THE GUISE OF FINANCIAL SECTOR REFORM. WHO GAINS? WHO LOSES?

 

In an incisive petition to the Akufo-Addo Administration titled, ‘PROTECTING DEPOSITOR AND INVESTOR FUNDS WITHOUT INCURRING EXCESSIVE DIRECT AND INDIRECT COSTS TO THE TAXPAYER’, IMANI’s Dr. Theophilus Acheampong made very sensible recommendations that every Ghanaian living everywhere must take note of.

The huge charge on the taxpayer’s purse of more than sixteen (16) billion Ghana cedis, is off budget, unplanned with questionable benefit except to suit the egos senior members of the Economic Management Team and smooth the political path of the ruling NPP.

Interestingly enough, there are disenchantment within the NPP about this just as there is strong suspicion that this was done to prevent the DKM “political disease” that struck the NDC from affecting the NPP.

So if Dr. Acheampong’s recommendations would still provide political benefit but not burden the taxpayer, why has it been ignored? This leads some experts to conclude that the real targets were Ghanaian business owners considered part of the opposition to the ruling party.

Interestingly enough, the ruling Administration has adopted the use of 3 to 5 year bonds as a method of payment to depositors and investors.

This is what Dr. Acheampong and market players have recommended all along and which would have placed the burden on private sector shareholders and not the taxpayers.

We reproduce below, excerpts from Dr. Acheampong’s paper:

“On 19 August 2019, the Bank of Ghana announced the completion of the two-year clean-up of specialised deposit-taking (SDIs) and non-bank financial institutions (NBFIs).

The outcome of this exercise has been the revocation of the licenses of various SDIs and NBFIs and consolidation of the sector. The expectation is that the recently enacted reform will lead to improving asset quality and a “resilient, inclusive, and supportive of Ghana’s economic growth trajectory”.

While the public has been assured that the cleanup of the SDIs is over1, the insurance and fund management industries have yet to experience any substantive interventions from their regulators and the Ministry of Finance, their sector ministry.”

“In this paper, I am proposing an alternative course of action in the fund management and insurance sectors to ensure that depositor, investor, and policyholder funds are protected without incurring excessive direct and indirect costs to taxpayers, business owners, and those whose livelihoods depend on wages and salaries earned by employees of distressed financial institutions. Instead of using public funds to pay customers and then suing former shareholders for reimbursement, I propose that the government should help facilitate the efforts of current shareholders to raise external funds to solve their companies’ problems.

Solving the challenges currently being faced by financial institutions will involve accomplishing two major tasks:
1. Ensuring that there is enough liquidity to deal with time-sensitive financial obligations of distressed firms
2. Ensuring that confidence is restored (not only in affected financial institutions but also in the wider financial industry in general).
These two goals are inextricably linked – higher confidence reduces the liquidity needed for withdrawals and redemptions but sufficient liquidity to meet a certain level of withdrawals and redemptions increases confidence.
My proposal involves a shift away from relying on public funds to settle customers and depositors, an expensive process that increases debt levels and results in hundreds of millions of Ghana Cedi in legal, consulting, and other expenses not including job losses and psychological stress. The actions connected with the financial sector cleanup have been largely premised on the idea that shareholders have assets that must be taken away from them and turned into cash that will reimburse the state for their upfront costs.

The forced-sale value received for those assets will have been reduced by legal fees, consulting fees, court fees, and auctioneer fees among others.

This could be the topic of a completely different debate and as such I will limit my discussion of this point.

That the BoG was allowed to take these actions implies, in my view, that amendments must be made to Act 930. Serious questions exist regarding the amount of money actually provided to depositors – unless these customers took their funds outside of the domestic banking system completely, the actual direct cost of the cleanup is likely far less than the amount reported.

A more efficient and less expensive approach would be to work with those firms that are financially distressed as opposed to being economically distressed15 to raise funds against the assets that are available.

This cooperative approach would save time and avoid the transfer of value away to lawyers, consultants, accounting firms, and the buyers of shareholder assets at forced-sale value.

3.1 Benefits
As suggested above, there will be several benefits to executing this proposal:
1. Money Saved: fees will not need to be paid to lawyers, accountants, consultants, receivers, auctioneers, among others.
2. Jobs Saved: institutions experiencing liquidity challenges will not need to shut down and/or lay personnel off.
3. Time Saved: with the cooperation of the affected institutions, identifying and gaining value from assets will take less time.
4. Fewer Distractions: actions such as the revocation of licenses attracts media coverage and is easily politicised. Affected parties are likely to issue statements, lawsuits, and use the media in an attempt to salvage their reputation.
5. Increased Recovered Value: securitising or borrowing against assets will result in more value than attempting to recover them through legal action. If Government, through the receivers appointed, is successful at recovering the assets pursued (thus far it has not been successful), the assets will be sold at forced sale value and will be net of a variety of expenses.

3.2 Mechanics

Executing this proposal would require a few key things to occur:
1. Identification and review of assets that are available to securitise, sell, and/or borrow against.
2. Provision of credit enhancements from Government in the form of guarantees, comfort letters, or bonds.
3. A reduction in the constant public statements indicating that negative actions are coming.

3.2.1 Assets Identification and Review
The first thing that would need to be done is to identify and value the assets that the firms under duress have recourse to. Valuations of these assets may already exist – assets that have not been valued recently can have those valuations done within 30 days or less using the services of the many well-qualified audit and valuation firms in Ghana.

This would ideally be done at the expense of the fund manager, as the procurement process for a government-funded valuation may take unnecessarily long.

I am aware that the SEC is currently conducting reviews of the assets and liabilities of some of the fund managers16.

The problem with this process is that this review is part of a forensic audit
Again, the argument can be made that it would be difficult to deem a fund manager economically distressed due to a mismatch of assets and liabilities, as investments lose value as a normal course of business.

I My understanding of the amount of time it took to select the firm conducting this exercise helped inform our opnion that the firms should conduct their own anlyses.

That, according to statements made by representatives of the commission and feedback from at least one fund manager under investigation, is aimed at uncovering evidence of wrongdoing at the firms being reviewed.

When a person arrives at an emergency room with life-threatening wounds, a well-trained physician will take steps to stabilise the patient, regardless of how the wounds occurred.

I believe that the same logic should apply here – while it may be important to understand the factors leading to the distress being experienced, it is more important to “stop the bleeding” – understanding how and why things went wrong can and should be done, but it should be done at the right time.

3.2.2 Provision of Credit Enhancements
It is well known that liquidity is generally difficult to come by in this economic environment – corporate entities as large and profitable as MTN has had challenges raising funds in Ghana. Investors appear to be adopting a “wait and see” approach to investing in the country and, as such, I cannot see how the fund management firms experiencing distress can be expected to raise funds without some support.
A guarantee or some other form of credit enhancement, for example, a bond against government receivables or fixed assets of the companies, would allow fund managers to attract outside financing to solve their short and/or medium-term obligations.

The concept of the ESLA bond that was put in place to provide liquidity to banks, for example, could be used to create an instrument to finance receivables due to contractors that owe banks and fund managers.

A fund could be established and jointly promoted to securitise the land and buildings that are owned by fund managers.

While the proper instrument may take some time to put in place, the very knowledge that an instrument is being put in place would likely have an impact on investor sentiment.”

 

 

By Today Research Team.

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