Why BoG closed down Ideal Finance Limited

Ideal Finance Limited was incorporated in 2009 under the Companies Act, 1963 (Act 179 and licensed by the Bank of Ghana under the Non-Bank Financial Institutions Act, 2008 (Act 774 as a money lending company. The company was subsequently licenced to carry on the business of a finance house on 18th December 2014 and established its head office at East Legon in Accra.

Ideal Finance has been faced with severe insolvency and liquidity challenges over the past two years. The Institution faces a significant capital shortfall with a Capital Adequacy Ratio (CAR) of negative 33percent in breach of the minimum required of 13 per cent with a corresponding capital deficit of negative Ghc188,257, 625.35

The institution is also facing a severe liquidity crisis with numerous complaints received by the Financial Stability Department of the Bank of Ghana from aggrieved customers who have been unable to access their deposits with the institution for the last several months. What is more, it has consistently failed to meet the minimum cash reserve requirement of 10 per cent of its total deposits.

The Institution’s shareholders have failed to restore the bank to the required regulatory capital and liquidity levels in spite of long-standing promises that new capital was expected from foreign investors.

The BoG has found key regulatory violations such as the following:

• The institution’s adjusted Net worth of negative GH¢117.5 million as at end

November 2018, indicates that the paid up capital is impaired in violation of Section 28(1) Act 930.

• The institution’s adjusted capital adequacy ratio of negative 32.8 percent as at end November 2018 is in violation of Section 29(2) of Act 930.

• Contrary to section 64 (2) of the Banks and Specialised Deposit-Taking Institutions

Act, 2016 (Act 930), the institution’s exposure to its related party has consistently been above the regulatory limit of 25% of net own funds (NOF). Exposures to related parties (FirstTrust Savings & Loans and Ideal Capital partners) were to the tune of Ghc63.19 million.

• The institution’s high non-performing loans (NPL) ratio of 23.2% was mainly attributed to poor credit risk management, thereby putting the deposits of its customer at risk.

• The company is yet to publish its 2018 audited accounts contrary to section 90 (2) of the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930). Furthermore, the company did not keep accounting records in a manner that gives an accurate and reliable account of the transactions of the company, and did not therefore show a true and fair view of its operations.

• Ideal Finance has not submitted their returns since November 2018. All efforts to get them to submit have proven futile.

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Onsite examination findings by BoG

1. The institution did not appropriately classify fifteen (15) impaired loan accounts in accordance with the requirements of the Bank of Ghana’s Guide for

Reporting Institutions, which resulted in an additional loan loss provision of GH¢14,255,275.53.

2. The Institution was technically over-exposed to all its credit customers due to its negative net own funds position which is in violation of Section 62(1) of Act 930.

3. Credit facilities granted to the affiliates of the Company were not approved by the Board and the exposures were not reported to Bank of Ghana in breach of Section 70(2) and 70(4) of Act 930. Total related party loans totaled GH¢52.70 million.

In a letter dated 25th June, 2019, the Bank of Ghana was notified about the intention to merge the operations of Ideal Finance Limited (IFL) and FirsTrust Savings and Loans Limited (FTSL). A review of the documents submitted in connection with the proposed merger and all available records obtained from the two institutions revealed that:

1. The shareholders’ funds of Ideal Finance Limited (IFL) and FirsTrust Savings and Loans Limited (FTSL) as at March 2019 per the merger documents was negative GH¢62.18 million and negative GH¢93.22 million respectively.

2. The reported shareholders’ funds of IFL per the last submitted prudential returns as at November 2018 was GH¢28.89 million. This was adjusted to negative GH¢117.50 million due to additional loan loss provisions and impaired investments, resulting in a decline in the reported capital adequacy ratio (CAR) of 0.52% to negative 52.18%, indicating a capital deficit of GH¢171.92 million.

3. The reported shareholders’ funds of FTSL per the prudential returns for May 2019 of negative GH¢99.46 million was adjusted to negative GH¢174.10 million due to impaired investments, resulting in a further reduction in the CAR of negative 48.67% to negative 132.96%, indicating a capital deficit of GH¢189.13 million.

4. The CAR of the merged entity was therefore assessed to be negative 78.32 percent with a capital deficit of GH¢361.05 million. The merger will therefore, neither address the current financial challenges facing the two institutions, nor improve their future prospects. In the light of the above, BoG could not accede to the request to merge the operations of FirsTrust Savings and Loans Limited and Ideal Finance Limited.

5. The cash reserve ratios of FTSL as at May 2019 was 0.07 percent compared to the regulatory minimum of 10%.

6. Both institutions are unable to meet customer withdrawal needs and the Bank of Ghana has received countless complaints from customers of both institutions about their inability to access their funds.

7. The use of landed property to shore up capital for the emerging entity is considered unacceptable in the light of the insolvent and illiquid state of the two institutions.