Governor Ernest Addison lived up to his speech at the Annual Dinner of the Chartered Institute of Bankers, Ghana on 2ndDecember 2017. The sector reform laced speech projected 2018 as a busy year in the banking history of Ghana. Undoubtedly, the second year of the current administration has indeed gone down as the busiest and tumultuous year of banking in Ghana.
The much acclaimed "clean-up" exercise, enhanced regulatory/supervisory frameworks and internal shakeup of the regulatory body have been lauded by industry players, watchers and the Bretton Woods Institutions. The plethora of sector reforms rolled out include the recapitalization of commercial banks, issuance of a Corporate Governance Directive, implementation of IFRS9, enforcement of loan write-offs and enhanced risk management practices through the implementation of the Capital Requirement Directive.
With the major overhaul to the banking sector in 2018, I dare say the stage is set for the"proper" implementation of deposit insurance. This tried and tested tool has the backing of the Deposit Protection Act 2016 (Act 931) and itsAmendment(Act 968) to protect the funds of "small"depositors. However, the business cost of the scheme has drawn debate in certain circles.Notably, the headline "Business Ghana doesn't need deposit protection scheme" was carried by the Daily Graphic in its February 1st2018 edition. These were the words of Emmanuel Asiedu-Mante, a former Deputy Governor of the Bank of Ghana (BoG) prior to a stakeholders meeting on the subject. The veteran regulator queried the relevance of the insurance scheme as mandated by Act 931 and contrasted the cost of the scheme to the already high lending rate environment of Ghana to jurisdictions such as United Kingdom, Germany, Malaysia and United States of America which operate such schemes. However, Governor Addison and his team havein their public engagements unequivocally opined the importance of the deposit insurance on the grounds of confidence and stability to the financial space.
Allow me to draw parallels between the current debate on insuring deposits in our country and the motion which birthed same in the United States about four decades ago."After all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people."These were exhorting words of President Franklin D. Roosevelt in calming the American people to avoid the panic withdrawal which crippled the American banking system in the first few months of 1933. Despite these words of suasion, public opinion was essentially the monetization of confidence via a federal plan to protect depositors. With public confidence still shaken by the turn of events during the Great Depression, the president signed into law the Banking Act of 1933 which created the Federal Deposit Insurance Corporation contrary to the views of the Secretary of the Treasury, Chairman of the Senate Banking Committee and the President himself. The trio believed that a system of deposit insurance comes at a cost (expensive) and could incentivized poorly managed banks.
Evidently, Asiedu-Mante and Roosevelt et al. bemoan the cost of deposit insurance system to the economy. Although these concerns were and are valid to an extent, there was and still is a public conviction that deposit insurance is worth the cost borne by customers/depositors. Interestingly, the mechanism of deposit insurance is such that, although it bears the "insurance" name, it is nothing like the normal insurance policies purchased for risk transfer. The customer/depositor does not pay any amount of money as premium to the bank to have their deposits insured.However, the state levies the banks to cover for the anticipated cost of deposit insurance claims.The success of such a scheme has seen its replication in the United Kingdom as the Financial Services Compensation Scheme (FSCS), Einlagensicherungsgesetz (EinSiG) in Germany and the Ghana Deposit Protection Corporation(GDPC) as created by Act 931.
The GDPC, an independent agency of BoG manages the Deposit Protection Scheme. The corporation determines and collects insurance premiums from the membership of the Scheme. The corporation is mandated to issue membership certificates to all Banks and Specialized Deposit-Taking Institutions in the country. It also sets the coverage limits of the Scheme, manage the Scheme's pool of funds and pay out claims to depositors inan insured event. As required by Act 931, GDPC has to manage the two funds established by same. Fund A and Fund B are pooled funds from Banks and Specialized Deposit-Taking Institutions respectively. These funds attract a one-off premium of 0.1% of the required minimum paid-up capital from the certified members of the Scheme. The corporation also determines annual premium ranging from 0.3%-1.5% of average insured deposits (of the previous year)payable quarterly by the membership. Given this backdrop, the arithmetic is quite simple, especially for the one-off premium due from banks. Currently, there are twenty-three (23) recapitalized banks operating in the country with a minimum paid-up capital of GHc400 Million each. Hence, each bank is liable to contribute GHc 400,000 as initial insurance premium.Without recourse to the 13 million loan agreement between the Government of Ghana and Kreditanstalt Fur Wiederaufbau (KFW) of Germany for the Scheme, Fund A at inception should have assets under management of approximately GHc9.2 million. Although, this is seemingly a direct cost to banks, business practices suggest this will not be so. Who actually bears the cost then?
Stakeholders of the financial sector- customers (depositors and borrowers), employees, shareholders and state will bear the cost. For example, bank depositors without being aware will pay for this added business cost through lower interest rates on their interest bearing accounts. Cheap funds matter a lot in financial intermediation. Customers who find themselves on the deficit side of the spectrum and in need of financing will share in the cost burden through higher interest rate charges. Employees are not left out of the loop as they contribute through lower wages (no pay rise). Shareholders and the state may be squeezed with smaller dividends and lesser taxes respectively. In summary, banks will comply with regulatory requirements and surrender a portion of their hard earned paid-up capital plus others and will not hesitate in taking it back from every one of us.