UNIVERSITY OF GHANA

UNIVERISTY OF GHANA BUSINESS SCHOOL

DEPARTMENT OF FINANCE

1ST SEMESTER, 2015/2016

FINANCE OPTION

COURSE: FINC 605: FINANCIAL MANAGEMENT OF BANKS

SEMESTER: SEMESTER I, 2015/2016 ACADEMIC

YEAR

LECTURERS: Jonathan Welbeck & Vera Fiador (Mrs) 

OFFICE: Bank of Ghana/UGBS

OFFICE HOURS: To be arranged in class

COURSE CONTENT-FMB

Commercial and Central Banking• Financial Systems • Elements and Laws relating to Banking• Modern Trends in Banking-Mobile banking, Islamic Banking, Technological advancement, Anti-Money laundering Framework

(AML/CFT),etc• Trending issues Risk management in banking Nature and sources of banking risks Corporate governance in banking Asset & Liability Management in Banks Risk Management Guidelines Evolution of Enterprise Risk Management (ERM) Trending issues

  Deposit & Loan Pricing and Cost Management in Banking• Credit Management• Base Rates Determination and drivers in Ghana and other key markets globally• Cost of funds determination • Cost structure of Banks and its efficient management• Fees and commission determination • Trending issues

   Performance and Profitability of Banks in Africa and Globally- (Review of global reports-KPMG,PwC,etc).

  Bank Strategic Management & Human Capital Management

  Bank Capital and Capital adequacy in Ghana

  Final Account preparation-Accounting Standards-IAS,IFRS, Basel I,II & III Recent developments: International Banking and Globalization; Banking Failure/Fraud cases

Reading List:• Asiedu-Mante E, (2011) Rural Banking in Ghana, First

Edition, Combert Impression Ltd • Awuah J, (2007) Law Relating to Banking, Second

Edition,CIB(Gh) Bankers Workbook Series• Keith Checkley, Lending, IFS(UK) Bankers Workbook

Series• White B C, A Simple Guide to Trade Finance, IFS(UK)

Bankers Workbook Series• Marsh, J.R., Practice of Banking, 2nd Edition • Baritsch, V, (2003), Bank Treasury Management• Study Guide for CAMS Certification Examinations,(2012),

Fifth Edition

Overview of Banking

• History of banking form ancient civilization to through the Middle Ages to the birth of “modern” banking.

• Pre-historical banking deals with the early beginning of banking in ancient civilization

• Evolutionary phase of banking

• Features of Banking

• Emergence of central banks,

• The Rise of Islamic banking

OVERVIEW OF FINANCIAL SECTOR REFORMS AND REGULATIONS

Ghana’s financial sector has been undergoing extensive restructuring and transformation during the last two decades as an integral part of a comprehensive growth agenda.

A more diversified financial sector began to emerge under the first generation Financial Sector Adjustment Programs (FINSAP I and II) of the 1980s.

SOME OF THE KEY ACTS

1. Companies Code Act 1963, Act 163

2. Banking Amendment Act 2007, Act (738)

3. Borrowers and Lenders Act 2008, Act (773)

4. Central Security Depository Act 2007, Act (733)

5. Credit Reporting Act 2007, Act (726)

6. Fair Wages and Salaries Commission Act 2007, Act (727)

7. Foreign Exchange Act 2006, Act (723)

8. Home Mortgage Financing Act 2008, Act (770)

9. Non-Banking Financial Institutions Act 2008, Act (774)

10. Bank of Ghana Act 2002, Act (612)

11. Banking Act 2004, Act (673)

12. Financial Administration Act 2003, Act (654)

13. Internal Audit Agency Act 2003, Act (658)

14. Long-term Saving Scheme Act 2004, Act (679)

15. Payments Systems Act 2003, Act (602)

16. Venture Capital Trust Fund Act 2004, Act (680)

17. Bills of Exchange Act 1961, Act (55): A bill seeking to amend this act is pending to be passed.

18. Insolvency Act 1962, Act 153

SOME OF THE KEY ACTS

• Anti-money laundering Act 2008, (Act 749).• Anti-money laundering Amended Act 2014, (Act 874)• Anti-money laundering Regulations (2011), (L.I. 1987).• Anti-Terrorism (Amendment Act), 2012 (Act, 842).• Anti-Terrorism Act, 2008 (Act 762).• Anti-Terrorism Regulations, 2012 (L.I. 2181).• FIC/BOG Guidelines 2011, Anti-Money Laundering and Terrorist

Financing Guidelines

OVERVIEW OF FINANCE

• Recall-Financial management– Sourcing, using and investing funds– Perfect markets– Imperfect markets– Risk management

• Banking-a highly regulated economic activity and risky.The main financial institutions in the economy are the banks.

• They are the main mobilizers of funds, providers of risk management services and financiers of medium- and large-scale enterprises and government.

• It is through them that finance makes its major contribution to sustained economic growth, development and stability in the country. Ghana’s banking industry is regulated by the Central Bank (i.e. the Bank of Ghana).

• Banks also play an important role in ensuring an efficient and effective payment system and transaction processing.

• While playing the foregoing role, the banking industry is also the medium through which monetary policy is implemented by the Central Bank.

General Introduction on Financial Systems

The Financial System in Ghana comprises Bank of Ghana (BOG),

Financial Intelligence Centre (FIC),

National Insurance Commission (NIC),

Venture Capital Trust fund (VCTF),

Security and Exchange Commission (SEC),

National Pension Regulatory Authority (NPRA)

Ministry of Finance and Economic Planning (MOFEP)

GHIPSS provides the platform for the payment systems

Financial assets and liabilities facilitates the financial intermediation process with the economy.

The other players in the financial system of Ghana are the Banks, Non-Bank Financial Institutions, Insurance firms, Pension Firms, Capital Market Operators etc.

THE FINANCIAL SECTOR IN GHANA

• Capital Market : A stock exchange with 35 listed companies, stock brokerage companies, investment advisors, collective investment schemes Banks (26)

• Rural and Community Banks (135)• Insurance Companies: Life insurance companies (17) , Non-life

insurance companies (23), Reinsurance companies (2) Pension Funds and Provident Funds

• Non-bank financial institutions: Finance Houses (22), Leasing and Leasing & Finance Companies (4), Venture Capital Funds (5), Export Development and Investment Funds (1), Mortgage Finance Companies (1), Savings and Loan Companies (19), Credit Unions(500 approximately)

• Microfinance Institutions: Financial NGOs (40), Susu Companies (300) and registered Individual Susu Collectors (1,500)

Functions of a Financial System

• Channelization of saving and economic growth• Convenience of payments for goods and services

anywhere and anytime without the need to carry cash through cheques, credit and debit cards.

• Flexibility of saving and liquidation• Options for protection against and transfer of risk• Convenience in carrying out transactions of all

kinds i.e. buy and sell all kinds of commodities without stress.

What is Financial Intermediation

• Financial intermediation is the acts of channeling funds from surplus units to deficit units.

• There are cost associated with intermediation e.g. search cost, administration and transaction cost, verification, monitoring and enforcement incurred by banks in order to establish the creditworthiness of potential borrowers.

• Banks provide deposits and loans products. Level of riskiness of a borrower determines the amount of risk premium to be added to prevailing interest rate.

• Asset transformation- Pooling assets and liabilities i.e. transforming the value of the assets and liabilities. Intermediation creates Debit and Credit transactions.

CENTRAL BANKING

The Central Bank of Ghana traces its roots to the Bank of the Gold Coast (BCG), where it was nurtured.

As soon as local politicians and economists saw political independence in sight in the mid 1950’s the agitation for a central bank was revived.

It was argued that a central bank was one institution which would give true meaning to political independence.

It may be recalled that way back in 1947 some leading politicians had called for the establishment of a national bank with central bank functions to act as banker to government and to cater for the indigenous sector of the economy.

Bank of Ghana currently operates under the Bank of Ghana Act, 2002 (Act 612).

The functions of the Bank of Ghana

• Formation and implementation of monetary policy aimed achieving objectives of the bank

• Promotion of the stabilization of the value of the currency within and outside Ghana through policy measures

• Institution of measures which are likely to have a favorable effect on the balance of payments, the state of public finances and the general development of the national economy

• Requesting, supervision and direction of the banking and credit system to ensure work operation of the financial sector

• Promotion regulation and supervision of payment and settlement systems• Issuance and redemption of currency notes and coins• Ensure effective maintenance management of Ghana’s external financial services• Licensing regulations, promotion and supervision of non-bank financial institutions• The Bank of Ghana (BoG), through its Banking Supervision Department (BSD) has

overall supervisory authority in all matters relating to the business of banking in Ghana. The BSD examines the affairs of every bank at least once a year, placing particular emphasis on capital adequacy, solvency, asset quality and management. Other areas also examined include the soundness of borrowing and lending operations, and the funding of long-term commitments.

Central bank operations

Departmental functions• Banking Supervision Department• Banking

Elements of banking (Retail)

Principles of Banking Law– Contractual Relationship in Banking– Duties of a banker

• Exception to Banker’s Duty of Secrecy

– Duties of a customer

Negotiable Instruments• Examples of negotiable instruments recognized by statute: Bills of

exchange, Promissory notes, Cheques, negotiable instruments recognized by usage or custom, Share warrants, Dividend warrants, Banker’s drafts, Circular notes, Bearer debentures.

• Examples of Non-negotiable instruments include Money orders, deposit receipts, Share certificates, Dock warrants, Postal orders etc

Bill of exchange Cheques

Elements of banking (Retail)

Definition of a cheque• Cheques – a cheque is an order to transfer funds from the payer’s bank to the account of the payee.

Cheques are generally valid for six months after the date of issue. The use of cheques has traditionally dominated Ghana’s non cash payments. Despite the development of other payment instruments, cheques remain an important form of payment. A cheque is effectively a future promise to pay the amount stated on it and needs to be presented to a bank in order to obtain the payment.

Parties to a cheque Cheque crossing Cheque endorsement

Elements of banking (Retail)

Other payment instruments– Cash – is the preferred method for small payments because it involves no credit and therefore no

promises. With cash, you can usually purchase goods and services easily as it widely accepted. Carrying too much cash is risky as it can lead to theft and other problems. However, people still carry cash for its convenience and flexibility. From the payee’s point of view, transactions are completed immediately and this cash can be re-used for other transactions.

– Debit Card – is a payment card where the transaction amount is deducted directly from the card holder’s bank account upon authorization. In Ghana, anyone having a bank account and an ATM card can make payments using the card at any merchant with an EFTPOS machine. The commercial banks are in the process of achieving total EFTPOS interoperability in Ghana. This will allow the public to use any bank’s debit card at any EFTPOS machine.

– Credit Card – enables its holder to buy goods and services with a credit line given by credit card issuer. Funds are settled at a later date. Card holders are billed on a monthly basis and bear financial charges (interest) on outstanding amounts if payments are not made by the due date. Credit cards are issued through commercial banks and/or other issuers.

– Direct Debit – money is transferred automatically from a payer’s to payee’s bank accounts. The payer must instruct their bank to make direct debit payments and the payee provides amounts and dates of the payments. This facility can be used for paying different amounts and is useful for paying regular bills.

Elements of banking (Retail)

Other payment instruments• Standing order-A standing order is set up by the customer with their current account provider -

and any changes to the standing order are made by the customer direct with that current account provider. The current account provider sends the regular payments to the party named by the consumer - until either the consumer tells it to stop or (if the consumer sets it up for only a limited period of time) the standing order instruction runs out. If the consumer wants to change the amount of the payments made under a standing order, they must give their current account provider a new standing order - and specify that it is intended to replace the old one.

• Internet Banking – a fast and convenient way of performing banking transactions such as transferring funds from your savings to current account or to a third party account.

• Mobile Banking - a service provided through the combined effort of a bank and a mobile service provider, to perform common banking transactions. An active bank account is needed and a mobile phone equipped with features required by the bank.

• Mobile Money – allows customers to make payments to selected merchants and other individuals through their mobile phones. Bill payments and purchases of goods and services are among the cashless transactions that can be made. To enjoy the benefits of mobile money, the customer has to register and open an account with the mobile money service provider. Examples of mobile money services in Ghana are Tigo cash,MTN Mobile money,vodafone,airtel etc.

Elements of banking (Retail)

Other payment instruments• Direct debit- By contrast, a direct debit is set up by a consumer with the party that will receive

the direct debit payments (known as the "mandate holder" or the "originator"). The mandate holder then notifies the consumer's current account provider about the direct debit mandate - and applies for the payments as and when they fall due. The mandate holder can also make changes to the payments that it collects under the direct debit arrangement. Extra protection is given to consumers who agree to make payments by direct debit under the Direct Debit Guarantee - offered by all banks and building societies that accept instructions to make payments by direct debit.

• Continuous payment authorities- Continuous payment authorities can only be set up on plastic cards (credit or debit cards). They are often used by consumers to pay ongoing subscription charges - such as for magazine subscriptions or to internet service providers. Some of the complaints we see are based on misunderstandings (by either the consumer or the card issuer) about the nature of a continuous payment authority. This is sometimes made worse by confusing or wrong explanations given by the card provider in response to the consumer's complaint.

• Drafts and counter cheques-A banker's draft can look, on casual inspection, like a cheque. And it is processed through the banking system in a similar way to a cheques. But it is not legally a cheque. A banker's draft is written by the bank itself, on its own head-office account - and is made payable to whoever the customer wants. Unlike a cheque, a genuine banker's draft cannot be stopped - even if it is lost or stolen. A bank’s counter cheque is written by the bank on its own local branch account - and is made payable to whoever the customer wants. A bank counter cheque can normally be stopped if it is lost or stolen.

Cheque Fraud

Cheque Fraud is one of the oldest types of financial crime. • Cheque fraud refers to a category of criminal acts that involve making the unlawful use of cheques in order to

illegally acquire or borrow funds that do not exist within the account balance or account-holder's legal ownership. • Most methods involve taking advantage of the float (the time between the negotiation of the cheque and its

clearance at the cheque-writer's bank) to draw out these funds. • Specific kinds of cheque fraud include cheque kiting, where funds are deposited before the end of the float period

to cover the fraud.• Counterfeit  Cheques - These are not written or authorized by legitimate account holder. The existence of

conterfeit cheques is supported by new technology. Thieves use printers, copiers and newest software to make clone cheques with high resemblance to the original. Many times these are hard to recognized as false even by experts.

• Stolen Cheques - Cheque is not signed by account owner, rather stolen, usually out of the glove box of your car or your house. The signature is then forged and cheque used as pleased. Most of the time once you recognize your cheques are missing it is too late.

• Altered or Forged Cheques - The Cheque is properly issued by the account holder but has been intercepted and the beneficary or the amount of the item have been altered or new information added. To do so, sharp instruments and chemicals are used.

• Closed  Account - Bank accounts which are not used anymore or are closed, but cheques still exist for this particular account. If you don't destroy those cheques you can be a potential victim.

• New Account - An identity is stolen or made up by false documents. If a fraudster has personal documents and some personal information, he can request a bank account in your name. Bankers, unknowingly accept these requests and open new accounts, giving scammers the opportunity to steal money from individuals or businesses in your name.

• Overpaid Cheques - A false cheque issued by your "business partner" with a larger sum than required. The thief will then ask you if you can give him the change, making up different excuses why he transfered the overpayed sum. The cheque is false and will be declined by the bank and you will end up losing the amount you gave him in exchange.

Cheque Fraud

Cheque Fraud is one of the oldest types of financial crime. • Cheque fraud refers to a category of criminal acts that involve making the unlawful use of cheques in order to

illegally acquire or borrow funds that do not exist within the account balance or account-holder's legal ownership. • Most methods involve taking advantage of the float (the time between the negotiation of the cheque and its

clearance at the cheque-writer's bank) to draw out these funds. • Specific kinds of cheque fraud include cheque kiting, where funds are deposited before the end of the float period

to cover the fraud.• Counterfeit  Cheques - These are not written or authorized by legitimate account holder. The existence of

conterfeit cheques is supported by new technology. Thieves use printers, copiers and newest software to make clone cheques with high resemblance to the original. Many times these are hard to recognized as false even by experts.

• Stolen Cheques - Cheque is not signed by account owner, rather stolen, usually out of the glove box of your car or your house. The signature is then forged and cheque used as pleased. Most of the time once you recognize your cheques are missing it is too late.

• Altered or Forged Cheques - The Cheque is properly issued by the account holder but has been intercepted and the beneficary or the amount of the item have been altered or new information added. To do so, sharp instruments and chemicals are used.

• Closed  Account - Bank accounts which are not used anymore or are closed, but cheques still exist for this particular account. If you don't destroy those cheques you can be a potential victim.

• New Account - An identity is stolen or made up by false documents. If a fraudster has personal documents and some personal information, he can request a bank account in your name. Bankers, unknowingly accept these requests and open new accounts, giving scammers the opportunity to steal money from individuals or businesses in your name.

• Overpaid Cheques - A false cheque issued by your "business partner" with a larger sum than required. The thief will then ask you if you can give him the change, making up different excuses why he transfered the overpayed sum. The cheque is false and will be declined by the bank and you will end up losing the amount you gave him in exchange.

Category of Bank Products and Services

• Banks in Ghana provide the following category of product:

• Liability products-Current account, Savings Account, Fixed Deposit Account, Foreign Deposit Account, Call Account etc.

• Transactional products-Remittances, drafts, payment orders, traveler cheques, credit card, debit cards etc

• Asset products-Term loans, Overdrafts, Lines of credit, etc

• Services-Safe custody, purchase of treasury bills, Guarantor services, international trade services etc

Business of banking

Customer on Boarding• Individual Accounts• Joint Accounts• Executors and Administrators Accounts• Trustee Accounts• Sole Proprietors Accounts• Limited Liability Company Accounts• External Companies Accounts• Non-Government Organization (NGO) Accounts• Societies/Club/Associations/Board of Trustees Accounts• Government Ministries, Departments, Agencies and Corporation Accounts• Partnership Accounts• Educational Institutions(Private) Accounts• Lawyer(s) Accounts• Staff Accounts

Business of banking

AML/CFT & P• Money laundering involves taking criminal proceeds and disguising their illegal

source in anticipation of ultimately using the criminal proceeds to perform legal and illegal activities. Simply put, money laundering is the process of making dirty money look clean.

• Terrorist financing uses funds for an illegal political purpose, but the money is not necessarily derived from illicit proceeds.

Financial inclusion• Financial inclusion can also be defined as ensuring access to

financial services at an affordable cost in a fair and transparent manner.

• For AML/CFT purposes, it is important that these financial products and services are provided through financial institutions subject to adequate regulation in line with the FATF

Business of banking

Customer Acceptance PolicyCustomer Due Diligence (CDD)ML/FT Customer Risk Rating (CRR)• Account opening requirements for the various Account

Types i.e. Current and Savings Accounts and Term Deposits. • Referencing for prospective current  accountholders When a customer who is not previously known to the bank

proposes to open an account with the bank, it is in the bank’s own interest to obtain satisfactory information about the stranger before accepting his as a customer. References may be referred to as Letters of Introduction (LOI).

References are obtained due to the following factors:

• Identity – the bank wants to confirm the identity of the new customer to ensure that the customer has not assumed a false name for the purpose of obtaining payment through the bank of a stolen crossed cheque.

• Character – to confirm that the character of the customer is good and would be a satisfactory customer and also has the ability to operate an account.

• Means of livelihood or employment – the bank need to know the name of the customer’s employer to forestall the payment of cheques by the bank payable to his employer and endorsed to the customer or drawn by his employer in favour of the third party and similarly, endorsed.

• Similarly considerations arise if the customer says he is self-employed and then delivers for collection cheques, which are not drawn payable to him by name.

Risk of Conversion

• This is an unauthorized act that deprives a person of his property permanently or for an indefinite period. An act, including an unqualified refusal of delivery, whereby the bank denies the title of the owner to the property in question.

• An unqualified refusal to redeliver customer’s property can be an act of conversion. This normally occurs when the items have been delivered to the wrong person.

• When the bank receives any third party claim, it will interplead stating its willingness to deliver the property to the owner when title has been properly ascertained.

• Where an item has been deposited by two or more bailors jointly, delivery should be made only on the authority of all bailors.

• On the death of one bailor, a right of survivorship may accrue to the survivors. Otherwise the personal representative of the deceased should give a receipt

Termination of contract

The banker-customer relationship may be terminated by :• Mutual Consent• Unilateral Act• Operation of Law• Termination due to the operation of law -Third Incidence of Bad Cheque

-Bankrupt / Wound-up customers-Death & Mental incapacity of the customer