. These guidelines, the SEC said, will ensure strict compliance so as to protect the interests of investors.
“If the trend of related party transactions is left unchecked and unrestrained, we will unwittingly be setting the system up for a major meltdown,” Reverend Daniel Ogbarmey Tetteh, Director General of the Commission, said in its 2017 annual report.
Revocations and suspension of licences
In April 2019, the SEC issued a statement that revoked the licences of five fund management firms: including Georgetown Capital Partners, Equity Capital, Index Analytics, DM Capital and Oxygen Advisory.
In 2018, it announced the suspension of licence for six asset management firms including Weston Capital, Canal Capital, EM Capital Partners, Mec Ellis Investments, MET Capital Group and MAK Asset Management. Also another four, Grofin Ghana, Verit Investments, HFC Capital Partners, and Hydefield Capital requested for voluntary cessation of operations.
What now?
What happens now could be the SEC following in the central bank’s footsteps – by revoking licences of insolvent fund managers and providing enough funds to pay off investors whose capital have been locked up for more than two or three years – which could require at least GH¢5billion to undertake a wide-ranging clean-up.
But another way to reduce the cost-burden on the taxpayer is to see the receivers of these microfinance companies, finance houses and savings and loans companies to quickly undertake their due diligence and pay-off depositors, which include these asset management firms. Such a move could free-up significant capital and allow these struggling asset management firms to pay their customers and return to liquid levels.
Subsequently, Consolidated Bank Ghana (CBG), could expedite action on paying off the institutional investors on its books. Whatever it is, the sector will see some action – and, definitely, it will come at a cost to the taxpayer.
BFT