Rejoinder: GAT and its role in the financial sector (1)

By Eric Nana OTOO

Ghana Amalgamated Trust Plc (GAT) appreciates the public interest in its activities and welcomes discussions around its role in Ghana’s financial sector. However, the recent article on page 25 of the Monday 28 October 2024 edition with issue number 4168 of the Business & Financial Times (B&FT) titled “GAT and its Role in the Financial Sector (1)” contains several misrepresentations, factual inaccuracies and unsubstantiated conclusions. It is unclear the purpose of this article particularly since the writer made no effort to verify his assertions with GAT.

It is important to address these issues to present a correct view of GAT’s mandate, achievements, and ongoing efforts to support the stability of the financial sector in Ghana.

1. Clarifying GAT’s Mandate, Objectives, and Impact

In 2018, the Government of Ghana (GoG), acting through the Ministry of Finance (MoF), set up GAT to support selected indigenous banks to promote the stability of the banking sector.

GAT was established after several indigenous banks had challenges in raising funds to recapitalize by the 31 December 2018 deadline that Bank of Ghana had given all banks to increase their required capital.

The shareholders of the indigenous banks petitioned GoG to support them to recapitalize in order to preserve Ghanaian ownership in the banking sector as foreign-owned banks were largely able to get recapitalization support from abroad.

GoG established GAT in response to this request from indigenous banks. GAT’s core mandate was to provide capital support to selected indigenous banks that faced significant challenges in meeting the increased minimum capital requirements (MCR) set by the Bank of Ghana (BoG) and to guide their transformation into viable and competitive institutions in the banking industry.

GAT operates on a private equity model with GoG backing, acting as a strategic investor and partner in stabilizing the banks, protecting Ghanaian depositors, and strengthening the financial ecosystem.

The positive impact of GAT in the banking industry includes the preservation of about 5,400 direct jobs and 20,000 indirect jobs as well as GHS 10.2 billion in deposits when it recapitalized and supported the selected indigenous banks in 2019.

2. Clarifying GAT’s Role, and Debunking the Allegations

It is important to correct certain key misstatements and inaccuracies presented in the recent article.

• Ownership Influence

Article Allegation: “While GAT was initially introduced  as a mechanism to support and revitalize these institutions, growing concerns suggest that it may now be serving a different purpose: enabling the government to acquire majority shares in local banks.”

GAT Response:

GAT has never deviated from its mandate since its inception, and the perception of serving a different purpose of enabling the government to acquire majority shares in local banks is totally false and lacks basis.

GAT has to date not acquired any additional shares in three of the four investee banks it recapitalized in 2019. In the case of one investee bank, GAT supported further recapitalization of that bank by taking up only a portion of its rights during a legitimate rights issue that granted rights to all current shareholders.

As in the example of OmniBSIC Bank Ghana Limited, GAT’s ordinary equity shareholding was 44.05% when it invested in the bank in 2020. When the bank needed further recapitalization afterwards, GAT encouraged the local shareholders to inject additional capital into the bank.

After the further recapitalization in 2021, GAT’s ordinary shares stake was diluted from 44.05% to 24.75%. The dilution of GAT’s equity stake in this private bank clearly contradicts the allegations of the writer.

This clearly contradicts the writer’s assertion that GAT is being used to acquire majority shares in its investee banks.

• GAT’s Relationship with Government

Article Allegation: “GAT’s governance structure reflects its strong ties to the government. The National Trust Holding Company (NTHC) serves as the sole shareholder of GAT, holding all issued shares on behalf of the Government of Ghana under a nominee shareholder agreement. This structure places significant government influence over the operations of GAT.”

GAT Response:
GAT operates independently within its mandate despite the GoG being its sole shareholder at present, acting through its nominee company, the National Trust Holding Company (NTHC).

Our governance structure ensures accountability through a largely independent board led by experienced professionals from the banking sector. This structure, therefore, does not place any significant government influence over the operations of GAT as alleged in the article.

Moreover, NTHC is only a nominee shareholder holding the shares in GAT on behalf of GoG. Thus, NTHC insulates GAT from GoG by ensuring that GAT deals on an arm’s length basis with its nominee shareholder rather than directly with GoG.

Hence, GAT receives policy guidance from the MoF but the GAT board implements its mandate independently. However, overall strategic and governance decisions are taken by the independent board.

Further, GAT has engaged professional firms with key expertise to support it in priority areas. Since inception, KPMG handles GAT’s general administrative functions including sourcing, procurement, payments and payroll management, while Ernst & Young (EY) is GAT’s statutory external auditor. This framework ensures transparency and adherence to best practices in financial management, accounting and corporate governance.

Contrary to the claims in the article, GAT operates under the oversight of the MoF. GAT submits regular reports to its sponsoring ministry and meets the necessary statutory reporting requirements. The company also provides periodic updates directly to the Parliament of Ghana via its finance committee including an update that GAT provided as recently as July 2024.

• Investment Structure and Capital Allocation

Article Allegation: “Despite the significant capital injected into GAT, many local banks that were supposed to benefit from its support have not seen tangible improvements in their financial health.

In fact, GAT’s involvement has negatively impacted the balance sheets of some banks, exacerbating their financial challenges rather than alleviating them.

Critics argue that GAT has failed to meet its primary objective of supporting local banks and guiding them toward recovery. Instead, the entity has become more of an investment vehicle for the government with little concern for the actual needs of the beneficiary banks.”

GAT Response:

The assertion that GAT’s structure somehow places the banks at a disadvantage is not only misleading but completely unfounded. GAT provided the selected indigenous banks equity capital instead of loans, to avoid saddling them with additional debt.

In structuring its investments, GAT avoided taking controlling stakes in any of the investee banks. Hence, at the time of investing, GAT ensured that it did not take controlling ordinary equity stakes in any of the banks it supported.

To achieve this goal of avoiding controlling equity stakes, in cases where an ordinary share structure risked creating a controlling majority stake, the investment was structured into both preference and ordinary shares to maintain a significant minority stake, but avoid controlling equity stakes.

Our investments were also designed to provide flexibility for the existing shareholders of the banks under the GAT programme. Hence, existing shareholders of the banks have had the option (call option provisions) to buy GAT’s shares out right from the investment date if they wanted to buy out GAT and regain control of their banks. Further, GAT committed to a planned exit (put option provisions) after at least five years for the investee banks.

This structured exit timeline allowed GAT to fulfil its transformation mandate, that is, strengthening governance, financial stability, and operational viability within the banks before a strategic exit.

As a shareholder, GAT relied on the boards of directors of the banks to implement strategies and guide operations to help improve the investee banks. Management of the banks were to execute plans ensuring that resources are approved by boards of directors.

As part of agreements between GAT and its investee banks, the banks were expected to improve through business transformation after the initial recapitalization from GAT so that GAT could later exit its equity stakes in the banks.

This equity-based approach empowered the banks to strengthen their capital base without the strain of immediate or near-term obligations to find funds to buy back GAT’s equity investments. The flexibility GAT provided the existing shareholders while limiting its own options benefited the existing shareholders and enabled the banks to focus on core banking activities to achieve sustainable profits.

• Addressing Misconceptions on GAT’s Financial Impact

Article Allegation: “GAT was initially established as a vital tool for stabilizing local banks and supporting their transformation in the aftermath of the 2017 – 2018 banking crisis. However, in practice, it has become a liability to the very institutions it was meant to help. With high-interest funding, lack of transparency, and misaligned priorities, GAT now threatens the long-term viability of local banks, which are crucial to Ghana’s financial ecosystem.”

GAT Response:

The article claims that GAT has failed to benefit local banks as intended. This statement is false and overlooks the substantial progress these banks have made in meeting regulatory capital requirements and improving their financial health with GAT’s support. These improvements have been critical in restoring public trust and stability in Ghana’s banking sector and broader financial ecosystem.

Since GAT’s investment, the four investee banks have reported that deposits increased from GHS 8 billion in 2019 to GHS 23.1 billion at the end of 2023, reflecting a 30% annual compounded growth rate (CAGR) which exceeds the 27%  estimated for the banking industry which grew deposits from GHS 83.5 billion in 2019 to GHS 214.5 billion in 2023.

Similarly, the GAT investee banks reported that total assets have grown from GHS 11.4 billion in 2019 to GHS 25.9 billion in 2023, reflecting a 23% CAGR compared to the industry CAGR of 21%, from GHS 129.1 billion in 2019 to GHS 274.9 billion in 2023.

Despite setbacks from the 2022 Domestic Debt Exchange Programme (DDEP) and the 2023 Asset Quality Review by the BoG, most of the GAT investee banks are recovering and regaining profitability.

The claim that GAT’s investment has not tangibly benefited the banks ignores the broader economic context. The major global economic downturn, COVID-19 coupled with the recent DDEP challenges, has affected Ghana’s financial institutions as a whole.

GAT’s support has been essential in helping its investee banks withstand these external pressures, which would have otherwise led to more severe consequences for the industry and the economy.

• Clarifying Interest Rates and Management Fees

Article Allegation: “GAT’s high-interest funding, combined with the management fees it imposes, has placed additional financial pressure on the banks, undermining their ability to recover and remain competitive in the market.

This approach has led to further distress among local banks, many of which are now struggling with liquidity issues and are unable to participate meaningfully in Ghana’s economic growth. The very institutions that were meant to be saved by GAT are now at risk of being further weakened.”

GAT Response:

The article’s claim that GAT’s investment has turned into a liability for the investee banks by burdening them with high-interest funding is baseless and false. GAT negotiated equity investments on an arm’s length basis with all its investee banks.

The writer falsely claims that the GAT investments are liabilities. The capital support GAT provided to the investee banks was equity and not liabilities. Hence, the concept of interest does not even apply.

However, GAT’s investments into the investee banks are not bailouts. The investments were offered and the investee banks accepted them voluntarily at concessionary negotiated equity returns if they wanted to buy back GAT’s shares.

The banks and GAT agreed on reasonable returns to be paid upon GAT’s exit or to allow GAT to sell its shares to other parties to enable GAT recover its investments with a reasonable return.

The expected returns on GAT’s equity investments are not obligatory and so do not result in accrued financial costs on the financial statements of the GAT investee banks as wrongly stipulated by the writer.

GAT was set up to be independent of GoG but yet to sustain its operations on its own. To ensure such sustainable operations without reliance on GoG for annual funding, GAT had to charge the investee banks minimal fees to support its operations.

Regarding such management fees, some banks negotiated upfront one-time fees with GAT, while other banks chose recurring annual fees. In either case, the management fees charged by GAT are moderate by industry standards (and below 50% of typical industry fees) and as mentioned earlier, are necessary for sustaining our operations.

These fees cover essential costs associated with monitoring and managing our investments, ensuring that we maintain transparency, accountability, and effectiveness in supporting the banks. This structure allows us to fulfil our mandate efficiently, without compromising the stability and viability of the banks or imposing additional costs on taxpayers.

• Transparency and Public Accountability

Article Allegation: “One of the major concerns surrounding GAT is the lack of transparency in its operations…. This lack of transparency has raised major alarms among policymakers and financial experts, who are calling for greater oversight of GAT’s activities.”

GAT Response:

The article’s concerns regarding transparency do not accurately reflect GAT’s commitment to accountability. We engage stakeholders, including the Ministry of Finance, Parliament’s Finance Committee, the State Interest and Governance Authority (SIGA), and others on our progress and provide regular updates on our impact and financial status. Our operations are guided by rigorous governance standards, and our performance is measured against clearly defined benchmarks.

Interestingly, the writer does not identify the policymakers and financial experts he claims are calling for greater transparency from GAT. Neither did the writer engage us to request for or clarify any information before publishing his article.

• Ensuring a Sustainable Future for GAT and Ghana’s Financial Sector

Article Allegation: “It is time to question whether GAT, as it currently stands, is still serving the purpose for which it was created. Rather than continuing to operate in its current form, GAT may need to be closed or restructured entirely. Without such changes, the government risks further destabilizing the banking sector and eroding public confidence in its ability to manage financial sector interventions.”

 

GAT Response:

GAT’s long-term viability has been carefully considered and remains adaptive to the evolving needs of the financial sector. By providing targeted support, GAT has contributed to a more resilient financial system and will continue to support initiatives that strengthen local banks and the financial sector without fostering dependency.

3. Conclusion

Per the author’s own expectations, GAT has successfully implemented its mandate. The writer indicates that “GAT was meant to ensure that these banks, which were critical to Ghana’s financial infrastructure, could remain operational, continue lending and contribute to economic growth…” The banks that GAT supported since 2019 continue to exist and operate today because GAT enabled them to do so with the injection of critically needed capital.

As indicated earlier, the publicly available financials published by the banks GAT invested in show that their assets and deposits have both grown faster than that for the industry, from 2019 to 2023. The growth in business for the banks under the GAT program has benefited the economy.

As we look to the future, GAT remains committed to fulfilling its mandate of strengthening the financial sector and protecting strategic Ghanaian interests. Our role extends beyond short-term profits; it is about creating a stable, resilient banking sector that can support Ghana’s long-term economic growth.

We welcome constructive feedback and are open to engaging with stakeholders to improve our processes. However, discussions about GAT’s impact must be informed by an accurate understanding of our goals, challenges, and the positive outcomes we have achieved.

Responsible journalism plays a vital role in informing the public about complex financial issues. Analysts and journalists are encouraged to conduct thorough research and seek direct engagement with GAT to fully understand our operations, mission, and impact. Unfortunately, the writer did not seek the views of GAT before publishing his article.

GAT remains open to inquiries and welcomes the opportunity to clarify its objectives, governance structure, and achievements. Misinformed commentary, such as the article in question, creates unnecessary public concern and detracts from the significant work being done by GAT and other stakeholders to stabilize and strengthen Ghana’s financial sector.

The writer is the Managing Director at Ghana Amalgamated Trust PLC

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