CHAPTER ONE INTRODUCTION         Background of the Study

Banks throughout the world perform a very important financial function in the economy, since they mobilise savings for productive investments and facilitate the circulation of capital from dormant to productive sectors of the economy. The growth of an economy is a function of an effective and stable banking system that mobilises excess liquidity for investment (Yeboah- Mensah, 2015, Tettey, 2017). The relationship between the banking system and rapid economic growth is seen more in the light of banks providing loans to businesses (SMEs) through accumulation of savings. Therefore, factors like poor management of banks (bank factors), Non- performing loans (NPLs), and environmental economic factors (economic shocks) could affect the smooth functioning of banks in a country (Yeboah-Mensah, 2015, Tettey, 2017). If banks are not able to perform these monetary transmission functions, the entire economy suffers through liquidity challenges, hindering financial institutions’ ability to make available depositors’ funds when needed (Amuakwa-Mensah and Boakye-Adjei, 2015).

The Central Bank of Ghana (BoG) is mandated to ensure the smooth running of the banking system. Over the years, Bank of Ghana has taken pride in enforcing stricter regulation and supervision. In this regard, the BoG formulated the Banks and Specialised Deposit Taking Institutions Act, Act 930 in 2016, which empowers it to be more aggressive in dealing with deviations in the sector. The BoG, aside instituting regulations, undertook a clean-up of the

financial sector. This saw the number of universal banks drop from 30 at the beginning of 2018 to

the current 23, as at the end of December 2018. These 23 universal banks were able to meet the minimum capitalisation requirement of GHS 400 million by the end of December 2018 (BoG, MPC reports, 2018).

In 2016, BoG conducted an Asset Quality Review (AQR) exercise, which revealed several challenges that had bedevilled the banking sector in Ghana. These challenges are insufficient capital, increasing levels of Non-Performing Loans (NPLs) owing to poor liquidity and credit risk management, as well as fragile corporate governance structures. The AQR exercise also revealed that most of the indigenous banks in Ghana were vulnerable to these challenges, especially insolvency. In a bid to prevent the total collapse of the financial sector, Bank of Ghana had to liquidate two banks (Capital Bank and UT Bank) in August 2017, and a year later, seven other banks were declared insolvent and combined to form Consolidated Bank Ghana (CBG), after several attempts to resuscitate these ailing banks failed. In total, BoG has, within two years, withdrawn the licences of nine indigenous banks.

One of the seven collapsed banks was uniBank Ghana Limited. The bank was one of the five banks that were initially consolidated into the Consolidated Bank Ghana (CBG) on first of August 2018. The other members of the Consolidated Bank were the Sovereign Bank, Beige Bank, the Royal Bank and the Construction Bank. However, on the 4th of January 2019, Heritage Bank and Premium Bank were added to CBG to increase the number to seven.

Financially, uniBank over the years has performed creditable. According to their 2016 annual report, the bank raised its total assets by 50%, worth GHS 5,743 million relative to the previous

year. Net loans and advances, profit after tax and all other indicators of financial soundness were reported to be doing very well. The report also added that uniBank was the third (3rd) biggest bank in terms of total assets at the end of 2016. It was therefore surprising to find it among the liquidated banks. This study therefore tries to answer the question “what accounted for the collapse of uniBank and for that matter the collapse of banks in Ghana?”

        Problem Statement

Notwithstanding the fact that loans are a bank’s main income source and constitutes majority of its assets, it is also a very unsafe area, as far as the banking industry is concerned. One of the main reasons given by the BoG in addressing why uniBank and the other eight (8) banks collapsed in Ghana was the issue of non-performing loans (NPLs). This could be attributed to the fact that banks in Ghana and other parts of the world make most of their profits from interest charged on loans (Interest income). The recovery of loans is always a challenge, not only to the individual universal banks, but also to the BoG as a regulator (Barr and Siems, 1994).

In a speech published by BoG on the establishment of the Consolidated Bank, it was revealed that an Administrator (KPMG) appointed for uniBank found it to be beyond repairs. It also indicated that uniBank was part of the list of banks that the updated AQR in 2016 found to be heavily undercapitalised. According to BOG (2018), the bank’s shareholders and affiliated organisations had absorbed a whopping amount of GHS 5.3 billion which formed seventy-five percent (75%) of the total assets of the bank. In conclusion, insufficient capital, sky rocketing non-performing loans (NPLs) and weak corporate governance were the main reasons given by BoG for the collapse of uniBank. Beyond these regulatory reasons, what are the other reasons for the collapse of the bank?

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