The Bank of Ghana is seriously weighing the option of offering banks an opportunity to buy the deposit liabilities of the troubled DKM Diamond Microfinance Company in a debt-buy-back scheme as the central bank explores ways of raising money to compensate investors who have lost funds to the rogue microfinance company.
The Governor of the Bank of Ghana, Dr. Abdul Nashir Issahaku, explained in Accra that the need to offer commercial banks a chance to buy DKM debts is to facilitate the processes for compensating depositors of the microfinance company as liquidation procedures continue.
He said banks that agree to a possible buy-back deal will assume the debts at a discounted cost; an investment the central bank believes will be realised from the sale of DKM’s assets.
“The payment process is what we are still thinking about, and there are a number of options that we are considering. One option is a debt buy-back approach whereby any commercial bank interested in buying the debt can start to make payment once the audit results come back. So, for instance, if the debt is GH¢100million they could buy it for GH¢70million — and that is important because going directly as central bank to make payment raises issues of moral hazard.
“So we need to think carefully! One thing is efforts are being made to pay depositors their original deposits, and that will be done. We are also thinking around how quickly that can be done. So someone has to start making payments even as the liquidation process continues, because submitting the audit report is just one step. We may then have to go into selling the assets and that may take over a year and the poor farmer for example, whose money is locked, cannot wait for a year to get a fertiliser. Someone has to pay,” he explained.
DKM, which was granted licence to operate as a microfinance company in 2013, has had its licence revoked after the central bank discovered that the company violated all regulatory rules governing operations in the sector.
Subsequently, in June last year, the regulator placed a 90-day moratorium on operations of the company and further went ahead to revoke its licence after an investigation by the Financial Intelligence Centre of the central bank indicated that the company at the time of the moratorium had a total deposit liability of GH¢115.2million, but had only GH¢10.8million in its accounts.
Additionally, a forensic audit commissioned by the central bank into the books of DKM established that the company diverted GH¢77.26million to subsidiary companies — DKM Mining Ltd., DKM Transport Ltd., DKM Shea Butter Ltd., DKM Gas Filling Station, and DKM Cement Depot Ltd.
According to Dr. Issahaku, since the sum of the money that were diverted and the funds in DKM accounts cannot offset the company’s liabilities to depositors, the central bank is looking to use the sale of assets to make up for the shortfall in compensating depositors without necessarily rewarding their actions.
“As you know, we are not going to reward the reckless behaviour of DKM customers. The other thing is to make sure that DKM is accountable for the losses of depositors, and that means they have to pay for it; and there is a process which requires that their assets are liquidated. Once you liquidate the assets, based on what you get, you use it to pay the liabilities.
“Now the challenge is establishing the true financial status of DKM — how much assets it has as against its liabilities as discovered in the books and how to verify the amount depositors claim to have lost; and all that is necessary before payment can be made to the depositors. So the Registrar-General’s Department – the official liquidator – has to establish that.
“And so PwC has been commissioned to undertake a forensic audit to establish the true financial position of DKM, and also validate the identities and original deposits as separate from accumulated interest payment of depositors.
“Once that is established – and registration of depositors have already started and will go on until the end of June – then payments can start, but the question is who is to pay?
“We have already made the point that the depositors’ funds will be paid from the liquidated proceeds of selling DKM assets…We discovered in the initial stages of the forensic audit there were some other assets that were not originally captured in the first audit we did internally, and so it may well be there are more assets than we think.”
The collapse of DKM, which has led to several thousands of people losing their funds, has become a toxic issue that threatens the financial system of the country with the President, John Mahama asking for the customers to be compensated in a year that the country goes to the polls.
The issue has also informed the central bank to sponsor a Deposit Protection bill to provide protection for the small depositor from the loss incurred as a result of an insured event occurring; and will support the development of a safe, sound, efficient and stable market-based financial system in Ghana.
Source: B& FT