What is happening to the Ghanaian banking sector? Part 1

Today, October 21, 2018, I wrote on my Facebook wall about the trouble many Ghanaian savers have gone through between August 2017 and October 2018. Some members of my year group from Opoku Ware School also asked the question in the title on our WhatsApp page today. The highpoint is that they have struggled to get access to their savings at the time they needed it and some of them may only get part of their savings if they get it at all. A number of financial institutions have failed 

and others too may go down. I got people liking the Facebook post and others sending me private messages about whether their savings were safe. I believe many of them have seen similar posts I made earlier and they think I may have some expertise or knowledge about the financial system. I won’t accept the tag of “expert” but I will admit that I have some knowledge on the financial system of Ghana and sub-Sahara Africa.

I admit to have some knowledge of the financial system firstly because I have been an active and conscious participant of the system since 2006 (I was in Senior High School) and my masters degree was in finance. My MPhil theses focused on monetary policy, exchange rates and risk-taking in the banking sector and I have since explored the data on the banking sector a bit more. The conclusion of the thesis findings was that the financial systems of many African countries were not stable and could experience crises in the short to medium term. The troubles in Ghana’s financial system started to show two months (June, August) after I submitted the thesis. On the bases of my experience and knowledge I will attempt in this write-up to share my views of the Ghanaian financial system and what the future might look like. I will only touch on aspects that I think would help people seeking answers about what is currently happening in Ghana and provide some advice on what to consider before choosing a savings product (more or less the financial institution).

Also, some people believe that anyone who studies economics or has a profession that uses knowledge of economics can be called an economist. I have studied economics in senior high school, bachelor’s degree and now pursuing a PhD in Economics. I think on that basis I can call myself an economist (finally!). The subject matter of this write-up may border on branches of economics such as monetary economics and financial economics but also to a large extent on behavioral economics. As a research student and a prospective academic, readers may expect that this write-up should be based on some research I have done specifically about the Ghanaian economy and should be technical. Unfortunately, the only aspect of economics that I am currently actively researching is behavioral economics with specific application to the health sector of sub-Sahara Africa and I don’t intend to present technicalities. Nonetheless, since many active academics in this field have failed to speak as loud as they should, read along and let me share some insight with you.

I will start by looking at the skillset of the people who work in the financial sector. I have heard time without number, how some of the people who work in the financial sector have said that they are the people who really know finance because they practice it. They sometimes go as far as saying that those of us in academia only know theories and not the realities. What they fail to see is that what is written in the books evolved from realities and that theories are careful attempts to represent or explain realities. They fail to see that theories are often the result of rigorous thinking and critique. Your body belongs to you, and you may know it quite well, but when it comes to medical care you cannot claim to know more about what you need than health professionals. This is simply because they have spent years studying human health and their knowledge has evolved beyond what you can know just by looking at yourself. I know people who have degrees in political science and English who are bank workers working in positions such as branch managers and one who was the CEO of microfinance institution. Unfortunately, many of these people think they are experts in banking, finance, investment and wealth management. No, they are not. Experience is good but a “naïve” experience is dangerous and it is part of the problem we have in the financial sector. It appears to me that people see the financial sector as an easy route to become rich and so they are in the sector just to try to make wealth for themselves. Many of the people who sit as customer service personnel at banks and those who mobilize savings (mobile tellers or susu collectors or investment brokers or “insurance agents”) have no proper understanding of what they sell. They always appear to me as conmen and I avoid them. Some of them only have one day training to do what they do which is certainly inadequate to qualify them to work in a sensitive sector like the financial sector. Because they do not have adequate training and understanding of the services they render or the products they sell, they are unable to explain it to customers and so they attract the wrong clients (you will understand this later). Moreover, many of us in Ghana have an attitude of trying to cut corners and I suspect that even those who understand what they do attempt to misrepresent it so as to meet their targets (sales target/quota).

Many of the top officials of financial institutions have an illusion that because of their positions as bank officials, they own or have control over the money at their banks. This is part of the problem. Ideally, the business of banking is not supposed to be business (confusing right? You will get it later). Many of these bank officials attempt to “diversify their investment”. Unfortunately, the money people come to deposit is not “their investment”; it is people’s money. You are not supposed to diversify their savings. If the reader will observe, you will notice that many of those who own banks also have business such as media houses (newspapers and radio and television stations), schools (including universities), real estate companies, insurance companies, transport companies, etc. Usually, these companies are established subsequent to the banks. I suspect they use some of the deposits to establish those businesses. That seems like they are using the banks to mobilize capital for their own business ideas. This practice is not right and you should avoid banks or financial institutions that are part of very large conglomerates that have very well diversified portfolios. That kind of diversification is only good for the shareholders of the conglomerate (it protects their investments- which is actually your money) not for you as a depositor. Before a bank can pay your deposit when you need it, it needs to be liquid (that is, have enough cash when you want it). If they are investing that money to build a university, it may take up to two years to complete the infrastructure of the university and more years to get the university running and even longer to begin to generate surpluses (or profits) from the university to pay you your money when you need it. But deposits or your savings must be available to you on demand or on notice (usually a few weeks at most if it is a very long term deposit). So, at the time when you want your money, it has been converted into mortar and roofing sheets. The bank cannot get the money for you immediately and that is partly the reason many people are struggling to withdraw their deposits.

The infamous DKM issue was partly because the company had used deposits to buy busses to operate a transport business. My dad is an expert in the transport sector and he tells me it would take more than one year to recoup all your investment in (brand new) busses (if you don’t overwork the busses).  So, if you made a 90day fixed deposit and your bank bought busses with it, they cannot pay you in 90days; that is partly what we see. So when the banks tell you those uninteresting stories such as the “system is down”, “management is in a meeting” etc, they are buying time in the hope that the investments they made with your money would mature so that they can pay you.

Banks are supposed to take your deposits and give it out as loans to businesses to do business. These businesses pay interest to the bank and the banks keep part of the interest and give you the rest together with the original amount you deposited. They are supposed to do due diligence to ensure that the businesses they lend to have the needed skill and sufficient track record in the business they do so that they are likely to be able to pay back the loans. This is what banks are supposed to do and not to invest the money themselves. The directors of the banks may be smart guys but they cannot possibly be excellent at managing all kinds of businesses at once; that is why they have failed. It appears the scope of banking has gone far beyond what it was meant to be. Have you seen Barclays Real Estate Company or Ecobank University or StanChart Transport Ltd before? Look for the names of the failed banks and google them and you will see that they all had subsidiaries that are unrelated to banking.

In January of 2018, I was driving along a very isolated highway and I saw a bank building which appeared not to be in use. I told my wife this bank would suffer soon (that bank is currently struggling to pay its depositors and other clients). Having too many branches is no longer a smart way of doing the business of banking. Check how many branches some of the defunct banks had and check how many branches Calbank or Ecobank or Bank of Baroda has (don’t point to GCB, they are a case study on their own). In fact Ecobank started to close some of their branches recently. Banking has evolved beyond brick and mortar and it is illusive to think that the Ghanaian banking sector will not evolve with the global trend in the short to medium term. This write-up is not a banking manual so I won’t go further. Just note that if your bank boasts of having so many branches and they are expanding too fast they may be heading the wrong way. Also, a new or young bank that owns practically all the buildings they operate from is probably not a safe place to bank.

A couple of years ago, my friend, Tawfiq, invited me to invest in Menzgold and I told him that business was not sustainable and they will eventually fail. In 2010, Seth wanted me to join a “pyramid scheme” where you are asked to enroll two other people and you get to be paid a percentage of their registration fee and the tree continues until you get to the apex. I told him I wasn’t interested. Unfortunately for Seth, he lost his investment in that scheme. In August 2018, I gave Daniel (my mate from Opoku Ware) a ride in my car after a wedding and he was telling me about a similar “pyramid scheme” and he was so sure it was genuine; he said he was planning to invest more money in the scheme and he invited me to join (of course i didn't). The scheme pays huge interest on monthly basis. I wasn’t able to convince Daniel not to continue. Daniel is a pastor and a seer so I take it that he may have some supernatural insights beyond my knowledge in economics and finance.  But in case you do not have such spiritual abilities, part two of this write-up will help you decide where to invest.