Banking and financial consultant Dr Richmond Atuahene has uncovered that many Specialized Deposit-Taking Institutions (SDIs) in Ghana are operating on unsustainable business models that resemble Ponzi schemes, putting the sector’s sustainability and viability at risk beyond the Bank of Ghana’s (BoG) new minimum capital requirements.
The research document, copied to The High Street Journal, enumerates unsustainable business models identified by the banking expert across microfinance firms, savings and loans companies, and rural banks that are supposed to champion financial inclusion for the unserved by providing small loans to market women and small businesses not captured by large commercial banks.
Dr Atuahene revealed that many SDIs have fallen into a dangerous trap called visibility as viability, pursuing aggressive branch expansions and opening numerous offices they cannot afford to run. This has significantly increased overhead costs including rent, salaries and utilities, which are often funded by indiscriminately mobilizing deposits at high interest rates rather than through actual profit from lending.
The banking analyst explained that when an institution uses new deposits just to pay off old ones or to keep the lights on, it is no longer a bank but a ticking time bomb. He warned that the situation of many SDIs, though not all, requires BoG attention beyond new capital requirements.
One of the most threatening business practices identified is the pocket bank mentality, where a single individual or family holds absolute control and treats depositors’ hard earned money as a personal automated teller machine (ATM) to fund other businesses on non commercial terms. This insider lending is a leading cause of failure, with undocumented and uncollateralized loans to connected parties draining capital meant to protect the public.
Dr Atuahene revealed that in one shocking instance, a single Savings and Loans company reportedly lent 146 million cedis to just six companies despite having a total capital requirement of only 15 million cedis. This represents a massive breach of the legal 25 percent single borrower limit established to protect financial institutions from concentration risk.
To sustain high operational costs, some SDIs charge oppressive interest rates as high as 10 percent to 15 percent per month, which the banking expert described as usurious. While these rates promise high returns for institutions, they are a death sentence for borrowers as small traders cannot sustain such repayment schedules, leading to massive defaults.
This has pushed the sector’s Non Performing Loans (NPLs) to a staggering 20.8 percent by late 2023, practically meaning that one out of every five loans issued by SDIs is not being paid back. The NPL ratio far exceeds the 5 percent threshold generally considered healthy for financial institutions and signals significant asset quality deterioration.
Dr Atuahene further identified that some institutions, particularly those that were unregulated or fun clubs, promise unsustainable returns hovering around 30 percent to 55 percent over two months to attract deposits. They then use new deposits to pay existing depositors, which he described as a risky practice characteristic of pyramid schemes.
He identified situations of excessive leverage and short term funding, noting that some firms are highly leveraged and rely on short term deposits to fund long term loans. This creates a liquidity mismatch as they cannot meet immediate withdrawal demands, leading to bank runs when depositors lose confidence.
For the financial and banking consultant, these Ponzi like models and other unsustainable practices do not just hurt individual firms but threaten the entire financial system. He outlined three primary threats including erosion of trust, liquidity crisis and mission drift from poverty reduction to high yield, high risk big ticket transactions.
Dr Atuahene stated that when an SDI collapses because it was built on creative accounting and high risk gambles, it destroys public confidence in all financial institutions. He warned that because these firms rely on short term deposits to fund long term, risky loans, they face liquidity mismatches that can trigger bank runs spreading like wildfire through the sector.
The banking expert noted that by shifting from poverty reduction to high yield, high risk big ticket transactions, these SDIs are failing their original mandate to support the informal economy. He emphasized that the institutions were established specifically to serve market women, small traders and micro enterprises excluded from conventional banking.
Dr Atuahene argued that simply demanding 100 million cedis in new capital is not enough if these toxic models remain. To save the sector, the Bank of Ghana must enforce its own rules including the 25 percent single borrower limit and ensure that directors are fit and proper individuals who respect the public trust.
The consultant emphasized that without a shift back to genuine small scale lending and ethical governance, more capital may only mean a bigger collapse down the road. He called for comprehensive reforms addressing governance failures, lending practices and business model sustainability rather than focusing solely on capital adequacy.
The Bank of Ghana carried out a special exercise in May 2019 to revoke licenses of 347 insolvent and dormant microfinance institutions (MFIs), 39 Micro Credit Companies (MCCs) and 23 Savings and Loans Companies and Finance Houses. The regulator determined that some institutions breached the solvency test provided in section 123 of Act 930, while others breached other sections of the Banks and Specialised Deposit-taking Institutions Act 2016 Act 930 and Act 774.
The cleanup cost approximately 21 billion cedis in government bonds issued to protect depositor funds and stabilize surviving institutions. The exercise exposed widespread corporate governance failures, insider lending, capital inadequacy and regulatory breaches across the SDI sector.
The BoG has regulatory and supervisory responsibility for licensed banks and Specialized Deposit-Taking Institutions including Microfinance Companies, Rural and Community Banks (RCBs), Micro Credit Companies, Financial Non-Governmental Organizations (FNGOs), Savings and Loan Companies and Finance Houses. Credit Unions are regulated under the Co-operative Credit Union Regulations 2015 Legislative Instrument 2225.
Dr Atuahene holds a PhD with specialization in corporate governance and financial performance from University of Bradford in the United Kingdom, a Master of Business Administration (MBA) in Finance, and is a Fellow Member of the Institute of Bankers Ghana. He has over 30 years experience in the banking sector, previously serving as Executive Director at First Atlantic Bank after holding senior positions at SG-SSB Bank and National Investment Bank.
The consultant has published extensively on banking risks, regulations, deposit protection schemes and financial sector governance. His research has frequently highlighted weaknesses in Ghana’s financial sector oversight and called for stronger regulatory enforcement to prevent institutional failures.
The World Bank approved a 250 million dollar credit facility in 2024 for a five year Ghana Financial Stability Project, with funds channeled through the Solvency Fund A1 of the Ghana Financial Sector Stability Fund (GFSF) established to provide solvency support to banks and SDIs impacted by the domestic debt exchange program.
