It is emerging that there is a “dark cloud” hanging over the country’s Specialized Deposit-Taking Institutions (SDIs), putting the sustainability and viability of the sector at risk.
The SDIs, which include the microfinance firms, savings and loans, and rural banks, by their nature and laws establishing them, are supposed to be the champions of the undeserved. They are the “bank for the unbanked,” providing small loans to market women and small businesses that are not captured by the huge commercial banks.
A research work conducted by banking and financial consultant, Dr. Richmond Atuahene, has uncovered that many of these institutions are operating on unsustainable business models that look less like banks and more like “Ponzi schemes.”
This situation of many of the SDIs, though not all, Dr. Atuahene believes, requires the attention of the Bank of Ghana (BoG) beyond the new minimum capital requirement.
The research document copied to The High Street Journal enumerates a number of these unsustainable business models identified by the banking expert.
The Trap of “Visibility as Viability”
Dr. Atuahene reveals that many SDIs have fallen into a dangerous trap called “visibility as viability”. Instead of building strong financial foundations, they are pursuing aggressive branch expansions, opening numerous offices that they cannot afford to run.
This has significantly increased their overhead costs, such as rent, salaries, and utilities, which are often funded by indiscriminately mobilizing deposits at high interest rates rather than through actual profit from lending.
The banking and financial analyst explains that when an institution uses new deposits just to pay off old ones or to keep the lights on, it is no longer a bank; it is a ticking time bomb.
The “Pocket Bank” Mentality
One of the most threatening business practices of some of the SDIs is the “pocket bank” mentality. In many cases, a single individual or family holds absolute control, treating depositors’ hard-earned money as a personal ATM to fund their other businesses on non-commercial terms.
This insider lending is a leading cause of failure, with undocumented and uncollateralized loans to “connected parties” draining the capital meant to protect the public. He reveals that in one shocking instance, a single Savings and Loans company reportedly lent GH¢146 million to just six companies, despite having a total capital requirement of only GH¢15 million.
This, he indicates, is a massive breach of the legal 25% single-borrower limit.
Usurious Rates: A Recipe for Default
To sustain these high costs, some SDIs charge what can be described as “oppressive” interest rates as high as 10% to 15% per month. While these rates promise high returns for the institution, they are a death sentence for the borrower.
Small traders cannot sustain such “usurious” repayment schedules, leading to massive defaults. This has pushed the sector’s Non-Performing Loans (NPLs) to a staggering 20.8% by late 2023.
This practically means that one out of every five loans issued by the SDIs is not being paid back.
Ponzi-Like Scheme
Dr. Atuahene further identifies that some institutions, particularly those that were unregulated or “fun clubs,” promise unsustainable returns. He quotes returns hovering around 30% to 55% over two months to attract deposits.
They then use new deposits to pay existing depositors, which he describes as a risky practice. He further identifies a situation of excessive leverage and short-term funding. Some of these firms are often highly leveraged, relying on short-term deposits to fund long-term loans.
This creates a liquidity mismatch, as they cannot meet immediate withdrawal demands, leading to bank runs.
Why This Threatens Everyone
For the financial and banking consultant, these Ponzi-like models and other unsustainable practices don’t just hurt the individual firm; they threaten the entire financial system.
He therefore reveals the threat and impact of this situation.
• Erosion of Trust: When an SDI collapses because it was built on “creative accounting” and high-risk gambles, it destroys public confidence in all financial institutions.
• Liquidity Crisis: Because these firms rely on short-term deposits to fund long-term, risky loans, they face “liquidity mismatches”. When customers realize their money is at risk, they rush to withdraw, leading to bank runs that can spread like wildfire through the sector.
• Mission Drift: By shifting from poverty reduction to “high-yield, high-risk” big-ticket transactions, these SDIs are failing their original mandate to support the informal economy.
The Bottomline
Dr. Atuahene argues that simply demanding GH¢100 million in new capital is not enough if these “toxic” models remain. To save the sector, the Bank of Ghana must enforce its own rules, such as the 25% single-borrower limit, and ensure that directors are “fit and proper” individuals who respect the public trust.
Without a shift back to genuine, small-scale lending and ethical governance, more capital may only mean a bigger collapse down the road.
