- Insolvency Law Leaves Depositors Dangerously Exposed – SEC Board Chair Warns
Ghana should urgently reconsider how depositors are treated when financial institutions collapse, with the Board Chairman of the Securities and Exchange Commission warning that the country’s existing insolvency framework does not adequately recognise the special position of people who entrust their savings to regulated institutions.
Dr Edwin Anani Ennin has questioned the creditor hierarchy under Section 107 of the Corporate Insolvency and Restructuring Act, arguing that depositors should not effectively find themselves close to the bottom of the repayment queue when a failed financial institution is liquidated. His intervention raises a wider question about whether rules designed for ordinary corporate insolvencies are sufficiently suited to institutions whose survival depends fundamentally on public confidence.
“Under the law, it’s like the depositors are only placed above shareholders, preference shareholders and ordinary shareholders,” Dr Ennin said. “That is how bad I think our law is, that it doesn’t give serious attention to depositors’ funds.”
The distinction matters because depositors are different from conventional investors. Shareholders knowingly provide risk capital in expectation of returns and accept that their investment may be impaired if a business fails, while ordinary depositors generally place money with financial institutions expecting safekeeping, access and regulatory protection rather than exposure to the institution’s underlying commercial risks.
Dr Ennin described deposits as essentially “trust money”, arguing that financial institutions assume a special responsibility when they accept savings from households and businesses. “If it’s a financial institution, I think that we should make the provision better to cater for the depositors who have given their money to you. Because that was, I call it trust money, and there’s an element of trust,” he said.
That trust is not merely a legal concept; it is one of the foundations of financial intermediation. Banks and other deposit-taking institutions mobilise savings and convert them into loans and investments, meaning confidence that deposited funds remain secure is critical to the functioning of the wider credit system.
Once confidence is damaged, the consequences can extend beyond a single institution. Depositors may withdraw funds, shift savings outside regulated channels or become reluctant to place money with financial firms, potentially weakening savings mobilisation and the pool of capital available for lending to businesses and households.
That is why Dr Ennin’s argument points towards a specialised insolvency regime for financial institutions rather than simply minor adjustments to the existing corporate framework. The collapse of a manufacturer or retailer can impose losses on creditors and employees, but the failure of a bank or deposit-taking institution can quickly transmit fear across the financial system.
Giving depositors stronger statutory priority would inevitably alter how losses are distributed. Creditors positioned below depositors would face greater exposure, potentially influencing the price and availability of funding supplied to financial institutions.
But that redistribution may be precisely what stronger depositor protection is intended to achieve. Sophisticated institutional creditors are generally better equipped to assess a financial institution’s balance sheet, capital position and risk profile than households and small businesses whose principal expectation is that regulated institutions will protect their savings.
Any reform would nevertheless have to be carefully designed alongside existing deposit-protection arrangements, prudential regulation and the resolution powers of financial-sector regulators. Depositor preference alone cannot substitute for effective supervision, adequate capital, early intervention and credible mechanisms for resolving institutions before their problems become systemic.
The issue carries particular weight in Ghana because the country has already experienced the disruptive consequences of financial-sector distress. Institutional failures can freeze working capital, delay access to savings and create wider economic costs that extend beyond the immediate creditors of a collapsed company.
Stronger insolvency rules could therefore serve two purposes. They could determine more clearly who bears losses after a financial institution fails while simultaneously strengthening public confidence before any failure occurs.
The larger policy question is whether insolvency law should remain concerned mainly with distributing the remaining assets of a failed company or whether, in the financial sector, it should also be treated as part of the architecture for maintaining financial stability.
Dr Ennin’s position strongly favours the latter approach. If depositors provide the funding on which financial intermediation depends, then their treatment in liquidation has implications for savings behaviour, financial inclusion, confidence and ultimately the cost and availability of capital across the economy.
Reform would not prevent financial institutions from failing. Dr Ennin himself acknowledged that distress and liquidation cannot be eliminated entirely from a market economy.
But the law can determine who absorbs the losses when failure occurs. For Ghana, that decision ultimately reflects a policy choice about whose claims the financial system considers most deserving of protection.
Dr Ennin’s argument is that depositors should no longer be treated almost like ordinary unsecured creditors waiting behind stronger claimants. If their savings constitute the “trust money” that allows financial institutions to operate, then protecting that trust should become a more explicit objective of Ghana’s insolvency regime.
