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Business News of Monday, 14 August 2017

Source: citifmonline.com

Greed, profits cause of banks’ failings – Prof. Dordunoo

Following the collapse of UT Bank and Capital Bank, an economist, Professor Cletus Dordunoo has attributed the precarious situation of some financial institutions to greed and a drive for profits.

Speaking on the Citi Breakfast Show, said he was somewhat surprised because at the collapse of the two banks “those were banks we thought were doing very well,” but he noted that a focus on profits could blindside a company to other essential components of banking.

“Banking today is not about only profits but is also about relationships and about knowledge and so the level of the other two; the relationship and the knowledge have been lacking in some of the practices we see in selected banks here and there… in the long run, what happened was that it [banking] is purely reduced to greed and profit without taking very informed decisions using all the necessary factors.”

“I don’t believe a bank can make interests rates over 100 percent per anum – it is impossible. The business will by all means collapse and if you see central bankers, who are policy bankers actually involved, you begin to doubt whether they understand profit,” Prof. Dordunoo explained.

He noted that this “profit margin orientation” for example, attracted banks from Nigeria; a country which has a relatively fixed spread for its banks. “These banks are running to Ghana because Ghana is for everybody. Your spread can be high and lending rates can be 40 percent and deposit rates for the ordinary customers can be as low as six percent. So the spread is huge. The greater the spread, the more likely bankruptcy will come.”

But this high spread will ultimately back fire because of the burden placed on customers, Prof. Dordunoo warned.

He said the high spread leads to defaulting as it “turns back to prey on the customers who are not able to honour their terms, leading to renegotiations, debt structuring and so on and so forth. So by the time you are done with them, it is a loss on your account.”

The collapse of UT Bank and Capital banks was announced on Monday, following their inability to address the “severe impairment of their capital.”

This led to a Purchase and Assumption agreement allowing GCB Bank to take over all deposit liabilities and selected assets of both UT Bank and Capital Bank, per section 123 of the Banks and Specialised Deposit-Taking Institutions (SDIs) Act, 2016 (Act 930).

The BoG revoked the licence of UT Bank and Capital Bank, which it said was “deeply insolvent.

As at Monday morning, GCB had begun rebranding some branches of UT Bank and Capital Bank.