Perspectives on banks’ ineffectiveness and failure in Ghana

The essence of banking in enhancing the developmental agenda of an economy cannot be overemphasised. To highlight this, the economist, Adam Smith, once stated, “It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country”.

Any nation’s quest for economic transformation cannot be divorced from the creation of a strong and stable financial services sector. Think of banking as the oil that lubricates the engine of a nation’s economic growth.

The Ghanaian banking sector has, undoubtedly, experienced a lot of positive development and innovations over the past couple of years; mainly inspired by competition from foreign investment. But compared to their counterparts in other countries, it seems the sector has quite a long way to go. An often-cited statistic relates to the fact that although there are just 22 banks operating in Nigeria, their unbanked population is only 46% compared with Ghana’s 70% with 34 banks; even though Nigeria’s population is 195 million whilst that of Ghana is only 28 million.

Several factors account for the ineffectiveness of the Ghanaian banking industry, some of which are in the areas of:

Recruitment and Staff Motivation: This is one area that is often overlooked when the strength of the industry is assessed. The fault in this ‘department’ fundamentally centres on the erroneous belief that by paying people well, you could get them to do anything. A foundation course in HR is enough to know that human motivation is much more complex, and financial incentives are just a small portion of it.

It seems the explosion of the customer-centric ideology has done nothing to alter the way management of banks treat their employees, who are supposed to be their (management) ‘customers’.

Some of the banks fail to conduct even a basic employee satisfaction survey to assess the motivation level of their staff and address their concerns. It has become quite a mantra in this country that “banking is stressful”, but should it be? Ultimately, what you get is a situation where the banks employ some of the smartest minds in the country and then ‘clip their wings’, a situation which results in one of the most demotivated workforces in any industry in the country. This explains why the staff attrition rate in the industry is so high, but then again many of the banks even fail to quantify the economic cost of staff attrition.

Again, when it comes to staffing, one issue that affects staff motivation and drives down productivity is a failure to adhere to the principles of meritocracy, through unhealthy organizational politicking. This has created a situation in the industry where staff are, generally, more interested in pretentious manoeuvres than in getting their work done effectively:

A situation which creates unhealthy internal competition dissipates team spirit and diminishes effort. Many of the institutions lack a clear and objective basis for employee assessment and end up further demotivating hard working staff.

Lack of Research Capacity: It is essential for financial institutions to develop robust research capabilities, so management could be provided with relevant insights spanning the macro-economy, sector developments, internal process improvement, customer relationships etc. Many of our financial institutions lack this critical element that ensures a data-driven approach to managerial decision making, so processes can be optimized.

In developed economies, research is considered a core function of financial institutions’ management. Meanwhile, we have the situation where our banks are sitting on mountains of data with virtually no one analyzing them to inform managerial decisions. Banks in Ghana are also notoriously unreceptive to collaboration with academia for research purposes.

Management of banks often resorts to their intuition when making key decisions instead of relying on relevant research and data analytics, like their counterparts in other countries. This situation often results in mis-pricing of facilities, sub-optimal assessment of credit, tendency to lend to ‘family and friends’ and other practices which weaken a bank’s foundation. For a bank, failure to invest in research is like driving an expensive Benz in the dark with the headlights off. One may enjoy the ride, but the outcome could be potentially disastrous.  Research helps to strengthen the principles of corporate governance, by providing relevant insight and data to aid strategic decisions.

Low Credit Appetite Boosted by a Weak Monetary and Fiscal Policy: A foundation course in banking will likely define their role as that of financial intermediation: which basically means connecting surplus and deficit units of the economy and making profits through the arbitrage opportunity they present. However, it appears the role of financial intermediation (when it comes to the private sector of the Ghanaian economy, which is the engine of growth) is largely ignored by the banks.

Faced with higher borrowing rates by the government and a regime that enables them to provide almost negligible interest on deposits, the banks end up shirking their core ‘duty’ of lending to the private sector. Another repercussion of the low-risk appetite is the tendency to lend to the services sector whilst largely ignoring the manufacturing and agricultural sectors, which are supposed to be the heartbeat of our economy. Banks in Ghana are perceived to be mostly interested in cheap and easy profit from sectors with very quick turnover – even if those sectors contribute little to inclusive development.

Now, I know there are several arguments justifying why the banks refuse to lend; a key one being the high non-performing loans which have bedevilled the sector, but risk can always be assessed and mitigated. Also, our industrious business people are faced with some of the highest lending rates anywhere in the world, which partly makes it difficult for even the well-intentioned ones to meet their debt obligations.

The government and the central bank have an important role to play here, but it’s high time the banking sector employed relevant risk management mechanisms that, for instance, allows them to build and share credit data of their clients. Within the current dispensation, it is not at all impossible for a near defaulting customer of one bank to subsequently receive a facility from another. Competition is good but if your business involves lending money, some collaboration is also important.

Ineffective Regulatory Supervision: ‘’Behind a failing commercial banking sector is a failing central bank’’. Given the importance of banking in the stability of the state, the knowledge and literature on the efficient management of banks abound. For instance, The Basel Committee on Banking Supervision has very detailed guidelines on banking management as spelt out in their Basel III accord (which mostly deals with capital and liquidity requirements, and leverage).

But relevant literature without adequate supervision is like an expensive Rolls Royce without an engine. It won’t go anywhere; given the human proclivity for excesses. Therefore, to address some of the systemic challenges facing the sector, the Central Bank ought to admit that, even though they may not be the problem, they are certainly part of it. A reform in the operational philosophy of the central bank is crucial in the nation’s quest for a strong and stable financial services sector.

The future presents a lot of opportunities for the country and a strong banking sector is essential for the realization of our economic potential. I am no expert in this field, but I do hope the lessons shared here (which could be extended to other industries in the country) will stimulate some debate and help reorient the managerial philosophy of our banking sector, so it aligns with our quest for socio-economic transformation.

- The writer blogs on social, political and economic issues at www.thinkingwityou.wordpress.com

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