RESEARCH WORKS in other countries have shown that these emotional effects have caused some users of financial services to lose their lives, abuse alcohol and psychological distress (Kaplan et al., 2015). These emotional effects can be described as a financial threat, which deals with the uncertainty regarding the use of current and future financial services by financial services users (Lisa et al., 2017).
This financial threat can affect individuals to change their financial behaviour. Available data indicate that over 101,958 Ghanaians have been affected by the scandals and revocation of licences of some financial institutions in Ghana (Ofori-Atta, 2018).
Causes Of The Ponzi Schemes And Revocation Of Licences Of Insolvent Financial Institutions In Ghana
DKM Diamond Microfinance Company Limited 2015 was suspended by the Bank of Ghana for failing to comply with terms and conditions stipulated in its licence, not having adequate assets to cover its liabilities to depositors, and offering high interest to investors, which was detrimental to the interest of the depositors of the company, violating statutory restrictions on exposures and setting up of subsidiary companies, which was against the restrictions of establishing subsidiary companies (GBN, 2016).
An audit conducted by the Bank of Ghana showed that DKM Diamond Microfinance Company Limited had a total deposit liability of GH¢115.24m against total cash of GH¢10.8m (Larbi, 2016). An amount of GH¢77.26m was also diverted to DKM Diamond Microfinance Company Limited subsidiaries (Eben, 2016).
Collapsing of some of the financial institutions resulted in the withdrawals of their operating licences. Some financial institutions collapsed as a result of poor corporate governance.
The board and senior management of these institutions fail to perform their functions well (Owusu, 2018). This paved the way for some management members to engage in activities that promoted their interests than promoting the growth of these financial institutions.
Some senior management members of the financial institutions such as the banks obtained loans from their banks, which they failed to pay, increasing the non-performing loans of the banks (Larbi, 2016). Board members of the collapsed banks failed to ensure that their banks followed the corporate reporting systems and external audit system.
Board of directors of these banks did not ensure the proper functioning of the risk management framework of the banks. Chief internal auditors of the collapsed banks contributed to the collapse of their banks. These auditors failed to report the wrongdoings of the executive directors of the banks to the board of directors of the banks (Owusu, 2018).
Non-performing loans also contributed to the collapse of some of the financial institutions. Non-performing loans were identified by the Bank of Ghana to be high on the balance sheet of the collapsed banks. The high non-performing loans increased the operating costs of the banks, reducing the profitability of the banks and tying up capital of the banks. These non-performing loans increased because of the increase in loans defaulted by borrowers. Loans were approved without due diligence and proper credit risk assessment (Afolabi, 2018).
Bank of Ghana’s lapses in regulating and supervising the banking system in Ghana also contributed to the collapse of the savings and loans companies, finance house companies, microfinance and banking institutions between 2015 and 2019. These lapses allowed the banks not to comply with the rules and regulations established by the Bank of Ghana. This resulted in vulnerabilities in the banking sector (Sarfo, 2018).
Some of the banks’ licences were withdrawn, because those licences were obtained under pretence. The Construction Bank was identified by the Bank of Ghana to have obtained its licence by false pretence, by using suspicious and non-existent capital. Capital Bank was also reported by the Bank of Ghana to have obtained their licence through pretence (Myjoyonline.com, 2018).
Menzgold’s licence was withdrawn by the Securities and Exchange Commission (SEC) in 2018, and preventing the company from trading in gold (Securities and Exchange Commission Ghana, 2018). The Securities and Exchange Commission found Menzgold in dealing in buying and deposit of gold collectables from the public, and entering into a contract with them. These contracts guaranteed customers high-interest returns. Menzgold offered these investment instruments without a valid licence from the Securities and Exchange Commission. The activities of Menzgold were in contravention of Section 109 of Act 929 of the Securities and Exchange Commission, which accounted for the withdrawal of their operating licence (Oka, 2018).
The reasons raised by the Bank of Ghana as the causes of the collapse of some of the banks in Ghana show that the banks failed not because of a bank run, whereby a large number of customers decide to withdraw their deposits due to the loss of the public confidence in the banking sector in Ghana and stock market failure, but because of the banks own mismanagement of their activities and regulatory failure (Owusu, 2018).
Ponzi Scheme
A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organisers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.
With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors’ cash out, these schemes tend to collapse.
Ponzi schemes are named after Charles Ponzi, who duped investors in the 1920s with a postage stamp speculation scheme.
Ponzi Scheme “Red Flags”
Many Ponzi schemes share common characteristics with these warning signs:
High returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
Overly consistent returns. Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.
Unregistered investments. Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.
Unlicensed sellers. Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
Secretive, complex strategies. Avoid investments if you don’t understand them, or can’t get complete information about them.
Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.
Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.
BY Kwabena Adu Koranteng