ABSTRACT
This study investigated the causes of takeovers in Ghana with specific interest in UT and Capital Bank, due to the shock value it created among Ghanaians at the time. The specific goal of this project was to scrutinize the reasons that led to the takeovers of these two Banks and whether the central bank could have prevented the failures of these banks.
The study adopted the quantitative approach to research. The study used ratio analysis. The Data was obtained from the financial statement of both UT and Capital Bank. The period considered was between the year 2012 to 2014. The reason for this range was due to the availability of the financial statements both banks presented to the general public. The findings of the study revealed that both banks had weak indicators which they didn’t improve in the subsequent years and also didn’t follow the statutory regulations and guidelines provided by the central bank when they were in crisis, with regards to the central bank. The lack of proactiveness on their part when both banks showed signs of failure is an issue they have to address. It is my hope that the central bank comes to the aid of banks sooner rather than later.
CHAPTER ONE
INTRODUCTION
Overview
This chapter introduces the background of the study, problem statement, project objectives, research questions, the significance of the study and how the study was organized.
Background of The Study
No country’s economy can survive today without a robust financial sector. Among its many importance’s, the financial sector sits between savers and borrowers it takes funds from savers ( for uexample, through deposits) and lends them to those who wish to borrow, be they households, businesses or governments. One important player in the sector is the bank.
A bank is a financial institution licensed to receive deposits and give loans. Banks offer financial services, such as wealth administration, currency exchange and safe deposit boxes. As financial mediators, banks channel funds from savers to borrowers, providing customers with the liquidity they need for investment in productive, lucrative enterprises. By motivating savings and investment, banks also efficiently reduce the loss of capital and boost economic growth (Baah-Nuakoh, 2017). In addition, the banking system facilitates internal and international trade. A great part of trade is done on credit. Banks provide references and assurances, on behalf of their customers, on the basis of which sellers can supply goods on credit. This is mainly significant in international trade when the parties exist in different countries and are very often unidentified to one another. Additionally, the banks serve as alternative gateways for making payments on account of income tax and online payment
of various bills like the telephone, electricity and tax. The bank customers can also capitalize their funds in various stocks or common funds straight from their bank accounts.
In most countries such as Ghana, the day to day activities of these banks are regulated by the national government or central bank. Bank of Ghana which is the central bank of Ghana was established in 1957 with Alfred Egleston as the first appointed Governor. The bank took over the administration of the currency and in July 1958 delivered its first National Currency the Cedi to replace the old West African currency notes (Bank Of Ghana, 2006)
The Ghana Commercial Bank (now known as GCB) was the first commercial bank in Ghana. It assumed the role and purposes of Government bankers and began to take over the finances of most Government branches and public establishments (Buckle, 1999). A new government elected by popular vote in 1957, made a way for new banks to be established in the country namely the Ghana Investment Bank as an Investment Banking Institution; the Agricultural Development Bank for the progress of Agriculture; the Merchant Bank for merchant banking; and the Social Security Bank to boost savings. These banks were incorporated by legislation between the periods of 1957 to 1965. In conformism with the economic plan of the time all these institutions were combined as state-owned banks.
In the last decade, Ghana’s financial sector has observed a lot of mergers and acquisitions which changed the ownership structure of banks in Ghana, especially Ghanaian banks from local to expatriate banks. The huge change of ownership structure of most of these banks, as can be observed, was inspired by the Bank of Ghana’s regulations regarding the change in banks’ minimum capital requirement. The first main increment in the minimum capital requirement of banks came in the year 2008, where the Bank of Ghana
set the minimum capital of banks in Ghana at GH¢60 million and in 2013, this number was further amplified to GH¢120 million. The aim for this exercise by the Bank of Ghana was to protect depositor’s funds. After these two increments, a lot of banks who could not meet the deadline resorted to mergers and acquisitions in order to comply with the Bank of Ghana’s regulations. Banks like Intercontinental Bank, Trust Bank of Ghana and BPI were taken over by Access Bank, Ecobank and UT bank respectively.
In the year 2017, after a change of government in the previous year, the minimum capital requirement of banks was further increased from GH¢120 million to GH¢400 million. After this increase, it was alleged that a lot of banks would not be able to meet this new capital requirement. As predicted, banks including Capital Bank and UT Bank were one of the first banks to crumble because of this new capital requirement which led to their takeover by GCB.
A takeover involves a business obtaining control of an additional business; they are the most common form of external growth, predominantly by larger businesses (Riley, n.d.). Takeovers can be advantageous to the acquirer because there may be established customers, a reliable income, a reputation to capitalise and build on, and a useful system of contacts. It may also be easier to attain finance as the business will have an established track record. Nevertheless, it can also be disadvantageous to the acquirer because they may need to honor or renegotiate any outstanding contracts the previous owner leaves in place. In addition, existing staff may not be happy with a new boss, or the business might have been run critically and staff morale may be low.
The takeover of UT Bank and Capital Bank by GCB was seen as a hostile takeover. A hostile takeover is a type of merger and acquisition where one company, called the
acquirer, takes control of the possession of additional company, called the target company, against the wishes of the target company’s management. (Divestopedia, n.d.). Hostility in corporate takeovers may be associated with better long-term operating performance of the merged company. The reason is that hostile bids are more expensive for the bidding firms, such that only takeovers that have high synergy potential are likely to succeed (Burkart, 2006)
Statement of The Problem
Corporate governance refers to the mechanisms, procedures, and relations by which institutions are measured and directed (Shailer, 2004). Good corporate governance has been highlighted to be important to corporate organizations particularly in transitioning and emerging economies while bad corporate governance has the opposite effect and can serve as an invitation for a hostile takeover. Bad corporate governance was one of the reasons for the takeovers of UT and Capital Bank because of the respective banks being unstable.
There is no agreed definition for “banking stability” (Segoviano, 2009). In the early 2000’s banks in Ghana that were beginning operations or were already established, used safety as a means of advertisement, and this was to encourage individuals and businesses to keep their monies with them. The advertising strategy seemed to have worked and led to the formation of new banks, so much so that in 2016 there were 30 banks operating in the country.
Now, in recent times, the narrative has changed, banks are either collapsing, being acquired or merging with other banks and customers are not sure how safe their deposits are, while prospective customers are hesitant in doing “business” with the bank, this means individuals keep their monies
at home or at the workplace which is not safe. This has led to Bank of Ghana coming under heavy scrutiny and being blame for the prevalent situation in the banking sector. The Bank of Ghana introduced a new capital requirement of GHS 400 Million that was introduced after a change of government in 2017. It is believed the increase from 120 million to 400 million was a very high increase in a short period of time. Capital Requirement is the quantity of capital that an insurer needs in order to remain viable in the market and preserve its default chance beneath a certain level (Coppola, 2012) it is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets. These necessities are put into place to ensure that these institutions do not take on extra leverage and become ruined. In 2016, the BOG performed an Asset Quality Review (AQR) of Banks in Ghana. The outcome of the AQR shows that local banks were susceptible to insufficient capital, high degrees of non-performing loans and feeble corporate governance (Owusu, 2017). Two of the local Banks that were distressed were closed on 14th August 2017, with the Bank of Ghana approving the acquisition of some selected assets (loans) and all liabilities (deposits) by the GCB Bank Ltd. These two banks were UT and Capital Bank. On 1st August, 2018, the Bank of Ghana formed a new Bank, the Consolidated Bank, Ghana Limited, and transferred the assets and liabilities of the 5 banks above to the new Bank. The 5 banks were liquidated for various reasons including the impairment of their capital from huge non- performing loans, fraud, misreporting, deceit and dishonesty amongst others. Judging from this event it can be said capital and UT bank shortcomings and failures were not studied well enough and lessons were not learned. This study therefore, aims to add more insight to these shortcomings to help understand the events that occurred at these two banks, and why they were taken over.
