What is happening to the Ghanaian banking sector? Part 2

In this second part I propose a rough guide to determine where to take your deposits or savings. It won’t make you an expert but it would be a fine starting point. I stated earlier that banks lend to businesses who in turn pay interest. The stock exchange is a market where companies sell shares. That market reflects (or it is expected to reflect) what is happening to businesses in general. You have to watch that market as an investor even if you don’t hold any shares (the Composite Index). On a daily bases, the stock exchange reports the performance of the firms listed on the exchange. You should look out for the overall performance of the stock exchange as a signal of what kind of interest you should expect to receive on your deposit. The Ghana stock exchange rarely crosses 30% (per annum). This means that the guys who actually do “real work” don’t even get more than 30% in 12months. So if the bank or savings and loans company or pyramid scheme tells you they can pay you 30% every month be careful. Even if they promise you 5% every month, my dear, save your money elsewhere. There is a principle in finance that states that the higher the risk the higher the (expected) return. Unless you have training in finance this may not be meaningful to you. Think of it as: the higher the return, the higher the risk. Yes, if they promise you very high returns, they most likely would not be able to pay- even your initial investment.

Don’t mind those who have accused you of being greedy and selfish or wanting to get rich quick. They are being hypocritical. All of us want to get things the easy way. We all wish we were millionaires and we didn’t have to work for the millions. But you see, things don’t work like that in real life. The only sustainable way to make wealth is to do business. By business, I mean doing something with your hand (your brain actually) - something tangible. Provide a service for a fee or produce a product for sale. At the very least, you can give someone else your money to do the “real business” so that you can hold shares (including mutual funds). That kind of investment or business in general is also risky and maybe even more risky. The difference however is that, you get to control what happens to your money and you know the worse that can happen. In any case, you are more likely to be careful how you manage your money. Also, even if you fail initially or do not get what you expected, you will become a better investor with valuable experience for the next business. You will still need the banking system but this time round not as a source of income.

Some years ago when I was reading for my bachelor’s degree I tried to buy plantain from farmers in Brong Ahafo and sell in Accra to those who make plantain chips. My first prospective buyer was a rough guy who wanted to cheat me so I sold some of the plantain to a woman who roasts plantain by the roadside at Kanda (I think) and I cooked the rest and quit the business. I may not have succeeded at that business but there is nothing nicer than “chopping your own plantain”. The lesson I learnt from that first business was how to negotiate and not appear weak or desperate at the negotiating table. I carried that lesson to my next business (which involved negotiating at every stage) and I succeeded. My investment in the first business was not more than GHS70 and I lost about GHS25 in transport cost but I “chopped” my plantain. I made several times more than this loss in my next business. I take it that I paid school fees to learn that lesson for the future. You can observe that financial schemes that promise to make you rich only enrich the originators or the first few people who get into it and not the majority of the people who join. Avoid them. If you want to earn interest without much trouble, you may want to buy government securities such as treasury bills and bonds. The other part is that if you buy too much of those ones too government debt may rise (remember the DEBT to GDP ratio debate?). Also, buying treasury bills means that ordinary businesses would not have access to borrow your savings and they would have to borrow someone else’s savings at a higher interest rate. In the end we will all complain of high interest rates. You should consider saving with institutions who promise modest returns such as 5-10 percentage points more than the T-bill rates.

I don’t think anyone can blame the Bank of Ghana too much for the problems in the sector. I believe the Bank of Ghana assumed that people who wanted to operate banks had adequate knowledge and were honest people and so they were not as strict with the rules as they should have been. The turn of events should remind them that human beings will always stray if they are not guided closely. No one should blame politicians either because some of these things are not within their power to do; it takes the collective effort of everyone to sanitize the industry. Regulators and industry leaders are only expected to demonstrate leadership and inspire confidence (be careful who inspires this confidence though) in the sector. It is unfortunate that certain politicians gave Ghanaians the impression that they are more anointed than Moses and Solomon and could single handedly do magic to transform the sector and the whole economy (let’s get beyond political chicanery).

As an economist, I know that expectations are important and words could have effects on the economy. Nonetheless, we owe a moral duty to society to explain what is happening as well as we think we can. The bad news is that, the happenings in the financial sector are not ending immediately and this may go on to affect the entire economy in the medium term. Banks were among the largest employers in the country. Many of these banks have now laid off some workers and those that have folded up (or been acquired/consolidated) have laid off most or all of their workers. This means that unemployment has risen. Other sectors of the economy will be affected as demand dips further. This means that general income levels would fall (inflation may also slow down {Philips curve???}). One implication is that all these people whose income level have fallen or who have lost their jobs would want to turn to their savings but the banks wouldn’t be able to pay and this may distress banks and other financial institutions further. Moreover, because people now have lower incomes, the savings rate would reduce and so financial institutions would not be able to mobilize enough new savings or deposits to sustain their businesses. Those with very minimal liquidity will struggle the most to survive. Besides people have lost confidence in the system (temporarily) and so would hold their money outside the formal financial system this means the financial institutions cannot continue to “recycle” deposits. Such ripple effects are not avoidable but we can think about what to do when the storm is over. The good news is that in about two years I believe the sector would get stronger and stay stronger for a long time until we forget 2017/2018. For now, one clue to determine where to save your money is to look in the news for the banks that have not been in the news for distress in paying customers and for not being able to meet the minimum capital requirement.

After these events, I suggest that banks and the Bank of Ghana should ensure that people who work in the financial sector have appropriate training in finance (at least a diploma in finance) even if they are only tellers. This is important because it is natural for people to seek progress in their jobs; these people would eventually climb the corporate ladder to make “finance decisions”. Common sense and experience are important in finance and investment but finance and investment is neither common sense nor experience. It all starts from school when people think Business (accounting, economics and business management) is easy and science (chemistry, physics and biology) is difficult. Sorry guys, you have to be smart to get into Accounting, Economics and Finance; and it takes hard work and significant mental effort to be good in these fields. Science and General Arts are for smart guys too. No field is easy! Bear that in mind. Secondly, the Bank of Ghana should be stricter with the enforcement of their rules. The requirement for operating a financial firm should be made more restrictive so that the bad firms are sieved out.

For you, the reader, you must read and read and read about finance, investment, the economy and markets in general. I don’t mean you should get a degree or a diploma in finance or become an expert in these fields. We all read about healthy lifestyles and how to stay healthy but it doesn’t make us medical doctors or health professionals. No matter how much you read about health on the internet, you never think you don’t need a health professional when something goes wrong or for health advice. Even health professionals consult themselves for ideas and advice (like I consulted my colleagues on the ideas I have shared with you). Apply the same principle to your investment.

What I have shared with you today is an opinion piece rather than an academic paper. I have tried to use everyday English to make sure that anybody can understand. I will be happy to give you free advice if you send me an email at gabrielamobila@outlook.com. My outlook of the medium term is something I believe but economists are not prophets and are limited in how much we can say about the future. Nonetheless, we more often than not get close to reality and you should take us serious. In the language of economics, what I have done here is called normative economics. As an active participant of the Ghanaian financial sector and the economy as a whole, these are some of the things I believe are the real issues in the sector. I invite people who have experience, knowledge or expertise in economics and finance to join in this conversation for an intellectual discourse. I think this is lacking and we allow politicians to dominate the discourse on the economy (or we allow our political preferences to influence what we say or how we say it). It’s our specialization and we owe the non-economists a moral duty to shape the debate. Cheers!

I acknowledge valuable comments from Andara Kamara and Mohammed Tawfiq Bidda which helped to make this write up as beautiful as you find it J . I take responsibility for any shortcomings but share the glory with all those who have engaged me on issues relating to the economy and the financial sector.

You don't need permission to copy or share material on this blog-just keep the conversations alive.