Question

The recent collapse of some banks and financial institutions and the merger of others in ghana is proof that the financial system which consists of institutional units and markets that interact, typically in a complex manner, for the purpose of mobilizing funds for investment and providing facilities, including payment systems, for the financing of commercial activity remains unprotected in spite of the the presence of the Regulator and a solid legal system backing it. From the discussion in class and available literature, examine some of the difficulties associated with the financial system and how these challenges have been addressed by the Banks and Specialised Deposit Taking Institutions Act 2016 (Act 930). Are there any novel ways by which some of the challenges may be resolved in your opinion? (40 Marks)

Answer 1

Answer:

The process of savings, finance and investment involves financial

institutions, markets, instruments and services. Above all, supervision

control and regulation are equally significant. Thus, financial

management is an integral part of the financial system. On the basis of

the empirical evidence, Goldsmith said that "... a case for the

hypothesis that the separation of the functions of savings and

investment which is made possible by the introduction of financial

instruments as well as enlargement of the range of financial assets

which follows from the creation of financial institutions increase the

efficiency of investments and raise the ratio of capital formation to

national production and financial activities and through these two

channels increase the rate of growth……"

Answer 2

Broadly speaking, a country’s financial system includes all institutions involved in moving savings from households and firms (whose income exceeds their expenditures) to other households and firms who like to spend more than their income and liquid assets. There are basically five parts of the financial system in Ghana

Explanation:

Challenges faced by the Financial System in Ghana

• "Macroeconomic" factors"; "poor corporate governance & "risk management practices"; "related party transactions" which were not "above board"'"regulatory non-compliance"' & "poor supervision"; ("questionable licensing processes" & "weak enforcement"); failure to "oversee bank accounting" & "corporate reporting systems" together with the "external auditing system" because of to lack of experience/r greed"; "lack of independence & integrity" amongst Auditors; all these factors resulted in considerable build-up of "vulnerabilities" in the financial system.
• In addition, because of bad corporate governance, effective risk management procedures were not implemented in credit delivery to reduce the credit risk, as well as proper surveillance and measurement modalities were not implemented in credit delivery.
• Another big cause of the collapse of certain banks is "non-performing loans". It has been noted that many of the banks which collapsed have huge loans on their accounts. This has financial consequences for banks, which could lead to reduced capital, which leads to undercapitalisation.
• The report made a number of substantial & controversial allegations concerning Bank conduct including substantial loan portfolios, "liquidity shortfalls", "rapid undercapitalisation" & "excessive loans" to "shareholders". The report also made several important and contentious claims.

The "Banks & Specialised" "Deposit-Taking Institutions", Act 2016", Act 930, is the primary statute that governs the Ghanaian banking industry. It bestows the "Bank of Ghana (BoG)/Central Bank" the power to formulate "corporate governance directives" & rules for "financial institutions" in Ghana. The measures taken by the Central based on the above act are,

• Several banks collapsed in Ghana over the last few months Most market observers believe that during this time the "herculean efforts" of the central bank of the nation had prevented "bank runs" & minimized contagion to the wider economy..
• The Central Bank 's pace and efficacy in avoiding depositors loss and disruption in local capital markets was a "welcome display" of the "regulatory efforts" made after the financial crisis of 2008 by established African economies such as Ghana.
• The "Banks & Specialized Deposit Taking Institution Act (2016)" is the legal basis under which the mechanism of Ghana resolution for bank failures has been established
• The Central Bank 's powers and discretion under the regulations allowed it to take the required measures to bring the banks that are failing into "state ownership". In the credit flow to small businesses as well as the payment to rural and industrial areas , local banks play a vital role; chaotic dissolution of the bank that have failed may lead to adverse effects in the real economy.
• Redressing initiatives have been enforced for months to promote the clean-up of the financial industry. Any of the shortcomings found in the regulatory system have been resolved by a number of legislative directives. The Central Bank has enforces a minimum of "GHS 400 million" (90$ million) as the capital requirement for  local banks, this is more than "double" the previous requirement.
• This has established the "Ethics & Internal Investigations Office" & the new Corporate Management Directive to reform the management culture and define requirements for a individual to act as a senior manager/director in a financial entity governed by a regulatory agency.
• Review & potentially improve the "scope & transparency" of the "Ghana Deposit Protection Corporation" that is incharge with "protecting deposits" in the event of a bank failure. Finally, in addressing the capital shortcomings, the Central Bank Governor confirmed that it would enforce a "Directive" on capital requirements, which would integrate into "Ghanaian law" the provisions of the relevant "Basel II / III" "Agreement" by 1st January 2019.

Some novel ways to by which some of these challenges can be resolved

• Strict regulatory mechanisms in place  by banks including regulations related to bank audits mechanisms
• Stringent rules when disbursing loans & appropriate procedures in place to be implemented to avoid credit risk
• Enforce good corporate governance and measures to prevent corruption by top management and recruitment and hiring of top managment

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