Table of Contents
Over Ambitious Expansion Drive
One of the constraints identified was the ambition to expand the bank beyond the normal growth trends. A strategy that was termed “quantum leap strategy” compelled the bank to attract expensive funds in an unsustainable manner. All universal banks in Ghana generally pay low interest rates on deposits and high rates on loans. The difference then becomes the gain. Some of the gains from these transactions are invested in physical infrastructure development.
The rate of expansion was therefore supposed to be equal to the gains made in that year. If not shareholders had to pump in extra funds to engage in expansionary drive. However, in the case of Unibank Ghana Limited, it was accepting deposits at high interest rates than at the rate it was giving out loans. This lead to serious losses and inefficiencies associated with the high cost of dealing with SMEs. Between 2014 and 2017, the bank opened 54 branches across nine (9) regions of the country, this gives an average of 13.5 branches per year.
It became unsustainable for the bank to generate such huge sums of money to engage in such expansionary works. It was also discovered that putting up one Unibank branch was much more expensive than putting up a similar branch per industry information. The reason for this was that, the contractors were related parties and therefore staff could not query bills submitted for payment.
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Policy of Business Promotion as an Incentive for Fixed Deposit Mobilization
A similar issue was the engagement in ridiculous business promotions to cover their heavy expenditure and stay above competition. This ranged from giving monetary reward to both staff and customer who were able to bring fixed deposit to the bank. It also included running very expensive marketing promotions with expensive rewards with expensive cars just to get customers to bring in more money to finance their high expenditure.
Because of the bank’s need for cash it accepted any cash that was available and therefore offerd rates between 0.35% to 10% as facilitation fees on amounts placed as indicated by KPMG’s report on Unibank. This resulted in the bank paying as high as 24% on fixed deposit, way higher than the Bank of Ghana maximum rate of 17% at the time.
Breach of the Bank of Ghana’s Regulations
Another factor was the breach of the BoG regulations without any punitive measures from the regulator. The BoG however supported Unibank to enable it surmount its challenges. Reports from BoG indicate that Unibank had liquidity shortfalls for two years and received liquidity support worth GHS2.2 billion from the BoG, this was a time the central bank ordered Unibank to stop all branch expansions and renovations. Despite the directive not being upheld, Unibank was not sanctioned
Investing in real estate and other non-core banking activities
The most popular investment drives by Unibank were treasury bills and real estate and fixed asset acquisition; lands and media houses which were all not in synchronization with core business of banking. These investments required heavy capital expenditures which could not be financed with deposits with high interest.
The return on investment therefore diminished and the pressure to pay high interest on fixed deposits was high as they matured in the three Years. To make matters worse, these companies were affiliated with political parties or members who have taken out loans from the same banks at a lower interest rate, regardless of loan appraisals. This was a logical conclusion at the constant rate of return on assets and trends in stocks observed by uniBank before it closed
This is a widely discussed factor among staff of the bank, media houses and the general public. In addition, this is one of the factors that was corroborated by the BoG in the closing notice.
Most of the transactions were related to the owners of the bank and that ‘it was a known secret at the bank, ‘. Family members, including the children of shareholders of the bank and some members of the board of directors were all related and engaged in various dubious transactions.
Misrepresentation of financial position to regulator
From various reports, it was conclusive that the managers of the bank did not reveal the real financial health to anyone, especially not to the regulator. The bank paraded itself as though it was doing well among its peers in the industry. Findings from staff of the bank indicate that they were made to understand that the liquidity challenges that the bank faced was just a strategy to invite more shareholders and that, the bank controlled the majority of the actions of most state-owned banks such as the Agricultural Development Bank (ADB). ‘
The rationale was that the founder of uniBank has worked as Governor of the Bank of Ghana and Minister of Finance for at least four years. It has also been revealed that the Ghana Revenue authority (GRA) had to fine the bank for false reports.
External factors
Regarding the external factors that may have contributed to the collapse of the institution, the only mentioned factors were inflation, cedi depreciation and political relations with all the main political parties in Ghana. Beyond these external factors, many contractors also owned Unibank Ghana Limited
Approaches to Avoiding the Problems of the Financial Crisis
The Bank of Ghana should be more proactive in detecting a bank that is sinking early enough for prescriptive purposes. This is because uniBank was too pampered by the continuous bailout by the central Bank. These bailouts were provided by the Bank of Ghana for a two-year period.
The Bank of Ghana’s initiative in developing corporate governance guidelines is moving in the right direction; however, it should present rigorous compliance strategies to ensure that these guidelines are not flouted with impunity. This is because the study found that, in some cases, the Bank of Ghana ordered uniBank to stop opening branches, but uniBank did not comply with the directive.
In addition, the Bank of Ghana should gradually give the Ghana Bankers Association powers to regulate the activities of banks to complement the efforts of BoG’s Supervisory Department. This will ensure that universal banks self-check their own activities to prevent reckless spending which could eventually lead to an increase in liquidity requirements.
It will also help to minimize borrowing on the interbank market. To ensure that the financial results that banks publish quarterly and annually are accurate, the Bank of Ghana should carry out surprise checks on banks that are too ambitious in expanding and promoting marketing campaigns.
For universal banks, they must balance the development of expansion with the caution of not depleting the institution’s gain. Expansion should not necessarily be on physical branches. The strategy should be to find the right mix of technology and branches. This is because in the case of uniBank, the excessive ambition to create new branches was the root cause of its failure. Universal banks should make it punishable by the summary rejection of bank auditors who end up producing bad financial figures.
Responsibility for evil report should rest on the board of directors which should break the whip. Universal banks in the name of competition should not deviate from basic banking transactions companies in areas where they do not have technical competence. Businesses such as estate and land should be done with the most external care and with all risk management and with a separate entity who has the technical competence. This is because, UniBank’s woes were partly due to investment in real estate and the media.
Shareholders of universal banks should make a policy of not allowing family members to work in organization as heads of sensitive department and directors. This will give managers the free hand to take managerial decisions.
Impact of the Financial Crisis Beyond Depositors
The banking sector is facing a deep and most likely permanent restructuring process in the economy, this is starting to gain grounds after the 2008 financial crisis. The restructuring process of the banking sector has had a considerable impact on earnings, investment decisions, employment security and the general life style of employees of the affected banks. From the research, it is evidence that the banking sector has experienced some major cut in overall activity after years of expansion, which has triggered significant job losses, and negatively affecting labour in the industry in terms of cash flow, investment decisions and life style of affected worker.
Cerra and Saxena (2008) who study the long-term impacts of banking crises, but focused on investment and income level of affected workers using a time series approach, they found out that the banking crises has a direct relationship with the decline in income level and investable income of affected workers.
Demirgüç-Kunt et al., 2006 opined that banking crises has a direct relationship with output growth and private credit growth as these variable dropped significantly below normal levels in the years around banking crises.
Finally, with respect to the financial level of the employees before and after the crises, the research found out that the banking crises affected the financial level of affected workers significantly, as most staff were dependent on their salaries as their main source of income and livelihood.
This is also in line with the research of Osei Peprah (2017) who was of the view that banking crises have a strong negative impact on GDP and level of income of workers. Empirical studies show that financial level and the standard of living of affected employees in fact decelerate during banking crises (Keminsky 2012)
Major Findings and Conclusions
Banking crises are likely to have relatively larger real effects in developing countries due to relatively under development of the bond and equity markets. The major internal factors responsible for the failure of Unibank were ambitious expansion, “Business” promotion for fixed deposit mobilization, breach of bank of Ghana regulations, investing in real physical properties, fixed deposits, related political party transactions, and above all, misreporting of financial state of the bank.
The excessive manner in which investors and customers’ funds were invested in extensive branch expansion, without adequate returns, was highly risky. This investment drive puts the bank in perpetual liquidity short falls.
Additionally, the disregard for Bank of Ghana’s guidelines and directives led to the breach of all regulatory requirements, including Capital Adequacy Ratio (CAR), which should not be less than 10%. For the bank to exist under this circumstance, it had to engage in unauthorized business transactions.
Another factor responsible for the collapse of uniBank was the fact that the bank engaged in offering gifts and other monetary rewards (“Business Promotion”); not only for on boarding customers but also for highly costly deposits. This reckless transaction attracted deposit at high cost to the bank and rendered the bank’s operations inefficient. This confirmed the report of Bank of Ghana that, poor cooperate governance was one of the factors responsible for the failure of Unibank.
To compound the liquidity situation of the bank, Unibank was investing in none core banking activities such as real estate and media (Radio and Television) which were capital intensive and could be supported by depositors’ funds.
The fourth internal factor that was responsible for the collapsed of the bank was its related political party transactions. Both loans and major bank business contracts were given to family members and political party members who are associated with the bank and its major shareholder. In the case of the loans, recovery became very difficult if not impossible. No wonder, the non-performing loans (NPLs) were always on the rise. On contracts of the bank, staff of the bank could not do “value for money audit” before contracts were awarded, and this led to high cost of operations that could not be sustained.
The final factor, which was rated high, was the fact that the bank was not reporting real financial state to both the regulators and tax authorities. This made it very difficult if not impossible for the regulators to pin point what was wrong with the bank.
During the banking crisis, regulators and policy-makers are more often concerned with containing the crisis and preventing its systemic implications in the economy. This implies that even those banks that were crippled by the crisis, but were not systemically important had a chance to remain in the market. Some banks benefited from the liquidity and/or capital injections from the regulatory. However, the effect of the banking crises on the employees of these affected banks are somewhat neglected as most workers were worse off after the restructuring of banks. Based on the findings of this research study, the following repercussions have been drawn regarding the impact of the banking crisis on banking sector employees.
The employees who worked in the affected banks have strongly felt the impact of the banking crisis in terms of income level, work satisfaction, financial level and motivation level. Thus, employees of affected banks feel a strong threat of their job security. On the other hand, the employees having only post-crisis job demonstrated satisfaction as they didn’t work in a pre-crisis environment. Thus, they had positive response regarding job motivation and security.
Recommendation
Improvement in the corporate governance framework of banks will also go a long way in safe guarding job security for bank workers. A suggested option is to build incentives that move the sector to less risky activities through a new corporate governance structure. This includes in particular rationalizing executive pay and dividend policies.
Policy-makers should also consider the establishment of recognized banking sector labour union as this institution will play a vital role in minimizing the impact of banking crises on workers in the industry by recommending and initiating policies in the interest of employees.
Labour union could instigate job search assistance and training boot camp in times of banking crises to essentially help in providing quick and sustainable reemployment for affected workers. Also, social dialogue among employers and unions in the sector can greatly support adoption of the needed measures.
