The moderating effect of board governance on credit risk management effectiveness in Ghana’s financial sector

By Selassie Isaac ISRAEL, Doctoral Student, Business Administration

Abstract
In the wake of Ghana’s landmark 2017-2019 financial sector clean-up, which saw the collapse of nine universal banks, the critical role of board governance has moved from theoretical discourse to regulatory imperative. This article investigates the moderating effect of board governance on credit risk management (CRM) within Ghanaian financial institutions.

It assert that the presence of sophisticated CRM frameworks alone is insufficient to ensure portfolio resilience rather, it is the quality, expertise, and independence of the board of directors that actively moderates strengthening or weakening the translation of these frameworks into tangible risk outcomes.

Drawing on empirical studies, regulatory directives, and case analyses from Ghana’s recent crisis, this article delineates the mechanisms through which governance acts as a critical catalyst. It concludes that for Ghana’s stabilized sector to achieve sustainable growth, a relentless focus on substantive not just structural board effectiveness is non-negotiable.

Keywords: Corporate Governance, Credit Risk, Board of Directors, Non-Performing Loans, Bank of Ghana, Financial Sector Clean-up, Risk Committee, Ghana.

1. Introduction: The Ghanaian Conundrum

Ghana’s financial sector, lauded for its innovation and depth in West Africa, has been paradoxically plagued by persistently high non-performing loans (NPLs) and systemic fragility. The spectacular failures of institutions like Capital Bank and UT Bank revealed a disturbing truth, many possessed seemingly adequate credit policies and risk management manuals. The fatal flaw lay not in the design of their credit risk management systems, but in the failure of oversight at the highest level the board of directors.

This article explores the critical concept of moderation in this context. It moves beyond the direct relationships (e.g., “good governance lowers risk”) to analyze the conditional relationship:

How does the strength of board governance influence the effectiveness of a financial institution’s credit risk management practices?

In simpler terms, does a strong board make a good credit risk system work even better, while a weak board renders it impotent?

The analysis is framed by Ghana’s unique institutional landscape characterized by concentrated ownership, relational business networks, and a proactive post-crisis regulator in the Bank of Ghana (BoG). Understanding this moderating effect is essential for directors, regulators, investors, and academics seeking to fortify the foundations of Ghana’s financial system.

2. Theoretical Framework: The Board as a Moderating Catalyst

Theoretically, the board’s role stems from agency theory and resource dependence theory. The board acts as an agent for shareholders and other stakeholders to monitor management (agents), ensuring that credit decisions align with long-term solvency rather than short-term profit chasing. As a moderating variable, board governance does not operate in isolation. It intervenes in the causal pathway between an institution’s CRM inputs (policies, models, committees) and its credit risk outputs (NPL ratio, loan loss provisions).

The Moderated Relationship:

A high-quality board leads to a low credit risk. This relationship is enchance through vigilant oversight, expert guidance, and cultural influence. A weak or passive board, conversely, severs the link, allowing managerial discretion to override formal systems.

3. Mechanisms of Moderation in the Ghanaian Context

3.1. Oversight vs. Ceremony: The Risk Committee Imperative

The BoG’s 2018 Corporate Governance Directive mandates a Board Risk Committee (BRC) for all banks. Yet, the moderating power lies not in its existence but in its functionality. A diligent BRC, with a clear charter and regular, substantive meetings, ensures that high-risk credit concentrations, sectoral exposures, and collateral adequacy are not just reported but rigorously challenged.

• Evidence:Research by Mensah et al. (2021) on failed banks revealed that BRC meetings were often “ceremonial,” with poor attendance and a rubber-stamp culture. This failed moderation allowed aggressive lending to connected parties and risky sectors to proceed unchecked. In contrast, surviving banks with active BRCs were better at enforcing risk limits, thereby making their CRM systems effective.

3.2. The Quality of Independence: Beyond the Paper Compliance

The BoG directive requires a majority of non-executive directors. However, Ghana’s business environment, with its strong familial and social ties, poses a challenge to substantive independence. A director may be legally “non-executive” yet psychologically aligned with a dominant shareholder or CEO.

• Evidence:Adusei & Obeng (2019) note that true independence is a scarce commodity. Their findings suggest that where substantive independence exists, it significantly strengthens the enforcement of credit approval hierarchies and conflict of interest policies. The moderating effect is strongest when independent directors possess the courage and contextual knowledge to question large, unusual, or insider transactions.

3.3. Contextual Expertise: Understanding the Ghanaian Borrower

Credit risk in Ghana is deeply intertwined with macroeconomic volatility (currency depreciation, inflation), informality, and land tenure complexities. A board member with international banking credentials but no understanding of Ghana’s agricultural cycle or the realities of SME cash flows is ill-equipped to oversee credit risk effectively.

• Evidence:Amoah et al. (2022) found in rural banks that board financial expertise specific to microfinance and community banking was a powerful moderator. It enabled boards to tailor CRM policies like grace periods for farmers or alternative collateral that were both prudent and practical, thereby reducing defaults. This expertise turns generic CRM from a compliance document into a living, effective strategy.

3.4. Ownership Structure: The Ultimate Moderator of the Moderator

The moderating power of board governance is itself moderated by ownership. In a bank controlled by a single individual or family, the board’s ability to objectively oversee credit decisions, especially to related parties, is severely compromised.

• Evidence:Bokpin & Isshaq (2018) provide robust evidence that ownership concentration weakens board effectiveness. Their study implies that in such settings, the formal CRM framework and the board become parallel structures to legitimate “skinny lending” (insider lending), completely nullifying any risk-mitigating effect. The board’s moderating role is activated only when ownership is sufficiently dispersed or when regulators aggressively police related-party transactions.

4. The 2017-2019 Crisis: A Case Study in Failed Moderation

The financial sector clean-up serves as a natural experiment. Failed banks shared common traits:

1. CRM Facade:They had credit policy documents and risk management titles.
2. Governance Collapse:Their boards were characterized by:
   • Absenteeism:Poor meeting attendance.
   • Dominant CEOs/Shareholders:Boards were subservient.
   • Lack of Risk Expertise:Inability to understand the risks of complex treasury and loan portfolio activities.
3. Result:The moderating link was broken. CRM policies were ignored, leading to fatal asset-quality deterioration.

The BoG’s license revocations were in essence, a regulatory intervention to reset this moderating mechanism by imposing strict new governance standards on the remaining institutions.

5. The Path Forward: Building Boards That Truly Moderate

For Ghana to solidify its financial stability, the focus must shift from form to substance in board governance:

1. Competency-Based Appointments:Regulators and shareholders must prioritize demonstrable risk and sector-specific expertise over prestige or connections.
2. Empowered Risk Committees:The BRC must have direct access to risk data, independent consulting budgets, and a mandate to escalate issues directly to the full board.
3. Continuous Director Education:Mandatory training on Ghana’s evolving economic landscape, cyber risks, and climate-related credit risk.
4. Stakeholder-Active Regulation:The BoG must continue its assertive supervision, penalizing boards for poor oversight as vigorously as it punishes capital deficiencies.
5. Conclusion

The journey toward a resilient Ghanaian financial sector is inextricably linked to the quality of its corporate boards. A sophisticated credit risk model is merely a tool, a vigilant, expert, and independent board is the skilled artisan who wields it effectively. The moderating effect of board governance is the unseen circuitry that connects policy to performance. As Ghana’s financial sector rebuilds, fostering boards that actively and intelligently moderate credit risk management is not just a best practice, it is the foundational pillar of sustainable trust and growth. The lessons from the past decade are clear that when governance moderates effectively, institutions thrive and when it fails, they collapse.

References

1. Adusei, M., & Obeng, E. Y. T. (2019). Board independence and bank risk-taking in Ghana. Journal of Financial Regulation and Compliance.
2. Amoah, B., Korankye, T., & Asiamah, A. (2022). Board financial expertise and credit risk in Ghanaian rural banks. Cogent Business & Management.
3. Bank of Ghana. (2018). Corporate Governance Directive for Banks.
4. Bokpin, G. A., & Isshaq, Z. (2018). Ownership structure, corporate governance and credit risk in Ghanaian banks. Journal of Financial Economic Policy.
5. Kyereboah-Coleman, A. (2012). Corporate governance and bank performance in Ghana. Journal of Business and Policy Research.
6. Mensah, E., Boateng, F. O., & Adu, D. A. (2021). Corporate governance and bank failure in Ghana: A qualitative analysis. Journal of African Business.
7. Securities and Exchange Commission, Ghana. (2020). Corporate Governance Guidelines for Listed Companies.

 

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