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UNIVERSITY OF GHANA

CAUSES OF TAKEOVERS IN GHAHA: A CASE STUDY OF UT AND CAPITAL BANK

BY

ANKUMAH ANDRE PAYIN

(10424998)

A LONG ESSAY SUBMITTED TO THE DEPARTMENT OF FINANCE, UNIVERSITY

OF GHANA, LEGON, IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR

THE AWARD OF MASTER OF BUSINESS ADMINISTRATION (FINANCE OPTION)

DEGREE

MAY,2019

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DECLARATION

I, the undersigned student do hereby declare that this Dissertation is the result of my own original research and that no part of it has been presented for another Degree in any University. All sources of borrowed materials have been duly acknowledged.

………………………………… …………………………………

ANKUMAH ANDRE PAYIN DATE

(10424998)

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CERTIFICATION

I declare that the research and the presentation of this Dissertation were in accordance with

the guidelines on supervision of Dissertation arranged by the University.

……………………………………… …………………………………

DR. LORD MENSAH DATE

(SUPERVISOR)

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DEDICATION

This Research Project is dedicated to the Almighty God and to my Parents Dr. Richard Ankumah and Mrs. Magaret Ankumah. I further dedicate this to my family and friends who have been of great help to us in the course of this journey.

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ACKNOWLEDGEMENT

My first appreciation goes to the Almighty God for his blessing and strength throughout our study.

Again, many thanks to the University of Ghana for instituting this program for Knowledge acquisition, developing skills in research and acquainting us on what was needed in the program.

My sincere gratitude also goes to my supervisor, Dr. Lord Mensah for his persistent help in all the steps of the project, from topic selection to writing the final report, and his enormous contribution to the success of the study. Besides, his gracefulness, good advice, constructive criticism, support, and flexibility are admirable.

Secondly, I wish to express my sincere and special appreciation to Jonathan Agbamey, Abena

Konama Donkor, Frank Otinkorang, Francis Kofi Gogovie and Nana Akua Benneh Owusu-Obeng for their support and encouragement in carrying out the project.

Lastly my gratitude also goes to my colleagues and friends at the University of Ghana Business

School who supported me with ideas and suggestions in the course of writing this thesis.

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TABLE OF CONTENT

DECLARATION ...... i

CERTIFICATION ...... ii

DEDICATION ...... iii

ACKNOWLEDGEMENT ...... iv

TABLE OF CONTENT ...... v

LIST OF FIGURES ...... ix

LIST OF TABLES ...... x

ABSTRACT ...... xi

CHAPTER ONE ...... 1

INTRODUCTION ...... 1

1.1 Overview ...... 1

1.2 Background of The Study ...... 1

1.3 Statement of The Problem ...... 4

1.4 Research Objectives ...... 6

1.5 Research Questions ...... 6

1.6 Significance of the Study ...... 6

1.7 Chapter Disposition ...... 6

CHAPTER TWO ...... 8

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LITERATURE REVIEW ...... 8

2.1 Introduction ...... 8

2.2 History of UT Bank ...... 9

2.3 History of Capital Bank...... 10

2.4 Importance of Bank Regulation ...... 10

2.5 Bank Failure Literature ...... 11

2.6 Acquisition ...... 12

2.7 Determinants of Bank Failures ...... 13

2.7.1 Loan Management ...... 13

2.7.2 Corporate Governance Practices in the Banking Sector ...... 16

2.7.3 Macroeconomic Circumstances ...... 17

2.7.4 Lending to a high-risk borrower ...... 18

2.7.5 Liberalization/ Deregulation ...... 18

2.7.6 Government Interference ...... 18

2.7.7 Fraud and Corruption...... 19

2.7.8 Political Patronage ...... 19

2.7.8 Banking Strategies and Operations ...... 20

2.8 Conclusion ...... 20

CHAPTER THREE ...... 21

METHODOLOGY ...... 21

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3.1 Introduction ...... 21

3.2 Research Design ...... 21

3.3 Research Approach ...... 21

3.4 Selection of Cases ...... 22

3.5 Sources of Data ...... 22

3.6 Data Analysis ...... 22

3.7 Classification of Ratios ...... 23

3.7.1 Common Size Ratio ...... 23

3.7.2 Liquidity Ratio ...... 23

3.7.3 Profitability Ratio ...... 24

3.8 Asset Management Ratio ...... 25

CHAPTER FOUR ...... 27

DATA ANALYSIS AND DISCUSSIONS ...... 27

4.1 Introduction ...... 27

4.2 Description of Data ...... 27

4.3 Ratio Analysis of UT & Capital Bank ...... 30

4.3.1 Current Ratio ...... 30

4.3.2 Quick Ratio ...... 32

4.3.3 Cash Position Ratio ...... 33

4.3.4 Net Profit Margin...... 35

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4.3.5 Return on Common Stock Equity ...... 37

4.3.6 Return on Asset Ratio ...... 38

4.3.7 Current Asset Turnover Ratio ...... 40

4.3.8 Fixed Asset Turnover Ratio ...... 41

4.3.9 Total Asset Turnover Ratio ...... 43

4.3.10 Bank Debt Ratio ...... 44

4.3.11 Capital Adequacy Ratio ...... 46

4.3.12 Non-Performing Asset Ratio ...... 47

CHAPTER FIVE ...... 49

CONCLUSION AND RECOMMENDATIONS ...... 49

5.1 Introductions...... 49

5.2 Summary of Findings ...... 49

5.3 Limitations ...... 51

5.4 Recommendations ...... 51

REFRENCES ...... 52

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LIST OF FIGURES

Figure 4.1 Current Ratio ...... 31

Figure 4.2:Quick Ratio...... 33

Figure 4.3:Bank's cash position Ratio ...... 35

Figure 4.4:Net Profit Margin Ratio ...... 36

Figure 4.5:Return on Common Stock Equity ...... 38

Figure 4.6:Banks Return on Asset Ratio...... 39

Figure 4.7: The Banks Current Asset Turnover Ratio ...... 41

Figure 4.8: Banks Fixed Asset Turnover Ratio ...... 42

Figure 4.9: Banks Total Asset Turnover Ratio ...... 44

Figure 4.10:Bank Debt Ratio ...... 45

Figure 4.11: Banks Capital Adequacy Ratio...... 47

Figure 4.12: Banks Non-Performing Assets Ratio ...... 48

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LIST OF TABLES

Table 4.1 Descriptive Analysis Of UT Bank ...... 28

Table 4.2 Descriptive Analysis of Capital Bank ...... 29

Table 4.3:Showing the Banks Current Ratio ...... 30

Table 4.4:Showing the Banks Quick Ratio ...... 32

Table 4.5:Showing the Bank's cash position Ratio ...... 33

Table 4.6:Showing the Banks Net Profit Margin Ratio ...... 35

Table 4.7:Showing the Banks Return on Common Stock Equity ...... 37

Table 4.8:Showing the Banks Return on Asset Ratio ...... 38

Table 4.9:Showing the Banks Current Asset Turnover Ratio ...... 40

Table 4.10:Showing the Banks Fixed Asset Turnover Ratio ...... 41

Table 4.11:Showing the Banks Total Asset Turnover Ratio ...... 43

Table 4.12:Showing the Banks Debt Ratio ...... 44

Table 4.13:Showing the Banks Capital Adequacy Ratio ...... 46

Table 4.14:Showing the Banks Non-Performing Assets Ratio ...... 47

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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.

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CHAPTER ONE

INTRODUCTION

1.1 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.

1.2 Background of The Study

No country’s economy can survive today without a robust financial sector. Among its many importance’s, the ufinancial usector usits ubetween usavers and uborrowers uit utakes ufunds ufrom usavers (ufor uexample, uthrough udeposits) uand ulends uthem uto uthose uwho uwish uto uborrow, ube uthey uhouseholds, ubusinesses or ugovernments. One important player in the sector is the bank. uA ubank uis ua ufinancial uinstitution ulicensed uto ureceive udeposits uand give uloans. Banks offer ufinancial uservices, usuch uas uwealth 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 ibanking isystem ifacilitates iinternal iand iinternational itrade. iA great ipart iof itrade iis idone ion icredit. iBanks iprovide ireferences iand assurances, ion ibehalf iof itheir icustomers, ion ithe ibasis iof iwhich isellers ican isupply igoods ion icredit. iThis iis mainly significant iin iinternational itrade iwhen ithe iparties exist in idifferent icountries iand iare ivery ioften unidentified ito ione ianother. Additionally, ithe ibanks iserve ias ialternative igateways ifor imaking ipayments ion iaccount iof iincome itax iand ionline ipayment

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iof ivarious ibills ilike ithe itelephone, ielectricity iand itax. iThe ibank icustomers ican ialso capitalize itheir ifunds iin ivarious istocks ior common ifunds istraight ifrom itheir ibank iaccounts.

In most countries such as Ghana, the day to day activities of these ibanks iare iregulated iby ithe inational igovernment ior icentral ibank. iBank 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 iGhana iCommercial iBank i(now iknown ias iGCB) iwas ithe ifirst icommercial ibank iin iGhana. iIt iassumed ithe irole iand ipurposes iof iGovernment ibankers iand ibegan ito itake iover ithe ifinances iof imost iGovernment ibranches iand ipublic iestablishments (Buckle, 1999). iA inew igovernment ielected iby ipopular ivote iin i1957, imade ia iway ifor inew ibanks ito ibe iestablished iin ithe icountry inamely ithe iGhana iInvestment iBank ias ian iInvestment iBanking iInstitution; ithe iAgricultural iDevelopment iBank ifor ithe iprogress iof iAgriculture; ithe iMerchant iBank ifor imerchant ibanking; iand ithe iSocial iSecurity iBank ito iboost isavings. iThese ibanks iwere iincorporated iby ilegislation ibetween ithe iperiods iof i1957 ito i1965. iIn iconformism iwith ithe ieconomic iplan iof ithe itime iall ithese iinstitutions iwere icombined ias istate-owned ibanks. i

In ithe ilast idecade, iGhana’s ifinancial isector ihas iobserved ia ilot iof imergers iand iacquisitions iwhich ichanged ithe iownership istructure iof ibanks iin iGhana, iespecially iGhanaian ibanks ifrom ilocal ito iexpatriate ibanks. iThe ihuge ichange iof iownership istructure iof imost iof ithese ibanks, ias ican ibe iobserved, iwas iinspired iby ithe iBank iof iGhana’s iregulations iregarding ithe ichange iin ibanks’ iminimum icapital irequirement. iThe ifirst imain iincrement iin ithe iminimum icapital irequirement iof ibanks icame iin ithe iyear i2008, iwhere ithe iBank iof iGhana

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iset ithe iminimum icapital iof ibanks iin iGhana iat iGH¢60 imillion iand iin i2013, ithis inumber iwas ifurther iamplified ito iGH¢120 imillion. iThe iaim ifor ithis iexercise iby ithe iBank iof iGhana iwas ito iprotect idepositor’s ifunds. iAfter ithese itwo iincrements, ia ilot iof ibanks iwho icould inot imeet ithe ideadline iresorted ito imergers iand iacquisitions iin iorder ito icomply iwith ithe iBank iof iGhana’s iregulations. iBanks ilike iIntercontinental iBank, iTrust iBank iof iGhana iand iBPI iwere itaken iover iby iAccess iBank, iEcobank iand iUT ibank irespectively.

In ithe iyear i2017, iafter ia ichange iof igovernment iin ithe iprevious iyear, ithe iminimum icapital irequirement iof ibanks iwas ifurther iincreased ifrom iGH¢120 imillion ito iGH¢400 imillion. iAfter ithis iincrease, iit iwas ialleged ithat ia ilot iof ibanks iwould inot ibe iable ito imeet ithis inew icapital irequirement. iAs ipredicted, ibanks iincluding iCapital iBank iand iUT iBank iwere ione iof ithe ifirst ibanks ito icrumble ibecause iof ithis inew icapital irequirement iwhich iled ito itheir itakeover iby iGCB.

A itakeover iinvolves ia ibusiness iobtaining icontrol iof ian iadditional ibusiness; ithey iare ithe imost icommon iform iof iexternal igrowth, ipredominantly iby ilarger ibusinesses (Riley, n.d.). iTakeovers ican ibe iadvantageous ito ithe iacquirer ibecause ithere imay ibe iestablished icustomers, ia ireliable iincome, ia ireputation ito icapitalise iand ibuild ion, iand ia iuseful isystem iof icontacts. iIt imay ialso ibe ieasier ito iattain ifinance ias ithe ibusiness iwill ihave ian iestablished itrack irecord. iNevertheless, iit ican ialso ibe idisadvantageous ito ithe iacquirer ibecause ithey imay ineed ito ihonor ior irenegotiate iany ioutstanding icontracts ithe iprevious iowner ileaves iin iplace. iIn iaddition, iexisting istaff imay inot ibe ihappy iwith ia inew iboss, ior ithe ibusiness imight ihave ibeen irun icritically iand istaff imorale imay ibe ilow.

The itakeover iof iUT iBank iand iCapital iBank iby iGCB iwas iseen ias ia ihostile itakeover. iA ihostile itakeover iis ia itype iof imerger iand iacquisition iwhere ione icompany, icalled ithe

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iacquirer, itakes icontrol iof ithe ipossession iof iadditional icompany, icalled ithe itarget icompany, iagainst ithe iwishes iof ithe itarget icompany's imanagement. (Divestopedia, n.d.). iHostility iin icorporate itakeovers imay ibe iassociated iwith ibetter ilong-term ioperating iperformance iof ithe imerged icompany. iThe ireason iis ithat ihostile ibids iare imore iexpensive ifor ithe ibidding ifirms, isuch ithat ionly itakeovers ithat ihave ihigh isynergy ipotential iare ilikely ito isucceed i(Burkart, 2006)

1.3 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

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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.

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1.4 Research Objectives

The exact objectives of this study are:

• Examine the factors that led to the takeover of UT and Capital bank

• Determine whether the Bank of Ghana could have prevented the failure of these banks

1.5 iResearch iQuestions iTo help attain ithe iresearch iobjectives ithe subsequent iquestions are asked

• What factors led to the takeovers of UT and Capital bank?

• Could the Bank of Ghana offer have prevented the failure of these banks?

1.6 Significance of the Study

The banking sector in Ghana is now under heavy scrutiny from the general public due to its recent shortcomings. This study will help fill the gap in addressing the problem of bank failures and show whether loyalty to financial integrity and discipline are important in the banking sector. Also, this study could help to provide more insight into how these matters could ihelp ito iaddress ithe occurrence iof ibank ifailures in Ghana, with a clearer understanding of the importance of the central bank.

1.7 Chapter Disposition

This study is ordered into five main chapters.

Chapter one will contain the introduction of this research paper which will cover the background of the study, the problem statement, the research objectives, the research questions, the literature review, the methodology and the significance of the study.

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Chapter 2 will review various works conducted by other researchers and institutions in relation to the objectives of the study and discuss various criticisms from them.

Chapter three will also focus on the research methodology adopted by the researcher.

Chapter four will present the analysis of data obtained and the discussion of the findings within the scope of the research objectives. It will also capture the interpretation of results.

Lastly, chapter five will cover the iconclusions iand irecommendations idrawn ifrom ithe ifindings iof ithe istudy.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

Banks in Ghana are recognized below iThe Banks and Specialized Deposit-Taking Institutions Act

2016, Act 930, it is the principal rule governing banking business in Ghana. This came into power on 14 September 2016 to annul the Banking Act 2004, Act 673. The new banking decree has combined the decrees relating to deposit-taking and regulates organizations that transfer on deposit-taking business. It does not apply to credit unions and leasing companies that are certified and monitored beneath the Non-Bank Financial Institutions Act 2008, Act 774. The new Act is broader in scope compared with the annulled Banking Act 2004, Act 673. It has given the BoG improved supervisory powers.

The Banking industry is predisposed to crisis due to its exceptional characteristics, hence a special policy interest in avoiding and dealing with such a crisis (Hausmann, 1996).The spread of huge scale banking crisis has therefore elevated prevalent concern, a banking crisis disrupts the movement of credit to households and enterprises, weakening investment and consumption additionally conceivably compelling workable firms into collapse. Banking crisis may also endanger the running of payment systems and by undermining assurance in local financial institutions, they may cause a weakening in local savings and/or a large-scale capital discharge.

Banks play a very crucial role in the national economy in the form of Gross Domestic Product

(GDP) and in turn enhance the standard of living in terms of employment opportunities through the promotion of entrepreneurial activities which are enhanced by credit facilities offered by banks.

Despite this crucial role in the national economy and the life of every citizen, there has been a total of seven banks collapsing since 2017 (Safo, 2018). Also, a systemic catastrophe may compel good

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banks to shut their doors (Vittas, 1998), In several countries, policymakers have retorted to banking crisis with several interferences ranging from wobbly monetary policy to the bailout of bust financial institutions with civic funds, Even when they are judiciously planned, saving operations have numerous disadvantages which include; High budgetary costs, Likelihood of inefficient banks remaining in operation, Creating expectations of imminent bailouts thereby plummeting incentives for satisfactory crisis management by banks, Weakening managerial enticements as is often the case, thus compelling strong banks to stomach the losses of weak organizations, also

Inflammatory loose monetary policy to prevent banking sector losses and in countries with an exchange rate commitment the possibility to activate of a hypothetical attack against the currency

(Kunt-Demirgue, 1997).

2.2 History of UT Bank

UT iBank iGhana iLimited, icommonly iknown ias iUT iBank i(UTB), iwas ia icommercial ibank iin iGhana. iAs iof iFebruary i2011, ithe ibank iwas ione iof ithe icommercial ibanks ilicensed iby iBank iof iGhana, ithe inational ibanking iregulator. iIn i1997, iJoseph iNsonamoa iand iPrince iKofi iAmoabeng ico-founded iFinancial iservices iand ithen irenamed iit iUnique iTrust iFinancial iServices. iUT iFinancial iServices iwas ia inon-bank ifinancial iservices iprovider i(NBFI), iin iGhana, iwhich iwas iincorporated iin i1997. iOver ia iperiod, ithe iNBFI iattained isubsidiaries iand iwas ilisted ion ithe iGhana iStock iExchange, iunder iits iholding icompany, iUT iHoldings iLimited i(UT Bank, n.d.). iIn i2008, iUT i(Unique iTrust) iHoldings iLimited iacquired ia ilarge ipercentage iof ishareholding iin ia iGhanaian icommercial ibank icalled iBPI iBank i(Nonor, 2010). iThe ibank iwas ire-branded ias iUT iBank iGhana iLimited iand iopened ifor ibusiness iin iMay i2009 i(Larbi, 2009). iIn iJune i2010, iUT iBank iand iUT iFinancial iServices iMerged iinto ione inew icompany icalled iUT iBank iGhana iLimited. iThrough ia

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ireverse ilisting ion ithe iGSE, ithe inew ibank's ishares ibecame ilisted iand ithose iof iUT iHoldings iwere ide-listed.

2.3 History of Capital Bank

Capital iBank i(previously iFirst iCapital iPlus iBank) iwas ian iindigenous iprivate inational idevelopment iand icommercial iGhanaian ibank. iIt iwas ione iof ithe iprivate inational idevelopment iand icommercial ibanks ilicensed iby iBank iof iGhana, ithe inational ibanking iregulator iCapital iBank iwas ifounded iby iWilliam iAto iEssien ion i29 iOctober i2009 ias ia imicrofinance icompany. iAs ithe iassets iof ithe icompany igrew, iit ibecame ia iSavings iand iLoans iCompany iknown ias iFirst iCapital iPlus iSaving iand iLoans iCompany i i(Myjoyonline,

2013). iThe icompany igrew iits ibase ideposit iand iassets ifrom iits iinception itill i2013 iwhen iit iapplied iand iwas iawarded ia iprovisional iuniversal ibanking ilicense iin iJuly, i2012. iAfter ithe isix imonth iprovisional iperiod, ithe ibank iwas igiven ia ifull ilicense ion i4 iDecember i2013 iand ibecame iofficially iknown ias iFirst iCapital iPlus iBank i(Myjoyonline, 2013). iThe ifirm ilater ire-branded ito iCapital iBank iin i2015 i(Ghanaweb, 2015)

2.4 Importance of Bank Regulation

. The iquestions iwhy iare ibanks iso iclosely iregulated? iMany itypes iof ianswers ifrom ilay iman iwill icome ifilling iin ithe igaps. iMeanwhile ia inumber iof ireasons ifor ithis iheavy iburden iof igovernment isupervision ihave ibeen ithere iover ithe iyears. iBelow iare ithe ireasons ifor ithis istrict iregulation: i-

First, iaccording ito i(Rose, 1991) ibanks iare ithe ileading idepositories iof ithe ipublic’s isavings iwhich iconstitute ithe isavings iof iindividuals, ifamilies, icompanies, iparastatals, ipension isocieties. iThese isavers ilack ithe iin-depth iinformation ito iaccurately ievaluate ithe iriskiness iof ibanks. iFor ithis ireason, iregulatory iagencies ilike iCentral iBank icomes iin ito ifrequently

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iassess ithe ifinancial icondition iof ibanks iin iorder ito iprotect ithe ipublic iagainst iloss iwhich imost iof ithe itime icomes ifrom itheft, ifraud, icorruption, iand ifinancial imismanagement. iSecondly itaking iinto iaccount ifor iinstance, ilong-term isavings ifor iretirement iin ipension iprograms iand iindividual iretirement iaccounts, ibanks ineed iheavy iregulation iin iorder ito iemploy isafety imeasure iagainst isuch ilosses. iAccording ito iKareken, i(1990) ithis iregulation iacts iare idone iby iproviding ideposit iinsurance ithrough iperiodic iscrutiny iof ibank ipolicies iand ipractices iso ias ito iencourage isound imanagement. iThirdly, ibanks iare iso icarefully iwatched ibecause iof itheir ipower, iin ithe iform iof ireadily ispendable ideposits iby icreation iof iloans iand iinvestments iopportunities ito ithe icompanies ias iwell ias iindividuals. iThis iis ibecause ithe iquantity iof imoney iin ian ieconomy iis iclosely ico-related iwith ithe inational ieconomic icircumstances iin ithe iarea iof ijob-creation iand ithe iexistence ior iabsence iof iinflation. iTherefore, isince ibanks ihave ithe iability ito icreate imoney iwhich ithus iimpacts ion ithe ivitality iof ithe ieconomy, ithere iis ian iacute ineed ifor igovernment iregulations ithrough iCentral iBanks ipolicies. iFinally, ibanks iprovide ifinancial isupport ito igovernments ito iconduct itheir iaffairs iin iform iof ibank icredits iand itaxation i(Crockett, i1988). iThis isupport ihelps iin ithe iformulation iof ieconomic ipolicy iand idispensing igovernment ipayments.

2.5 Bank Failure Literature

The works on economic sorrows and bank failures recognize that banking construction is characteristically unbalanced and therefore, itself backs to the incidence of disaster (Dybvig,

1983). Being a deposit-taking institution, the responsibilities of a bank, at a given point in time are fixed, and a static interest is assured on them, however, its assets are in the form of loans producing flexible interest and subject to credit risk. The works on financial distress and bank failure can be accredited to both exogenous and endogenous factors, and endogenous influences include

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managerial incompetence, insider manipulations, misconducts and meddling intrusion by major shareholders, weak internal control systems undercapitalization and so on. The exogenous factors include macroeconomic uncertainty, regulatory feebleness and policy-induced shocks (Atuahene,

2018). One prominent cause that has paid to the wave of financial distress and bank failures worldwide has been a matter of bad loans. Risk assets can turn into non-performing loans when borrowers default on their repayment of the interest and principal on the maturity date.

2.6 Acquisition

An iacquisition iis ian iaction iwhere ia ifirm itakes ia igoverning iownership iinterest iin ianother ifirm, ia ilegal isubsidiary iof ian iadditional ifirm ior iselected iassets iof ianother ifirm i(DePamphilis, 2009). iThis imay iinvolve ithe ibuying iof ianother ifirm’s iassets ior istock i(DePamphilis, 2009). iAn iacquisition imay ibe iwelcoming ior iaggressive idepending ion iwhether ithe itarget icompany iis iwilling ito iaccept ithe iacquiring icompany’s ibid iand iwhether ithe iacquiring icompany imakes ian ioffer ito ithe itarget icompany’s iincumbent iboard iof idirectors iand imanagement ibefore iannouncing iits iintentions ipublicly. iThe iacquisition iis iconsidered ihostile iif ithe itarget ifirm‟s iincumbent imanagement iis iagainst ithe iacquisition ior ithe iacquirer icircumvents ithe iincumbent imanagement iof ithe itarget ifirm iand ibids idirectly ifor ithe ishares iof ithe itarget ifirm. iThere iare ivarious iways ithe iacquiring icompany ican iremove ithe iincumbent imanagers. iFirst, iit ican ibuy ithe irequisite inumber iof ishares iby ioffering ia ifixed iprice iper ishare ithat iis iabove ithe icurrent imarket iprice, iand ithis imethod iis icalled itender ioffer. iThe itender ioffer iis ibasically ia icash ioffer ifor ithe icurrent ishareholders. iHowever, ithe iincumbent imanagers ihave ideveloped icreative itools ito iprotect ithemselves ifrom ihostile itakeovers ior iat ileast ito inegotiate ilucrative ideals ifor ithemselves iat ithe icost iof itheir ishareholders. i(Shleifer, 2003) ipoint iout ithat i“takeover idefenses

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iemployed iby itarget imanagement irange ifrom ithe irelatively iinnocuous ifair iprice iamendment ito ithe ipractically iimpossible ipoison ipill.” iThe iterm i“poison ipill” irefers ito imanagers‟ iset iof idefensive itools ithat iimpose isignificant iand idiscouraging icosts ion ithe iacquirers iupon i“triggering” ithe ipill. iThe itypical itypes iof icosts iinclude idilution iof iacquirers‟ iequity iholdings iand irevocation iof itheir ivoting irights, iand ithe ipill iis itriggered iif ithe iacquirer iaccumulates ia icertain ipercentage iof ithe itarget icompany’s ishares ithat iexceeds ia icertain ipre-specified ithreshold. iAlso, ithe ipotential iacquirer ican ipersuade ia inumber iof ishareholders ithat iis inecessary ito ireplace ithe iincumbent iboard iof idirectors iand imanagement iwho iare iagainst ithe iacquisition. iThis imethod iis icalled ia iproxy ifight ibecause ithe iindividual ishareholders iof ia icorporation ido inot iparticipate iin ievery imeeting iand ido inot ivote ifor ievery imatter. iInstead, ithey idelegate itheir ivoting iprivileges ito ian iindividual iwho iis icalled iproxy. iThe iproxy ivotes ion ibehalf iof ithe iprincipal ishareholder iand ithe ipotential iacquirers itry ito ipersuade ithe iproxies ito ivote iin itheir ifavor ito ireplace ithe iincumbents.

2.7 Determinants of Bank Failures

In the next sections, this work will show the factors that enabled UT and Capital bank to perform poorly and be prone to a takeover, showing more consideration to non-performing loans.

Therefore, in this paragraph, bank administration will emphasis on loan management, financial management and additional grounds of bank failures will be emphasized thereafter.

2.7.1 Loan Management

In imost ideveloping icountries, isuch ias iGhana, ia ikey iproblem ithat ihas ibeset ithe imain isectors iof ithe ieconomy ihas ibeen iaccess ito iloanable ifunds. iMany istrategic ifinancial iinstitutions ihad ibeen iestablished ito ihelp iameliorate ithis iproblem iby imaking iloanable

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ifunds iavailable ito isupport iboth ithe iprivate iand ithe ipublic isectors. iHowever, iwith ithe irise iin ithe irate iof inon-performing iloans i(NPLs), ia isizeable inumber iof ithese ifinancial iinstitutions ibecame idistressed itherefore iit ican ibe isaid ithat iLoan imanagement iis icrucial iand iit iis iinstrumental iin iensuring ithe isuccess ior ifailure iof iany iBank, ithis iis ibecause iLoans iare ithe ilifeblood iof ia ibank. iAll ibusinesses isell iproducts, iand ia ibank's iproduct iis imoney. iBanks imake imoney iby itaking iin ifunds ifrom idepositors iand iother isources iand ithen iloaning imoney iout ito icustomers. iThe ibank ispread iis ithe ivariance ibetween iwhat ithe iinterest ia ibank imust ipay ito iobtain ithe ifunds iand ithe iamount ithe ibank icharges ion ithe iloan. iFor iexample, ia ibank imight ipay itwo ipercent iinterest ito ia idepositor iand icharge ia icustomer isix ipercent iinterest ion ia iloan. iThe ifour ipercentage ipoints iis ithe ibank's ispread, iand iits iprofit i(Freehling, 2016). iDue ito ithis irisky inature iof iloans ion ithe ibank’s iperformances, isome iloans iare irestricted ior ieven iprohibited iby ilaw. iFor iinstance, isection i62 iof ithe iGhana iBanking iAct i930 isays i“A ibank ior ispecialized ideposit-taking iinstitution ishall inot itake ifinancial iexposure iin irespect iof ia iperson ior ia igroup iof iconnected ipersons iwhich iconstitutes iin ithe iaggregate, ia iliability iamounting ito imore ithan itwenty-five ipercent iof ithe inet iown ifunds iof ithat ibank ior ispecialized ideposit-taking iinstitution ior ia ilower ipercentage ithat ithe iBank iof iGhana imay irecommend”. iTherefore, ithe ivalue iof ia ibank’s iloan iportfolio iand ithe iaccuracy iof iits ilending ipolicies iare ivery icrucial iand iconstitute ithe iareas iwhere ibank iexaminers ilook iat iclosely iwhen iexamining ia ibank, ithus ithis ishows ithat ilending imanagement iin ibanks iis ivery ivital ifor iits igrowth ias iwell ias iits ifall. iOne iof ithe imost isignificant imethods ia ibank ican iuse ito imake isure iits iloans imeet iregulatory istandards iand iare iprofitable iis ito iestablish ia iwritten iclear ipolicy iand iwhich iwill igive ithe iloan iofficers iand ithe ibank’s imanagement ispecific iguidelines iin imaking idecisions ion

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iindividuals ias iwell ias icorporate iloans. iIn ithis icase i(Rose, 1991) icredit iworthiness iinvolves ia icomprehensive istudy iof isix icharacteristics iof ithe iloan iapplication: icharacter, icapacity, icapital, icollateral, iconditions iand icontrol. iTherefore, ia igood iloan imust isatisfy iall ithe iabove iaspects ion ithe ilender’s ipoint iof iview. iLoan imanagement iis ithe imain isource iof ifinancial itheft iin ibanks. iAccording ito i(Amuakwa–Mensah, 2014) iIn iGhana, ia iprimary icause iof idistressed ifinancial iinstitutions ior ibank ifailure ior ifold-ups iis ithe ihigh irate iof ibad idebts. iNonetheless iliterature ion iNon iPreforming iLoans i(NPL) iavailable ion iGhana iis inot ifully isaturated i(Amuakwa–Mensah, 2014) iinvestigated ideterminants iof iNPLs iin ithe ibanking iindustry. iUsing ia ipanel iregression iapproach, ithe istudy irelied ion idata ifrom ithe iBank iof iGhana iand iWorld iDevelopment iIndicators idatabase. iThe istudy ifound ithat ibank- specific ivariables isuch ias ibank isize, icurrent iyear iloan igrowth iand inet iinterest imargin, iand imacroeconomic ivariables isuch ias iinflation, iGDP iper icapita iand ithe ireal ieffective iexchange irate, isignificantly iinfluence iNPLs iin ithe ibanking iindustry iin iGhana. iThe istudy ifurther iseparates ithe isample iand ianalyses ithe iresults ifor ismall iand ilarge ibanks. iThe iresults ishow ithat ifor ilarge ibanks, imacroeconomic ifactors iinfluence iNPLs imore ithan ibank- specific ifactors i(current iyear iloan igrowth) iwhereas, ifor ismall ibanks, ibank-specific ifactors iare isignificant iin iexplaining iNPLs.In iconclusion i(Nestor Amahalu, 2017) iin itheir iwork iLoan iManagement iand ifinancial iperformance iof iquoted ideposit imoney ibanks iin iNigeria, ihighlighted ithe iimportance iof iloans iin ithe ibanking isystem iand ihow ibanks iare istruggling idue ito ipoor iloan imanagement. i

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2.7.2 Corporate Governance Practices in the Banking Sector

Corporate igovernance ihas iits iorigins ifrom ithe irise iof icapitalism iand imodern istock iorganizations, ithe iadvance iof iinternational itrade iand ithe ihuge igrowth iof imultinational icorporations iduring ithe i“industrial irevolution” iin ithe iinitial ipart iof ithe inineteenth icentury i(Erismann-Peyer, 2008). iIt ihas ilately ireceived imuch iattention ias ia iresult iof ithe ioccurrence iof icorporate ifrauds, iaccounting iscandals, iexcessive icompensation ipackages, iinsider itrading, iself-dealing, imisleading idisclosures iand ipossible icivil iand icriminal iliabilities iof icorporate iorganizations. iIn iGhana, imore iand imore icorporate iorganizations iare ibeing iinduced ito iapply igood icorporate igovernance ito ieffectively iand icompetently icompete ion ithe iinternational imarket. iThe irecommendations iof ithe iCompanies iCode i1963 i(Act i179), iSecurity iIndustry iLaws i1993 i(PNDCL i333) ias iamended iby ithe iSecurities iIndustry iAct, i2000 i(Act i590), ias iwell ias ithe icitation iregulations i1990 i(L.I. i1,509) iof iGhana iStock iExchange i(GSE), ioutline ithe iroles iof ithe iboard, idirectors iand iauditors. iThey ialso iprovide ishareholders’ irights iand iregulatory iframework ifor ithe isetting iup iand ioperations iof icorporate iorganizations iin icorporate igovernance ipractice. iThe iInstitute iof iDirectors i(IoD-

Ghana), ithe iPrivate iEnterprise iFoundation iand ithe iState iEnterprises iCommission iare iall iintricate iin ithe ienhancement iof ieffective icorporate igovernance ipractice iin iGhana. iIn ilesser ideveloped icountries ilike iGhana, igovernment iownership iof ibanks iand idirection iof itheir ilending ito iprioritized isectors iof ithe ieconomy, iin ithe iname iof iindustrial iand idevelopment ipolicy ior ito ipolitically ifavored iborrowers, ifor iexample, iis iwidespread. iThis iraises inumerous iconflicts iof iinterest iif ithe igovernment’s ior ipoliticians’ iobjectives iare inot ito imaximize ipublic ieconomic iwelfare. i(Maureen, 2003) iconcluded iin itheir iresearch ititled

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iThe iCorporate iGovernance iof iBanks, ithat ibanks iwith ilow ilevel iof icorporate igovernance ihave ia ihigh ichance iof ifailure

(Hetteš, 2002) isays ithat ibanking isupervision icannot ifunction iproperly iif ithere iis ino icorrect icorporate igovernance, iexperiences ihave ishown ithe ineed ifor ian iappropriate ilevel iof iresponsibility, icontrol iand ibalance iof icompetences. iHettes igoes ifurther ito isay ithat; iapproving icorrect icorporate igovernance istreamlines ieven ithe iwork iof ibanking isupervision iand itherefore icontribute ito igood icorporation iamong ithe imanagement iof ia ibank iand ithe ibanking isupervision iauthority. iIn iconclusion iThere iis ia istrong iconnection ibetween iinternal igovernance iand irisk imanagement. iThe ipoorer ithe ibank’s icorporate igovernance ithe iriskier ithe ibank. iStrong isupervision icannot icounteract ithe ieffects iof ithe icorporate igovernance ion ithe ibanking isystem.

2.7.3 Macroeconomic Circumstances

Macroeconomic instability is occasionally blamed on the banking instability. This takes place with the amalgamation of the downfall of asset prices, or a strident increase in the interest rates or falls in the exchange rate. These factors mostly are interconnected. Therefore, bank management and bank supervisors must confirm that banks are not susceptible to such issues (Latter, 1997).

Macroeconomic instability would have had two significant costs for the loan quality of the local banks. First, high inflation rises the unpredictability of business profits because of its randomness, and because it normally involves a large degree of inconsistency in the rates of increase of the prices of the specific goods and services which make up the complete price index. The probability that firms will generate losses increases, as does the probability that they will earn bonanza profits

(Harvey, 1994). This strengthens both adverse selection and adverse incentives for the borrowers to take hazards, and thus the likelihoods of loan default. The second significance of high inflation

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is that it makes loan assessment more problematic for the bank because the feasibility of possible borrowers depends upon erratic progress in the total rate of inflation, its individual components, exchange rates, and interest rates.

2.7.4 Lending to a high-risk borrower

Another ifactor idonating ito ibank ifailure iwas ilending, iat ihigh iinterest irates, ito iborrowers iin ihigh-risk isectors iof ithe icredit imarket. iThis iinvolved ielements iof imoral ihazard ion ithe ipart iof iboth ithe ibanks iand itheir iborrowers iand ithe iadverse ivariety iof ithe iborrowers. iIt iwas iin ipart imotivated iby ithe icost iof iassembling ifunds. iBecause ithey iwere ialleged iby idepositors ias ibeing iless isafe ithan ithe ireputable ibanks, ilocal ibanks ihad ito ioffer idepositors ihigher ideposit irates. iSome iof ithe ilocal ibanks irelied iheavily ion ihigh-cost iinterbank iborrowings ifrom iother ibanks iand ifinancial iinstitutions, ion iwhich ireal iinterest irates iof iover i20% iwere inot iuncommon i(Mamman, 1994). iThe iproblem iof imost iof ithe ifailed ibanks iwas ithat ithey idid inot ihave isatisfactory iexpertise ito iscreen iand imonitor itheir iborrowers, iand itherefore idifferentiate ibetween igood iand ibad irisks..

2.7.5 Liberalization/ Deregulation

Deregulation iin ithe ifinancial isector ihas iin imost icases iencouraged icrash ibehaviour, ileading ito imany iproblems i(Latter, 1997). iThis iis inot ian iargument iagainst ideregulation ibut ia iwakeup icalls ifor ithe ibank imanagement iand iregulators ito ibe iaware iof ithe ipotential iconsequences iand iparticularly ito ilet ithem ibe ialert.

2.7.6 Government Interference

It iis ioften isaid iunless ia ibank iis iin ifinancial icrisis, iGovernment iinterference iespecially iin itheir iday ito iday ioperations ican icause ibanking iinstability, ithis iis iwhy imost istate-owned ibanks iperform ipoorly icompared ito iprivate iowned ibanks. iEmpirical istudies itypically

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isupport ithis iassertion iirrespective iof iprofitability idealings, iregions iand isample iperiods. iFor iexample, i(Mian, 2003) ifound ithat igovernment ibanks iuniformly iunderachieve iprivate ibanks iusing i250 iGOBs ifrom i71 iemerging ieconomies. (Iannotta, 2007) iusing ian iinflamed iincreased isample, ifound ithat igovernment ibanks ihave ilower iprofitability iand iloan iquality, iand ihigher iinsolvency irisk, iassociated ito iprivate ibanks. iFurthermore, i(Cornett, 2003) ifound ithat igovernment ibanks iare isignificantly iless iprofitable ithan iprivate ibanks.

2.7.7 Fraud and Corruption

Some icauses icited iabove imay iamount ito ifraud iby isome iparticular idealers ior itraders idepending ion ihow ilegalistic ione imay ibe. iThere ihave ibeen irampant ifrauds iand icorrupt idealing iin imany ibanks. iEmployees iand imanagement iin icollaboration iwith ioutsiders imay ibe isusceptible ito icorruption ior icapable iof ifraud ion ia ibank iespecially iwith ithe ipresent ihigh icomputer itechnology, iexample iof imoney ilaundering ithrough iinternet. iThis itherefore ileads ito ibank icrashes i(Latter, 1997).

2.7.8 Political Patronage

Many ibanks ifailure iis idue ito imismanagement ithat ioccasioned ithe iwithdrawal iof ihuge iamounts iof imoney iby ipoliticians iwith ithe iconnections iat ithe iState iHouse iand ithe ioffice iof ithe iPresident. iPeople iin ihigh ilevel iof ipolitical iarena iof ithe icountry iwill iwalk iinto ithe ibank iwith ichits isigned iby imen iin iauthority iand iwithdraw imoney ithat iwould inever ibe irepaid. iThis itradition ihas ienriched ifew iindividuals iwhile ithe ibank icrashed, ileaving idepositors isuffering. iBankers iare icomplaining ithat ipolitical iinterference iis inow ithe imajor ijeopardy ifacing ithe ibanking iindustry, ia ireport ipublished isays i."Politicization" iof ibanks ias ia iresult iof ibailouts iand itakeovers inow iposes ia i"major ithreat" ito itheir ifinancial ihealth, iaccording ito isome i450 isenior ifigures iwho icontributed ito ithe iannual iBanking iBanana

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iSkins ireport ifrom iPricewaterhouseCoopers i(PwC) iand ithe iCentre ifor iFinancial iInnovation i(Moore, 2010).

2.7.8 Banking Strategies and Operations

. In imany icases, ibanks ifailure ihas ibeen ibrought iby ithe ishortcomings iin itheir iown istrategy. iThe ifollowing iare ithe isliding iground ibanks imay iventure ion:

• Rush ito iexpand ihas ibeen ione iof ithe imost icommon icauses iof ifailure.

• Failure ito iinculcate inew imanagement istyle ito ibank’s istaff, ito iutilise iinformation

itechnology ieffectively. iAll ithis imay ilead ito ibank ifailure idue ito ipermanent

icompetition ifrom iother ibanks i(Latter, 1997).

• Poor icredit iassessment: ifailure ito iconduct ian iaccurate iassessment iof icredit irisk iand

ito iprice iaccordingly iis icommon icause iof ibank’s iproblems.

• Unauthorized itrading ior iposition itaking, iassociated iwith ia ifailure iof iinternal

icontrols iappeared ito ihave ibeen ian iincreasingly iworrying isource iof ibank ilosses ior

iultimate ifailure i(Latter, 1997).

• Over-reliance ion iIT isystems, iwithout iadequate iback-up, isufficient iverification,

iproper iaudit iarrangements ior imanagement iunderstanding ienough iabout ithe isystems.

2.8 Conclusion

In conclusion even though 2018 so the central bank acquires 5 additional banks to from consolidated bank, an end of year report by the central bank which is the bank of Ghana stresses that the banking industry remains safe and sound despite pockets of feebleness. By the end of the second quarter of 2018, banks were normally solvent and adequately liquid. There were clear signs of continued efforts to recapitalize to meet the December 2018 Deadline

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CHAPTER THREE

METHODOLOGY

3.1 Introduction

This chapter defines the general approach and specific techniques adopted to address the objectives of the research. The chapter also discusses the study area, the research design, the population, the sample, and sampling techniques as well as research tools.

3.2 Research Design

(Bhattacherjee, 2012) describes research design as a complete plan for data collection in an empirical research project. The design provides specific direction in conducting research work and further serves as a “blueprint” for empirical research aimed at answering specific research questions (Creswell, 2003). Depending on how a researcher prefers the outcome of a study to be the researcher may select a particular research design for the study. Examples of research approaches include qualitative, quantitative and mixed method approaches.

3.3 Research Approach

One methodology was used in the study, namely the quantitative methodology, the study utilized the quantitative methodologies, given that the objectives required the utilization of that methodology. For the quantitative aspect ratio analysis was used. This research tends to determine the overall state of UT and Capital bank which lead to their eventual takeover. Ratio analysis was used to determine which aspects the banks were doing poorly.

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3.4 Selection of Cases

UT and Capital banks were chosen for this particular study due to the shock value it presented to both its staff and the general public because it was perceived that UT and Capital were banks that were performing well. This is because in 2011 UT Bank won the bank of year award followed by an award for the most valued company by PriceWaterhouseCoopers and B&FT newspaper the following year. Capital Bank also won an award for Adjudged Best Growing Bank, Best Bank in

Deposits and Savings and Best Bank in Household & Retail Banking in 2016. This makes these banks collapse an interesting case and examining the factors that led to the collapse will serve as a guide to future banks since it can be said that the seven banks that collapsed in 2018 did not take the case of Capital and UT bank seriously.

3.5 Sources of Data

To understand the study more profoundly, secondary data will be gathered from the yearly financial reports of both UT and Capital Bank from the period of 2012 to 2014.

3.6 Data Analysis

The istudy iused iall iimportant itools iof iratio ianalysis ifor iprofitability ievaluation iof ibank. iThe iresearcher iconducts ia iselection iof ifinancial ireport ithat imeans ia ichoice iof iannual ifinancial ireports. iThe iyearly ifinancial ireport ipresents ifinancial idata iof ia icompany's isituation, ioperating iperformance, iand ifunds iflow ifor ian iaccounting iperiod. iThe iresearcher iused ithe iannual ireporting iof ibank iin i2013 ito i2015. iSecond istep iof imodel, iresearcher icategorize ithe ibalance isheet, iincome istatement, icash iflow istatement ifrom ithe iannual ifinancial ireport. i

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3.7 Classification of Ratios

Accounting iRatios iare iclassified ion ithe ibasis iof ithe idifferent iparties iinterested iin imaking iuse iof ithe iratios. iA ivery ilarge inumber iof iaccounting iratios iare iused ifor ithe ipurpose iof idetermining ithe ifinancial iposition iof ia iconcern ifor idifferent ipurposes. iRatios imay ibe ibroadly iclassified iin ito: i

• Arrangment iof iRatios ion ithe ibasis iof iBalance iSheet. i

• Arrangment iof iRatios ion ithe ibasis iof iProfit iand iLoss iAccount. i

• Arrangment iof iRatios ion ithe ibasis iof iMixed iStatement i(or) iBalance iSheet iand iProfit iand iLoss iaccount to imeet ithe iobjective ithe istudy igroups iratios iand idivides ithree imain iparts iwhich iare iLiquidity iratios, iprofitability iratios, iand iasset imanagement iratios.

3.7.1 Common Size Ratio

One iof ithe imost iuseful iways ifor ithe iowner iof ia ibusiness ito ilook iat ithe icompany’s ifinancial istatements iis iby iusing i“common isize” iratios. iCommon isize iratios ican ibe ideveloped ifrom iboth ibalance isheet iand iincome istatement iitems. iThe iphrase i“common isize iratio” imay ibe iunfamiliar ito iyou, ibut iit iis isimple iin iconcept iand ijust ias isimple ito icreate. iYou ijust icalculate ieach iline iitem ion ithe istatement ias ia ipercentage iof ithe itotal

3.7.2 Liquidity Ratio

Liquidity iratio irefers ito ithe iability iof ia icompany ito iinteract iits iassets ithat iis imost ireadily iconverted iinto icash. iAssets iare iconverted iinto icash iin ia ishort iperiod iof itime ithat iare

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iconcerns ito iliquidity iposition. iHowever, ithe iratio imade ithe irelationship ibetween icash iand icurrent iliability

•Current iRatio i: i

Current iRatio i= iCurrent iassets i/Current iliabilities

•Quick iRatio: i

Quick iRatio= i(Quick iAssets-Inventories)/ iQuick iLiabilities

Quick iAsset= icurrent iasset- i(stock i+ iprepaid iexpense)

Quick iLiabilities i= icurrent iliabilities i-Bank iOverdraft

•Cash iRatio: i

Cash iRatio i= iCash i/ iCurrent iLiabilities

3.7.3 Profitability Ratio

Profitability iratios idesignate ia ibank's ioverall iefficiency iand iperformance. iIt imeasures ihow ito iuse iassets iand ihow ito icontrol iits iexpenses ito igenerate ian iacceptable irate iof ireturn. iIt ialso iused ito iexamine ihow iwell ithe ibank iis ioperating ior ihow iwell icurrent iperformance icompares ito ipast irecords iof ibank

•Net iProfit imargin i

Net iProfit imargin i= iNet iprofit i/sales

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•Return ion icommon istock iequity iratio

Return ion icommon istock iequity iratio i= iNet iincome i/ iCommon istockholders' iequity

•Return ion iTotal iAssets i

Return ion iTotal iAssets i= iNet iprofits i/ itotal iassets.

3.8 Asset Management Ratio

Asset imanagement iratios iare imost inotable iratios iof ifinancial iratios ianalysis. iIt imeasures ihow ieffectively iany iorganization iuses iand icontrols iits iassets. iIt iis ianalysis ihow ia icompany iquickly iconverted ito icash ior isale ion itheir iresources. iIt iis ialso icalled iTurnover iratios ibecause iit iindicates ithe iasset iconverted ior iturnover iin ito isales.

•current iasset iturnover iratio current iasset iturnover iratio=sales/current iasset

•Fixed iasset iturnover i

Fixed iasset iturnover i= iSales i/ iNet ifixed iasset

•Total iasset iturnover i

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Total iasset iturnover i= iSales i/ iTotal iasset

•Debt iRatio i

Debt iRatio i=Total iliabilities i/ iTotal iassets

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CHAPTER FOUR

DATA ANALYSIS AND DISCUSSIONS

4.1 Introduction

This chapter presents the data collection and the analysis of the results. The research findings are examined to determine the shortcomings of both UT and Capital Bank which led to the subsequent takeover by GCB Bank Ltd.

The study used secondary data in the form of annual financial statements of UT and Capital Bank from 2012 to 2014 respectively and ratio analysis of these financial statements were used to determine particular aspects of the two banks that were underperforming, the analysis focused on

2012 to 2014 because these were the only available years the researcher obtained financial statements from both banks. Capital Bank stops publishing after 2014 till its collapse in 2017 and

UT Bank published un-audited financial statements for 2015 and did not publish any till their eventual collapse. Years before 2012 were not considered because they were too far away to have an impact on the study.

The Researcher will analyze first UT Banks financial statements with the appropriate ratios and thereafter will analyze Capital Bank, Diagrams will be used to aid in the description for both banks.

4.2 Description of Data

Data used in this ratio analysis was obtained from the yearly report of both UT and Capital bank from the years 2012 to 2014.

The data below shows the ratios that were calculated with the exception of Non-performing asset ratio and capital adequacy ratios because the banks didn’t give enough data for it.

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Table 4.1 Descriptive Analysis Of UT Bank

UT

Name of Ratio Mean Median Min Max Sd Skew Kurt

Current Ratio 1.1373 1.1650 1.0700 0.0487 - - 1.4441

0.6571 0.6571

Quick Ratio 0.1618 0.1680 0.1450 0.1740 0.0125 - 1.4116

0.5869 iCash iPosition iRatio 0.1029 0.1010 0.0980 0.1100 0.0051 0.5280 1.5531 iNet iProfit iMargin 0.0126 0.0092 0.0086 0.0250 0.0076 0.7038 2.2125 iReturn ion icommon istock iratios 0.0992 0.0791 0.0758 0.1630 0.0404 0.7036 2.0228 iReturn ion iasset iratio 0.0099 0.0073 0.0067 0.1525 0.0061 0.7020 2.2224

Current Asset Turnover Ratio 0.1510 0.1503 0.1501 0.1525 0.0011 0.6892 1.5099

Fixed Asset Turnover Ratio 6.8743 6.3760 6.1750 8.2510 0.9349 0.6827 1.6850 iTotal iAsset iTurnover iRatio 0.1385 0.1390 0.1360 0.1406 0.9349 - 1.4904

0.3525

Debt Ratio 0.8960 0.9037 0.8699 0.9150 0.0192 - 1.4776

0.5272

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Table 4.2 Descriptive Analysis of Capital Bank

Capital

Name of Ratio Mean Median Min Max Sd Skew Kurt

Current Ratio 1.0744 1.1300 0.9470 1.1590 0.0939 -0.6568 1.3875

Quick Ratio 0.1306 0.1770 0.0680 0.1850 0.0534 -0.6952 1.0572

Cash Position Ratio 0.0620 0.0490 0.0300 0.1620 0.0583 0.6511 2.4211

Net Profit Margin 0.0124 0.0140 0.0054 0.0250 0.0080 0.1486 1.8797

Return on common 0.0934 0.0756 0.0410 0.2630 0.0975 0.6409 2.4726

stock ratios

Return on asset 0.0103 0.0114 0.0045 0.0214 0.0069 0.2201 1.9551

ratio

Current Asset 0.2520 0.2540 0.2470 0.2550 0.0036 -0.6655 1.4812

Turnover Ratio

Fixed Asset 6.8928 7.0100 4.5800 10.2000 2.3013 0.1638 1.6738

Turnover Ratio

Total Asset 0.2240 0.2337 0.2041 0.2357 0.0144 -0.6970 1.4109

Turnover Ratio

Debt Ratio 0.8857 0.8910 0.8486 0.9188 0.0289 -0.2481 1.4846

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4.3 Ratio Analysis of UT & Capital Bank

4.3.1 Current Ratio

Table 4.3:Showing the Banks Current Ratio

Year Current Asset (A) Current Liabilities (B) RATIO (A/B)

UT Capital UT Capital UT Capital

2012 893,640,000 231,084,442 833,223,000 244,078,066 1.07 0.947

2013 1,231,884,000 465,025,780 1,056,994,000 401,269,744 1.165 1.159

2014 1,506,318,000 687,213,000 1,272,056,000 608,203,000 1.18 1.13

Source: Secondary Data from Financial Statements of UT & Capital

Table 4.3 outlines both UT and Capital bank’s current ratio from 2012 to 2014. The above data shows UT current ratios of 1.07, 1.165 and 1.18 for 2012, 2013 and 2014 respectively. All the ratios of UT are above 1.0 and which is an indication that banks will be able to meet its short-term obligations when they fall due. While Capital Bank Ratios are 0.947, 1.159 and 1.13 at 2012, 2013 and 2014 respectively. The ratios are above 1.0 except for 2012 with a ratio slightly below 1.0.

This indicates an overall positive improvement of the current ratio within the years reported.

Capital Bank will be able to achieve its short-term obligations as they fall due for 2013 and 2014.

The Current ratio may be defined as the relationship between current assets and current liabilities.

This ratio is also known as "working capital ratio". It is a degree of general liquidity and is most broadly used to make the analysis for short term financial position or liquidity of a firm.

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It is calculated by dividing the total of the current assets by a total of the current liabilities. In the case of Banks, their primary assets are loans and deposits they receive are their liabilities. Deposits and interest paid on them are short terms while loans tend to be long term. The difference between the timing of assets and the liabilities gives rise to liquidity. The higher the current ratio the more beneficial it is to a bank to be able to withstand a crisis.

Figure 4.1 Current Ratio

Current Ratio 1.4

1.2

1

0.8

0.6

0.4

0.2

0 2012 2013 2014

UT Capital

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4.3.2 Quick Ratio

Table 4.4:Showing the Banks Quick Ratio

Year Quick Asset (A) Current Liabilities (B) RATIO (A/B)

UT Capital UT Capital UT Capital

2012 144,726,000 43,139,772 833,223,000 244,078,066 0.174 0.177

2013 177,474,000 27,366,497 1,056,994,000 401,269,744 0.168 0.068

2014 183,937,000 112,803,000 1,272,056,000 608,203,000 0.145 0.185

Source: Secondary Data from Financial Statements of UT & Capital

Table 4.4 outlines both UT & Capital Bank Quick ratio from 2012 to 2014. The above data shows

UT quick ratios of 0.174, 0.168 and 0.145 for 2012, 2013 and 2014 respectively. The ratios indicate a downward trend in the years reported. While Capital Bank Quick ratio from 2012 to 2014 is

0.177, 0.068 and 0.185 respectively. The ratios indicate the quick ratio of the bank made a dip in

2013 at 0.068 and recovered at 0.185 in 2014 exceeding the previous years. The Quick ratio is also referred to as the Liquidity test or Acid Test Ratio. It is the ratio of liquid assets to current liabilities.

The true liquidity refers to the ability of a firm to pay its short-term obligations as and when they become due, short-term obligations are financial duties that are expected to be paid off within a year. UT Bank is above the minimum requirement of 10% but the downward movement of their quick ratio in the subsequent years is a cause for concern.

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As of 2013 Capital Bank were below the minimum requirement of 10% but came above the minimum requirement in 2014, even though it did well to come above the minimum requirement it was still low.

Figure 4.2:Quick Ratio

Quick Ratio 0.2 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2012 2013 2014

UT Capital

4.3.3 Cash Position Ratio

Table 4.5:Showing the Bank's cash position Ratio

Year Cash (A) Current Liabilities (B) RATIO (A/B)

UT Capital UT Capital UT Capital

2012 92,147,000 39,459,267 833,223,000 244,078,066 0.174 0.162

2013 103,835,000 19,782,576 1,056,994,000 401,269,744 0.168 0.049

2014 128,818,000 18,537,000 1,272,056,000 608,203,000 0.145 0.03

Source: Secondary Data from Financial Statements of UT & Capital

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Table 4.5 outlines both UT and Capital Bank cash position ratio from 2012 to 2014. The above data shows UT cash position ratios of 0.174, 0.168,0.145 at 2012, 2013 and 2014 respectively. The ratios indicate a downward movement in 2013 with 0.168 and further dipped down 2014 to 0.145.

While Capital Bank also experienced a downward movement with respect to cash ratios throughout all the three years. A cash position signifies the amount of cash that a bank has on its books at a precise point in time. The cash position is a sign of financial strength and liquidity. In addition to cash itself, this position often takes into deliberation highly liquid assets such as certificates of deposit, short-term government debt, and other cash equivalents. The unstable downward trend signifies that the two banks are not being marketable enough and also the loans are not bringing enough money to the banks, which shows the bank has a large number of bad loans, which indicate poor loan management as (Anthony Saunders, 2010) said in their book Credit risk management in and out of the financial crisis: new approaches to value at risk and other paradigms, “The more banks hold risky assets without having adequate capital, sufficient collateral or back up assets, sound credit risk management amongst others, the more it is exposed to risk of capital loss and insolvency”. This shows banks should pay more attention to their loan management.

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Figure 4.3:Bank's cash position Ratio

Bank's cash position Ratio 0.12

0.1

0.08

0.06

0.04

0.02

0 2012 2013 2014

UT Capital

4.3.4 Net Profit Margin

Table 4.6:Showing the Banks Net Profit Margin Ratio

Year Net Profit (A) Sales (B) RATIO (A/B)

UT Capital UT Capital UT Capital

2012 20,931,000 6,132,899 134,110,000 58,556,681 0.1561 0.1047

2013 9,757,000 5,745,339 187,888,000 118,410,288 0.0519 0.0485

2014 10,955,000 3,265,000 226,346,000 169,559,000 0.0484 0.0193

Source: Secondary Data from Financial Statements of UT & Capital

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Table 4.6 outlines the bank’s net profit margin ratio of UT & Capital from 2012 to 2014. The above data shows UT Bank’s Net Profit Margin of 15.61%, 5.19%,4.84% for 2012, 2013 and 2014 respectively. While Capital Bank shows net profit margin ratios of 10.47%,4.85%,1.93% for

2012,2013 and 2014 respectively. The ratios of the two banks indicate a downward trend in the years reported. The net profit margin is equivalent to how much net income or profit is generated as a percentage of revenue. The Net profit margin is the ratio of net profits to revenues for a company or business segment. The ability of a bank to sell itself to individuals is very important because if it does this very well it opens the avenue for individuals and companies to deposit their money and take loans from the bank. This is important because the revenue gotten from these individuals or companies are used to pay for expenses and what is left is profit. In the case of both

Capital and UT Bank, it can be seen from the table above their net profit margin is declining this can be due to poor banking strategies and operations which is affecting the net profit margin of the bank.

Figure 4.4:Net Profit Margin Ratio

Net Profit Margin Ratio 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2012 2013 2014

UT Capital

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4.3.5 Return on Common Stock Equity

Table 4.7:Showing the Banks Return on Common Stock Equity

Year Net Profit (A) Common Stock Equity (B) RATIO (A/B)

UT Capital UT Capital UT Capital

2012 20,931,000 6,132,899 128,435,000 23,284,263 0.163 0.2630

2013 9,757,000 5,745,339 128,670,000 76,029,601 0.0758 0.0756

2014 10,955,000 3,265,000 138,421,000 79,293,000 0.0791 0.0410

Source: Secondary Data from Financial Statements of UT & Capital

Table 4.7 outlines both the bank’s Return on Common Stock Equity ratio from 2012 to 2014. The above data shows the common stock equity ratios of UT bank of 0.163, 0.0758 and, 0.0791 for

2012, 2013 and 2014 respectively. While Capital Bank has common stock equity ratios of

0.2630,0.0756 and 0.0410 for 2012,2013 and 2014 respectively. These ratios indicate a downward trend in the years reported. In the case of UT bank, there was a slight increase from 2013 to 2014 but it was still not good enough for the bank. Common Stock Equity Ratio is the ratio of net profit to shareholder’s investment. It is the affiliation between net profit (after interest and tax) and shareholder’s/proprietor's fund. This ratio establishes the profitability from the shareholders' point of view. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have financed.

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The downward trend shows a mixture of poor corporate governance and bank strategies and operation, this means the banks are not managing their funds well in addition to improper management practices.

Figure 4.5:Return on Common Stock Equity

Return on Common Stock Equity 0.3

0.25

0.2

0.15

0.1

0.05

0 2012 2013 2014

UT Capital

4.3.6 Return on Asset Ratio

Table 4.8:Showing the Banks Return on Asset Ratio

Year Net Profit (A) Total Assets (B) RATIO (A/B)

UT Capital UT Capital UT Capital

2012 20,931,000 6,132,899 986,905,000 286,860,793 0.02 0.0214

2013 9,757,000 5,745,339 1,336,336,000 502,338,373 0.0073 0.0114

2014 10,955,000 3,265,000 1,628,412,000 725,686,000 0.0067 0.0045

Source: Secondary Data from Financial Statements of UT & Capital 38

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Table 4.8 outlines the bank’s Return on Asset ratio from 2012 to 2014. The above data shows the return on asset ratios of 0.02, 0.073 and 0.067 for 2012, 2013 and 2014 respectively. While Capital

Bank shows a return on asset ratio of 0.0214,0.0114 and 0.0045 respectively. The ratios for both banks indicate a downward trend in the years reported. The return on assets ratio is a profitability ratio that measures the net income produced by total assets during a period by associating net income to the average total assets. In other words, the return on assets ratio or ROA measures how efficiently a company can manage its assets to produce profits during a period (My Accounting

Course, n.d.). The downward trend can be associated with operational challenges that might be linked with ineffective corporate governance.

Figure 4.6:Banks Return on Asset Ratio

Banks Return On Asset Ratio 0.025

0.02

0.015

0.01

0.005

0 2012 2013 2014

UT Capital

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4.3.7 Current Asset Turnover Ratio

Table 4.9:Showing the Banks Current Asset Turnover Ratio

Year Sales (A) Current Assets (B) RATIO (A/B)

UT Capital UT Capital UT Capital

2012 134,110,000 58,556,681 893,640,000 231,084,442 0.1501 0.254

2013 187,888,000 118,410,288 1,231,884,000 465,025,780 0.1525 0.255

2014 226,346,000 169,559,000 1,506,318,000 687,213,000 0.1503 0.247

Source: Secondary Data from Financial Statements of UT & Capital

Table 4.9 outlines both banks Current Asset Turnover ratio from 2012 to 2014. The above data shows UT Bank current asset turnover ratios of 0.1501, 0.1525 and 0.1503 for 2012, 2013 and

2014 respectively. While Capital Bank has a current asset turnover ratio of 0.254,0.255 and 0.247 respectively Current Asset Turnover is an activity ratio, measuring the firm’s ability to create sales through its current assets (cash, inventory, accounts receivable, etc.).

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Figure 4.7: The Banks Current Asset Turnover Ratio

Current Asset Turnover Ratio 0.3

0.25

0.2

0.15

0.1

0.05

0 2012 2013 2014

UT Capital

4.3.8 Fixed Asset Turnover Ratio

Table 4.10:Showing the Banks Fixed Asset Turnover Ratio

Year Sales (A) Fixed Asset (B) RATIO (A/B)

UT Capital UT Capital UT Capital

2012 134,110,000 58,556,681 21,033,000 12,796,401 6.376 4.58

2013 187,888,000 118,410,288 30,426,000 16,894,109 6.175 7.01

2014 226,346,000 169,559,000 27,434,000 16,595,000 8.251 10.2

Source: Secondary Data from Financial Statements of UT & Capital

Table 4.10 outlines both banks Fixed Asset Turnover ratio from 2012 to 2014. The above data shows the ratios for UT bank’s fixed asset turnover which were 6.376,6.175 and 8.251 as at 2012,

2013 and 2014 respectively. While Capital Bank had a ratio of 4.58,7.01 and 10.2 as of 2012,2013 41

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and 2014 respectively. The ratios indicate a positive trend in the years reported. This ratio measures the efficiency and profit earning capacity of the concern. Higher the ratio, the greater is the intensive utilization of fixed assets. A Lower ratio means the under-utilization of fixed assets.

From the table above it can be said the banks fixed asset turnover ratio was very good.

Figure 4.8: Banks Fixed Asset Turnover Ratio

Fixed Asset Turnover Ratio 12

10

8

6

4

2

0 2012 2013 2014

UT Capital

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4.3.9 Total Asset Turnover Ratio

Table 4.11:Showing the Banks Total Asset Turnover Ratio

Year Sales (A) Total Assets (B) RATIO (A/B)

UT Capital UT Capital UT Capital

2012 134,110,000 58,556,681 986,905,000 286,860,793 0.136 0.2041

2013 187,888,000 118,410,288 1,336,336,000 502,338,373 0.1406 0.2357

2014 226,346,000 169,559,000 1,628,412,000 725,686,000 0.1390 0.2337

Source: Secondary Data from Financial Statements of UT & Capital

Table 4.11 outlines the bank’s Total Asset Turnover ratio from 2012 to 2014. The above data shows the UT Bank total asset ratio of 0.136,0.1406,0.1390 at 2012, 2013 and 2014 respectively.

While Capital Bank shows a total asset ratio of 0.2041,0.2357,0.2337 at 2012,2013 and 2014 respectively. The ratios indicate a positive trend in the years reported. The total assets turnover ratio measures the turnover of all the firm’s assets. It measures the ability of a company to use its assets efficiently. This ratio considers all assets, current and fixed.

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Figure 4.9: Banks Total Asset Turnover Ratio

Banks Total Asset Turnover Ratio 0.25

0.2

0.15

0.1

0.05

0 2012 2013 2014

UT Capital

4.3.10 Bank Debt Ratio

Table 4.12:Showing the Banks Debt Ratio

Year Total Liabilities (A) Total Assets (B) RATIO (A/B)

UT Capital UT Capital UT Capital

2012 858,470,000 263,576,530 986,905,000 286,860,793 0.8699 0.9188

2013 1,207,666,000 426,308,772 1,336,336,000 502,338,373 0.9037 0.8486

2014 1,489,991,000 646,393,000 1,628,412,000 725,686,000 0.9150 0.8910

Source: Secondary Data from Financial Statements of UT & Capital

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Table 4.12 outlines the banks’ Debt ratio from 2012 to 2014. The above data shows UT Bank, debt ratios of 0.8699,0.9037 and 0.9150 as at 2012, 2013 and 2014 respectively. While Capital bank has a bank debt ratio of 0.9188,0.8486 and 0.8910 as at 2012,2013 and 2014 respectively. The ratios indicate a positive trend in the years reported. This ratio specifies what proportion of debt a company has relative to assets. The measures give an idea to the leverage of the company along with the potential risk the company faces in terms of its debt load.

Figure 4.10:Bank Debt Ratio

Bank Debt Ratio 0.94

0.92

0.9

0.88

0.86

0.84

0.82

0.8 2012 2013 2014

UT Capital

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4.3.11 Capital Adequacy Ratio

Table 4.13:Showing the Banks Capital Adequacy Ratio

Year Capital Adequacy Ratio (%)

UT Capital

2012 13.42 -

2013 12.16 -

2014 11.91 11.7

Source: Secondary Data from Financial Statements of UT Bank reported off the balance sheet

Table 4.13 outlines the banks’ Capital Adequacy ratio from 2012 to 2014. The above data shows

UT bank capital adequacy ratio of 13.42%,12.16% and 11.91% for 2012, 2013 and 2014 respectively. The ratios indicate a negative trend in the years reported. For capital bank, the capital adequacy ratio wasn’t reported for 2012 and 2013 only 2014 ratio was available which was 11.7%,

The capital adequacy ratio, also known as capital to risk-weighted assets ratio, measures a bank's financial strength by using its capital and assets. Bank of Ghana in the banks and SDI act, 2016

(Act 930) states the minimum capital adequacy ratio of a bank should be 10% UT Bank’s capital adequacy ratio is above the minimum of 10% but from 2012 to 2014 as seen in the table above their capital adequacy ratio was declining year by year and it meant trouble for the bank.

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Figure 4.11: Banks Capital Adequacy Ratio

Bank Capital Adequacy Ratio 14

13.5

13

12.5

12

11.5

11

10.5 2012 2013 2014

UT Capital

4.3.12 Non-Performing Asset Ratio

Table 4.14:Showing the Banks Non-Performing Assets Ratio

Year Non-Performing Asset Ratios

(%)

UT Capital

2012 11.86 -

2013 10.92 3.7

2014 12.38 2.1

Source: Secondary Data from Financial Statements of UT Bank reported off the balance sheet.

Table 4.14 outlines the banks’ Non-Performing ratio from 2012 to 2013. The above data shows the banks non-performing assets ratios of 11.86%,10.92%,12.38% as of 2012, 2013 and 2014 47

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respectively. While Capital bank’s 2012 ratio wasn’t presented but 2013 and 2014 ratios were presented and they were 3.7 and 2.1 respectively. A non-performing asset refers to a classification for loans or advances that are in default or are in arrears on scheduled payments of principal or interest. In most cases, debt is classified as nonperforming when loan payments have not been made for a period of 90 days (Kenton, 2018). The ratios for UT Bank show a temporary drop in

2013 and rising past the ratio recorded in 2012. While capital bank was declining. There is no benchmark but banks must maintain low levels in order not to affect capital adequacy ratio. The unstable trend in the years in question was not good for UT bank.

Figure 4.12: Banks Non-Performing Assets Ratio

Non-Performing Asset Ratio 14

12

10

8

6

4

2

0 2012 2013 2014

UT Capital

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CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

5.1 Introductions

The aim of the study was to ascertain the causes for the collapse of both UT and Capital Bank, and to prevent the future collapses of banks. To this end, a ratio analysis was conducted using financial statements of both UT and capital bank from the years 2012 to 2014 to study the key aspects of their banks that were failing. This chapter summaries the key findings of this study. The chapter will also present recommendations for the bank industry to consider.

5.2 Summary of Findings

One of the most important ways to value a bank’s financial position is by comparing its assets to liabilities. When assets are more than liabilities it represents a cushion of capital that is available to cover losses of any kind and most banks strive for this kind of condition.

The findings revealed that both banks had good capital adequacy ratios that were above the threshold but weren’t enough to cushion the banks from a liquidity crisis. A bank can be solvent holding assets exceeding its liabilities on an economic and accounting bases and still collapse suddenly if depositors or other funders lose confidence in the financial institution. For example, in the Lehman Brothers case, they were a state of a tier 1 capital ratio of 11 percent just five days before the firm's collapse boasting of $639 billion in assets and $619 billion in liabilities (Holdings,

2011). When we look at quick and cash position ratios these ratios give us how likely the bank is able to meet its short term liabilities, therefore the banks need to have a higher number of assets

(cash and cash equivalents, securities, etc.) that they can easily turn into cash, but looking at the

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quick and cash position ratios for UT and Capital bank respectively the study showed that the trend is on the downside which implies that both banks are suffering some liquidity crisis.

Again, the findings indicate that a general overview of UT Bank’s ratios in the given time period shows that it’s struggling with non-performance asset ratios which is not low enough, also their revenue growth is not encouraging even though it had a dip in one of the years it could not recover to the previous strength. The volume of non-performing loans generally increased and coupled with a decrease in depositors funds was not good reading for the bank.

In the case of Capital bank, the first thing we can notice is the poor performance of their Non- performing asset ratios which were abysmal as compared to UT bank and even in 2012 capital bank didn’t report their Non-performing asset ratios.

Credit risk management is very important for a bank surviving crisis, having non-performing loans on the rise is an indication of incoming crisis to the bank’s income, this is because loans are the fulcrum of which banks operate, in the long run, if banks can’t recover loans they gave out to customers it will affect the banks’ ability to generate funds to operate their business and lead to losses. As of the end of the period reported in this work, the statutory capital requirement was increased from 60 million to 120 million, so having a lot of Non-performing loans was an issue.

Furthermore, both banks saw a dip in their net profit margins for those periods which can also be traced back to their poor loan management. This can be said that both banks poor performance in their non-performing asset ratios, Capital Adequacy ratios and liquidity ratios reveal their poor loan management. Some indicators which are off the balance sheet like good corporate management and effective credit risk management are challenges that need to be solved but cannot be seen from the balance sheet. For instance, off the balance sheet report in capital bank’s annual

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report revealed that there was a default in the statutory liquidity requirement in the year 2014, the statutory requirements in liquidity were violated four times and the penalty GHS 31,742 was paid.

To sum it up the bank’s poor liquidity ratios, poor risk management practices and possibly poor corporate governance resulted in poor performance in these banks and their eventual sale to GCB

Bank.

5.3 Limitations

Acquiring the financial statements of both banks proved to be challenging and resulted in the three years used for the analysis in chapter 4, also getting additional information from the Bank of Ghana regarding the ratios was also a challenge.

5.4 Recommendations

This study revealed the major flaws in UT and Capital Bank before their eventual collapse in 2017.

With regards to UT and Capital bank, I would recommend that banks should follow the statutory regulations and guidelines provided by the central bank and in a situation where they are in crisis, banks should follow the action plans provided them by the central bank. With regards to the Central

Bank, I would recommend intervening in banks as soon as there are signs of trouble with the banks because in the case of UT and Capital the banks stalled before they got into the crisis and were not able to follow the action plans recommended to them.

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