Ghana’s financial sector crisis is now part of the election campaign

By Antoine Galindo in Accra
Posted on Tuesday, 1 October 2019 16:56

Akufo-Addo, Ghanaian President, during a visit to Japan in 2018. Shohei Izumi/AP/SIPA

Ghanaian President Nana Akufo-Addo is contesting the 2020 presidential elections against a backdrop of a fragile banking sector. While reforms have been undertaken, including moves to tackle corruption, they have not met all expectations.

The case of Nana Appiah Mensah, CEO of the gold concession and investment company Menzgold, is emblematic of the financial sector in Ghana.

No less than 61 charges, which include money laundering, fraud, taking illegal deposits and trading in unlicensed minerals, were brought against Mensah. At stake are the 1.68 billion cedis ($308.4m) collected from 16,001 individuals.

  • From 2014 to 2018, Menzgold offered its investors interest rates of 7 to 10% per month on gold deposits.
  • It was an attractive offer — more generous than what traditional banks offered — and was directly accessible from Menzgold’s website.
  • Fearing a Ponzi scheme, the Central Bank of Ghana (BoG) and then the police’s criminal investigation department, issued warnings.

But it was not until 2018 that Menzgold’s activities ceased.

After a brief spell on the run abroad, Mensah was held in detention in Dubai for allegedly defrauding a business partner there. He finally returned home on July 11, 2019. Released on bail on August 6, he is now preparing his defence.

While the Menzgold saga is an extreme case, it testifies to the serious abuses of the financial sector in Ghana.

In-depth reforms

It was in December 2015 that alarm bells sounded for the first time.

Following an audit conducted by the International Monetary Fund (IMF) and the BoG on credit facilities in the West African nation, serious dysfunctions were revealed: lack of regulation and control, lack of liquidity in the capital of several major banks, and fraudulent activities. The diagnosis of the audit was irrefutable: several banks had substantial supply shortfalls.

Since then, the BOG and the IMF agreed on a roadmap to restore banks’ equity capital.

It is under the mandate of Akufo-Addo that the government, as part of this roadmap, is committed to rescuing the sector, buying back debt from banks, savings companies and microfinance institutions, in order to bail out investors. It forced financial institutions to recapitalise and banks to merge.

Rural banks in the State’s sights

Four years later, nearly $6bn has been put on the table by the government, and 420 financial institutions were closed by the BoG. As authorities dig deeper, new problems are emerging. After the big banks, the government then turned its attention to microfinance companies. Now it is the turn of rural banks.

“The financial sector was in complete chaos! There were too many actors. Some were not registered or regulated. Some took deposits without a licence, did not have adequate governance structures or even siphoned money from one institution to another,” says Peter Quartey, Professor of Economics at the University of Ghana.

When Akufo-Addo came to power in early 2017, he inherited this disorder. He created a Fiscal Council and a Financial Stability Board, introduced new rules on the capitalisation of banks, and repurchased debt.

Blocked investors

“The situation has now stabilised and we must welcome the order the authorities have tried to bring back into the banking system,” said Dr. Touna Mama, IMF representative in Accra, last March, as he closed the Bretton Woods Institution’s programme in Ghana.

“What remains to be done today is to allow investors to recover their money,” continues Quartey.

There are about 70,000 people waiting to recover about 9 billion cedis ($1.65bn).

“The impact on the economy is serious, because investors cannot recover their cash. Some entrepreneurs cannot access their capital, and users no longer have access to their money. But some people need it to send their children to school, others to ensure their retirement, or to pay for medical expenses,” the economist says.

21 funds targeted by the Ghana SEC

All this liquidity has not been reinjected into the economy. The Ghanaian state does not have the means to take charge of everything.

“But institutional investors, or middle- and high-class depositors, have not yet been settled. And that’s the problem. If the government could set up a special court to deal with these financial problems, we would have faster trials, and people could be paid more quickly,” Quartey suggests.

The Securities and Exchange Commission, Ghana’s financial market regulator, is currently investigating 21 hedge fund managers. It could be years before the first judgments are rendered.

Neither the current ruling New Patriotic Party (NPP) nor the ruling party from the previous administration, the National Democratic Congress (NDC), want to take responsibility for the prevailing chaos.

Especially since in 2020 Ghanaians will elect their next president.

The banking sector is becoming an electoral issue and campaigning has already begun.

“Nearly 20,000 people lost their jobs as a result of the closure of 420 financial institutions. And that’s not counting indirect jobs. By the time this calculation is made, 40,000 to 50,000 people may have lost their jobs,” former President and NDC’s 2020 presidential candidate, John Mahama, said in late August, pointing to the BoG’s responsibility.

A few days later, the current Vice President and NPP member, Mahamududu Bawumia, was on the defensive. “The problem in the banking sector was known as early as 2014, and even earlier. This is something that President[John] Mahama and his government should have thought about. When we were in opposition, data already suggested that eight banks could collapse. And nothing has been done.”

Money for banks

Still the political games continue.

In early September, it was the turn of NDC MP Isaac Adongo to take aim: “Why would the government be willing to borrow 14 billion cedis [$2.57bn] to close banks, 7 billion [$1.28bn] to close savings and loan companies, 2 billion [$367m] to close microfinance companies, but is not willing to use part of this money to pay the government’s debts to entrepreneurs, [debts] that have contributed significantly to the insolvency of some banks?”

For Quartey, the solution is not that simple.

“Yes, $6bn has been put on the table to save the banks. But it’s not free, it’s about bond repayments. If you look at previous administrations, a lot of money had already been given by the BoG to support the banks. And some of them had used it to create or bail out sister companies,” says the economist, who believes that “a lot of money has been given in the past, much more, moreover, than what was spent on the current rescue”.

Akufo-Addo cornered

In a note published this summer, the BoG extended the deadline for rural and community banks to recapitalise until February 2020. They had until June to increase their capital to 2 million cedis ($367m).

“This decision is above all a strategic one,” says Quartey. “It’s all about buying time to solve current problems, and also to step back from the rural sector. And also, to look for money. Since it will also require money to bail out depositors at some of these rural financial institutions,” the academic adds.

Bottom line: Akufo-Addo has little time to resolve these issues ahead of next year’s elections. And as his popularity continues to erode, he is struggling to keep his 2016 election promises.

This article first appeared in Jeune Afrique.


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