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Finance perspective : OthersLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

Nov 2017 Q5 a.

During the past year, the management of Doncat Limited faced many challenges, including several customer complaints, loss of some key customers and a high level of employee turnover. At a meeting of the Board of Directors, the Chief Executive Officer presented a report on the financial performance of the company during the period and, in his closing remarks, he said, “Overall, we have done very well, notwithstanding the challenges we faced.” Some members of the Board were not happy with these remarks and accused him of doing a “partial evaluation” of the company.
Required:
i) Explain FOUR limitations of the use of financial measures for evaluating the performance of the company.             (6 marks)

View Solution

  • Financial analysis often measures past performance only and does not show what is happening currently.
  • It involves subjective judgments e.g. Positive or negative values or low and high values may mean different things for different industries or even organization.
  • Financial analysis also only talks about the financial health of the organization and not every aspect of its performance.
  • Comparing any two years may not reveal the true picture i.e. especially good or especially bad is unlikely to be repeated.

ii) Describe THREE financial measures and THREE non-financial measures that Doncat Limited may use to evaluate its performance.                                                                                                                                                                       (9 marks)

View Solution

Financial

  • Return on Capital Employed (ROCE)
    ROCE is used by companies to assess the value add by investing a certain amount of capital. It aims at ensuring the efficient use of capital. It is expressed as a percentage of profit earned over the capital employed.
  • Economic Value Added
    Economic Value Added (EVA) is used to assess ongoing performance of the organization. It helps managers to determine whether current policies are creating value. It is used to assess the company’s current position in terms of the value that has been created by the past and current strategies being employed. Basically, if a company achieves a positive EVA then the investment will have generated a surplus greater that the firm’s weighted average cost of capital and therefore created value for the shareholders. EVA = Adjusted profits after tax – (adjusted capital) invested capital x weighted av. Cost
  • Pay back
    Payback simply measures the number of years it will take to recover the original investment from net cash flows resulting from a project. Typically, it is used to make an investment decision that requires a choice between two or more projects. If the payback is the sole evaluation criterion, the company would choose the option which would result in the shortest payback period.
  • Net Present Value
    This approach is used to calculate the present value of projects. It is based on the principle that money received today is worth more than money received net year because of the opportunity to invest and consequently earn a return. There are three possible outcomes: where BPV is 0, there decision maker is indifferent. NPV is negative: The project will fail to generate sufficient funds to cover the cost of capital. NPV is positive: the project is likely to generate a return greater than the cost of capital. An investment may be considered.
  • Ratios (profit, sales, operational)
    There are three main types of ratios: Profit ratios, Sales ratios and Operational rations. Thus, ratios are used to measure profits, sales performance and the organizations ability to generate cash.
    Profit ratios: The main profit ratio is the profit margin which measures the amount of profit generated form sales. ie. Profit before interest + tax divided by sales turnover. Other profit ratios include profit generated from the use of assets (profit/net assets), gross profit generated from sales (gross profit/sales) and net profit generated from sales (net profit/sales)
    Sales Ratios: The main sales ratio is asset turnover ie sales/net assets. Other ratios used by firms involve sales turnover calculated as a ratio of: fixed assets, working capital or selling cost. All these ratios either tracked over time or compared against competitors or the standards set can give a company a measure of the efficiency of their performance in these areas.
    Operational Ratios: Operational ratios help a company assess its ability to generate cash on which to run the business. Without cash a company cannot operate its business, therefore the liquidity of the company and its amount of working capital will be regularly monitored. In these ratios the turnover periods in which cash will be generated are calculated, usually expressed in terms of days or how many times the business is exchanging cash.
    The main liquidity ratios are: Debt collection period: level of debt/sales turn over, Stock turnover period: average stock level/ total cost of goods, sold Creditors turnover period: average trade credit/ cost of sales Current ratio: current assets/current liabilities. Any increase in any of these ratios will warn the company that cash is being tied up in funding the work in progress.
    Non – Financial Measures
    There are many non- financial measures and the choice of an appropriate measure depends on the critical success factors that drive performance in the market/industry. Thus, if a critical success factor is superior customer value, level of customer satisfaction and level of customer loyalty may be key measures. Some of the common non – financial measures are:
  • Market share – measures the percentage of the total market that an organization controls. A high market share indicates that the organization occupies a relatively high market position as compared to the others.
  • Sales volume/ growth – a high sales volume suggests that the organization is doing well in terms of sales.
  • Customer loyalty – demonstrates the extent to which customers are willing to continue buying the organisation’s product/service. This reflects the quality of product/service and customer service provided by the organization.
  • Number of customer complaints – many customer complaints signify weak performance with regard to product/service quality, access to the products/services or challenges with the processes that customers have to go through.
  • Market image and awareness levels – the image of the organization or product and level of awareness signifies the effectiveness of the organisation’s promotional efforts and level of acceptance and usage of the product/service.
  • Employee motivation – the extent to which employees are willing to put in more efforts in their performance is an indication of how well the organization is treating them.
  • Employee turnover – measures of employee turnover (the rate at which employees leave the organization) signify the level of their satisfaction with conditions in the organization.

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Level 2 - Corporate Strategy, Ethics & GovernancePESTEL FrameworkPrevious Syllabus

Nov 2017 Q4 c.

Technology is one of the most powerful forces within the external business environment that has changed significantly how business is conducted especially within the 21st Century. For instance, information technology (IT), well exploited, can have significant impact on all the five forces of competition.
Required:
Identify FOUR effects of technological change on organisation.                                                                                      (4 marks)

View Solution

  • The type of products or services that are made and sold.
  • The way in which products are made (eg process automation, new raw materials)
  • The way in which goods and services are sold. The growth of direct selling via the internet has had a significant impact on the implementation of business strategy
  • The way in which markets are identified. Database systems make it much easier to analyse the market place.
  • The way in which firms are managed. IT encourages delayering of organisational hierarchies, homeworking, and better communication. Technology has also enabled greater integration between buyers and suppliers via the use of Extranets.
  • The means and extent of communications with external clients. The financial sector is rapidly becoming electronic – call centres are now essential to stay in business, online banking is becoming increasingly common, and the internet, smart phones and tablets are featuring in business plans.
                                                                                                                                                                                   (Any 4 points)

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Level 2 - Corporate Strategy, Ethics & GovernancePrevious SyllabusStrategic Mgt.

Nov 2017 Q4 b.

Awilo Holdings began as a small company which operated in the financial services sector of Ghana’s economy. Within the last ten years, the Board, which is chaired by the founder, Ms. Abigail Kyerewaa, has incrementally expanded into three more sectors of the economy, namely: telecommunications, logistics and real estate. Currently a conglomerate, Awilo Holdings has four different companies in its portfolio and has its corporate head office located within the capital city, Accra.
Required:
Explain the different levels of corporate strategy as it relates to Awilo Holdings.                                                             (6 marks)

View Solution

  • Corporate level of strategy
    At the apex level of strategic management in Awilo Holdings is the corporate head office located in Accra. The corporate level of strategy, which is the responsibility of the board of directors of Awilo Holdings, is concerned with the overall purpose and scope of the organisation and how value will be added to the different strategic business units.
    In Awilo, strategy and strategic management at the corporate level is expected to impact upon the whole organisation. Thus, all parts of the business operation should support and further the strategic plan. Specifically, the board of Awilo has the sole responsibility of determining which industries to involve the organisation. It is also expected that the board of Awilo will prioritize and manage the expectations of stakeholders. Finally at the corporate level, the board is expected to allocate or obtain corporate resources both for the present and the future.
  • Business-level strategy
    Business level strategy represents the second tier level of strategic management. In Awilo Holdings, business level strategy would refer to each of the particular and distinct combination of products and markets dealt with by each strategic business unit – in this case the individual firms that operate in the different sectors aforementioned. It is the responsibility of each of the corporate managers to translate the statements of direction and intent generated at the corporate level into concrete objectives and strategies for their respective business units. In essence, the corporate managers of each business unit determine how their respective firms will compete in the product-market arena.
  • Functional or operational level strategy
    This level is concerned with how the components parts of an organisation deliver effectively the corporate and business level strategies in terms of resources, processes and people. The functional level represents the third tier or the bottom of the decision-making hierarchy. The functional level in Awilo Holdings will be the operational areas for each of the business units such as Finance and accounting, human resource, marketing and sales, research and development functions. The managers at the functional areas are to develop annual objectives and short-term strategies that would implement the strategic plans of their respective business units. The focus of functional level managers is to do things right – i.e. be efficient.

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Corporate governanceLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

Nov 2017 Q4 a.

Boards of Directors are expected to manage companies effectively. However, corporate boards sometimes fail to manage companies effectively. Recent corporate scandals have highlighted key weaknesses of Board of Directors.
Required:
Explain FIVE common weaknesses of Board of Directors.                                                                                             (10 marks)

View Solution

  • Domination by a single individual
    A feature of many corporate governance scandals has been boards dominated by a single senior executive with other board members merely acting as a rubber stamp. Sometimes individual may by pass the board to action their own interests. Even if an organisation is not dominated by a single individual, there may be other weaknesses. The organisation may be run by a small group centred round the chief executive and chief finance officer, and appointments may be made by personal recommendation rather than a formal objective process.
  • Lack of involvement of board
    Boards that do not meet regularly or that fail to systematically consider the activities and risks of an organisation are clearly weak. Sometimes the failure to carry out proper oversight is due to a lack of information being provided, or the directors lacking the knowledge or skills necessary to contribute effectively.
  • Lack of supervision
    Employees who are not properly supervised by the board can create large losses for the organisation through their own incompetence, negligence or fraudulent activity.
  • Poor oversight of accounts and audit
    A lot of governance guidance has been concerned with defining effective internal control. Inevitably, many companies involved in scandals have had glaring weaknesses in internal control, weaknesses that have not been picked up by those monitoring control.
  • Lack of adequate control function
    An obvious weakness is a lack of internal audit. Another important weakness is lack of at equate technical knowledge in key roles, for example in the audit committee or in senior compliance positions. A rapid turnover of staff involved in accounting or control may suggest inadequate resourcing, and will make control more difficult because of lack of continuity.
  • Misleading accounts and information
    Often misleading figures are symptomatic of other problems but clearly poor quality accounting information is a major problem if markets are trying to make a fair assessment of the company’s value.
    The ultimate risk is of the organisation making such large losses that bankruptcy becomes inevitable. The organisation may also be closed down as a result of serious regulatory breaches, for example, by misapplying investors’ monies.
                                                                                                                                                                                    (Any 5 points)

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Corporate governanceLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

Nov 2017 Q3 b.

Sawaba Telco Ltd is a recently listed local company that is in the process of reorganizing its corporate governance structure to reflect its status as a public company. At the first board meeting after the listing, the board chairman raised the issue of setting up of sub-committees of the Board. The Board agreed to start with two sub committees which are Remuneration Committee and Audit Committee. The board chairman is unsure how the remuneration committee of the board should be composed, its functions and other related matters. As a corporate governance consultant, the board chairman has written to you for advice on various issues regarding the remuneration committee.
Required:
Write a report to the board chairman advising him of the following:
i) The composition of the Remuneration Committee. (3 marks)

View Solution

The remuneration committee should comprise of a majority of non-executive directors. The executive directors who are members of the committee should exclude themselves from deliberations concerning their own remuneration.

ii) THREE functions of Remuneration Committee. (3 marks)

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  • Establishing a formal and transparent procedure for developing policy on executive remuneration;
  • Ensuring that a proper system of long term and short term compensation is in place to provide performance oriented incentives to management;
  • Scrutinising executive contracts with a view to ascertaining any inordinate losses the corporate body may be liable to incur in the event of an early termination of services.

iii) THREE factors to be considered in the remuneration of executive and non-executive directors. (6 marks)

View Solution

  • Level of experience – the remuneration levels of directors should reflect experience and the level of responsibilities undertaken by the particular director concerned.
  • Exclusion of concerned director – the board as a whole should determine the remuneration of non-executive directors with the individuals concerned excluding themselves from deliberations of the matter.
  • Commitment of non-executive directors – the remuneration of non-executive directors should be fixed at a level that will ensure their commitment to the duties and obligations they are required to discharge.

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CSR StancesLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

Nov 2017 Q3 a.

Different organisations take different stance on corporate social responsibility (CSR), which will be reflected in how they manage such responsibilities. The stance taken normally reflects the extent of inclusion of stakeholders’ interests.
Required:
Explain each of the following CSR stance:                                                                                                                         (8 marks)
i) Enlightened self-interest;

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This stance of CSR involves with recognition of the long-term financial benefit to the shareholder of well-managed relationships with other stakeholders. The justification for social action is that it makes good business sense. An organisation’s reputation is important to its long-term financial success. Given that employees see it as important that their employer acts in a socially responsible manner, a more proactive stance on social issues also helps in recruiting and retaining staff. So, like any other form of investment or promotion expenditure, corporate philanthropy or welfare provision might be regarded as sensible expenditure. The sponsorship of major sporting or arts events by companies is an example.
The avoidance of ‘shady’ marketing practices is also necessary to prevent the need for yet more legislation in that area. Managers here would take the view that organisations not only have responsibility to their shareholders, but also a responsibility for relationships with other stakeholders (as against responsibilities to other stakeholders). So communication with stakeholder groups is likely to be more interactive than for laissez-faire-type organisations. They may well also set up systems and policies to ensure compliance with best practice (for example, ISO 14000 certification, the protection of human rights in overseas operations, etc.) and begin to monitor their social responsibility performance. Top management may also play more of a part, at least insofar as they support the firm taking a more proactive social role.

ii) Multiple stakeholder obligation.

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This stance of CSR explicitly incorporates multiple stakeholder interests and expectations rather than just shareholders as influences on organisational purposes and strategies. Here the argument is that the performance of an organisation should be measured in a more pluralistic way than just through the financial bottom line. Companies in this category might retain uneconomic units to preserve jobs, avoid manufacturing or selling ‘anti-social’ products and be prepared to bear reductions in profitability for the social good. Some financial service organisations have also chosen to offer socially responsible investment ‘products’ to investors. These include only holdings in organisations that meet high standards of social responsibility in their activities.
In such organisations responsibility for CSR may be elevated to board-level appointments and structures may be set up for monitoring social performance across its global operations. Targets, often through balanced scorecards, may be built into operational aspects of business and issues of social responsibility managed proactively and in a coordinated fashion. The expectation is that such a corporate stance will, in turn, be reflected in the ethical behaviour of individuals within the firm. Organisations in this category inevitably take longer over the development of new strategies as they are committed to wide consultation with stakeholders and with managing the difficult political trade-offs between conflicting stakeholders’ expectations.

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Accountants & EthicsLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

Nov 2017 Q2 b.

The International Federation of Accountants (IFAC) Code of Ethics discusses the need for professional accountants to be aware of and avoid conflict of interest situation as well as maintain independence in carrying out their professional duties. The professional accountant is exposed to several threats to independence, which are likely to lead to conflict of interest. A threat may arise where an assurance firm provides services other than assurance services to an assurance client.
Required:
i) Identify the specific threat a professional accountant or assurance firm faces by providing the following services:     (8 marks)

  • Preparing accounting records and financial statements;
  • Valuation services.

View Solution

  • Preparing accounting records and financial statements
    There is clearly a significant risk of a self-review threat if a firm prepares accounting records and financial statements and then audits them. On the other hand auditors routinely assist management with the preparation of financial statements and give advice about accounting treatments and journal entries. Therefore, assurance firms must analyse the risks arising and put safeguards in place to ensure that the risk is at an acceptable level.
  • Valuation services
    A valuation comprises the making of assumptions with regard to future developments, the application of certain methodologies and techniques, and the combination of both in order to compute a certain value, or range of values, for an asset, a liability or for a business as a whole. Audit firms should not carry out valuations on matters that will be material to the financial statements. If the valuation is for an immaterial matter, the audit firm should apply safeguards to ensure that the risk is reduced to an acceptable level.

ii) Suggest TWO measures each a professional accountant can take to minimize the threats identified in (i).                  (4 marks)

View Solution

Safeguards for preparing accounting records and financial statements include:

  • Using staff members other than assurance team members to carry out work
  • Obtaining client approval for work undertaken.
    Safeguards for valuation services include:
  • Second partner review
  • Confirming that the client understands the valuation and the assumptions used
  • Ensuring the client acknowledges responsibility for the valuation
  • Using separate personnel for the valuation and the audit

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Business ethicsLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

Nov 2017 Q2 a.

Apau Chemist Ltd is a company engaged in the manufacturing of various drugs for the local market. There have been series of ethical infractions within the company. Some top management have been accused of insider trading, bribing of some key staff of the regulatory authorities and attempts to cover up alleged distribution of expired drugs. There is total breakdown of ethical standards within the company. The board of directors have expressed grave concerns about the current happenings in the company. At its last quarterly meeting, the board resolved to engage the services of a corporate governance expert to help address the situation. The board understands that there are two major approaches to managing ethics in an organisation.
Required:
As a corporate governance expert, you have been engaged by the board to advise it on TWO approaches to the management of ethics in organisations.                                                                                                                                                       (8 marks)

View Solution

There are two approaches available to the board in its effort to resolve ethical issues in Persiba Chemist Ltd. These are Compliance-based approach and integrity-based approach. Each of these approaches are discussed below:
Compliance-based approach
A compliance-based approach is basically designed to ensure that the company acts within the letter and spirit of the law, and that violations are prevented, detected and punished. Generally, organisations faced with the legal consequences of unethical behaviour take legal precautions such as the following:

  • Follow laid down compliance procedure to detect misconduct on the part of any employee. The board should activate its compliance system by taking suspected employees through compliance procedures.
  • Institution of audits of various contracts within the company to unravel any unethical conduct by management.
  • Put in place whistleblower mechanism or systems to encourage employees to report unethical and criminal conduct/behaviour without fear of retribution.
  • Strict disciplinary procedures should be instituted to deal with transgressing employees.
    Integrity-based approach
    An integrity-based approach combines a concern for the law with an emphasis on managerial responsibility for ethical behaviour. Integrity-based approach strives to define company’s guiding values, aspirations and patterns of thought and conduct. When integrated into the day-to-day operations of the organisation, it helps prevent damaging ethical lapses, while tapping into powerful human impulses for moral thought and action. The company may pursue the following strategies:
  • Consciously building/inculcating ethical values and conduct into the culture of the organisation so as to become taken-for-granted assumption.
  • Regular ethical based training programmes for all levels of staff in the company.
  • Encouraging staff to whistle blow any unethical conduct and offering necessary protection for such staff.
    Incorporating serious ethical background checks in the recruitment process in order to weed out recruitment of unethical joiners.

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Competitive advantageLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

Nov 2017 Q1 e.

MOBILE MONEY SERVICE
Introduction
The government of Ghana has been concerned with low savings culture, low financial inclusion as well as high cash-based transactions in the country. In the year 2005, the government decided to pursue policies to grow the financial services industry (FSI) since it was indispensable to the accelerated economic growth required to make the country middle income country. The key service providers include banks, non-bank institutions, and mobile network operators (MNOs). By the close of 2017, 52% of the population would remained excluded from any form of financial services

There is generally high cost of credit in the country as the banks complain of difficulty in mobilizing deposits. Ghana is said to have one of the highest lending rates to the world, placing second in the latest ranking released by Trading Economics, a development which has been identified as a disincentive for the business community. The government budget deficit as a percentage of Domestic Product (GDP) decreased from 8.7% in 2010 to 8.5% in 2016 respectively. In the past, the government relied on external capital markets to fund the budget deficits but, following the worsening deficit figures, international financial organisations have raised concerns about the need for the government to ensure fiscal discipline.
The major development that revolutionized the FSI was the launch of mobile money solution in 2009 by the four MNOs. Mobile money rides on the backbone of the mobile telephony infrastructure of the mobile networks operators. This allows mobile money to be operated from wherever there is network coverage. It is estimated that there is 65% mobile network coverage in Ghana.
The MNOs deliver mobile financial services largely through thousands of registered mobile money agents throughout the country. This effectively makes agents closer to the customers than traditional banks and non-bank financial institutions. Most of the traditional banks’ branch networks are concentrated in the urban centres to the exclusion of peri-urban and rural communities. The combination of these two factors enables mobile money services to be administered quickly and efficiently, and in the most remote areas. The capital requirement for registration as mobile money agent is GH¢4,000 and the daily transaction limit is currently at GH¢5,000. On the average, agents operate one network mobile money, while very few agents have signed up to two or more different mobile money solutions. The total number of agents have increased from about 17,467 in 2013 to 93,376 as at close of 2016, and National Communication Authority (NCA) has projected rapid annual growth for the next three years (2017-2019).
The Environment
Mobile money started in the country largely with two products – airtime purchases and domestic remittances for small amounts. With the passage of time, mobile money service offerings have expanded to include bill payments, Point of Sales (POS) payments, fund transfers in increasingly larger amounts, and deposit collection by banks and non-bank financial institutions. The
expansion of the product offerings from mobile money makes it more appealing to a broad spectrum of mobile subscribers in the country. Customers are, therefore, keeping larger amounts in their wallets than they used to, and are using the expanding offerings from mobile money at the expense of existing products from the banks. There is growing mobile phone penetration rate as increasing number of mobile phone users are subscribing to more than one mobile network.
Furthermore, mobile money has become very popular among middle and lower income earners who make up about 80% of the population. The operation of mobile money on the handset is very easy and convenient and can be done from the comfort of one’s location. All that prospective mobile money customers require are a registered SIM card on the network of choice and a valid national ID. With these they can be set up and ready to use their mobile wallets within minutes. The processes for setting up and using bank accounts are however more complex due to stricter Know Your Customer (KYC) requirement by the Central Bank. Remittances through mobile money is instant at a fee of 1% of amount remitted or received. Mobile money transactions in Ghana reached GH¢679.17 million by the end of June 2016, according to the Bank of Ghana’s Payment Systems Department and it is expected to hit GH¢35 billion by the close of 2017. Until very recently, the income from mobile money was not taxed but the Minister of Finance in his 2017 mid-year review hinted of plans to impose a tax on the fees from mobile money operations.
The mobile money operations face the issue of network instability and system downtime as mobile network operators have not correspondingly expanded their infrastructure to match the growing subscribers. Sometimes, the agents are unable to meet cash demands of the customers due to mismatch in net remittances. This is more pervasive in the rural communities. Due to the weaknesses inherent in the issuance of valid Identity Cards (IDs), there are many fake ID cards and this has resulted in fraudsters having a field day. Some agents and customers have lost sums of money to fraudsters.
The customers and other players in the FSI have expressed concerns about their inability to carry out mobile money services across the various networks. Accordingly, the Central Bank has tasked its Payment Systems Department to ensure interoperability of mobile money across all networks in the country by June 2018. The government believes that mobile interoperability will deepen financial inclusion.
Regulation
Mobile money services it has operated without any regulatory framework. The industry players, according to a recent survey, suggested that the long-term survival of the mobile money service require stringent regulation. The Central Bank has now published guidelines for mobile money operators to be licensed as Dedicated Electronic Money Issuers (DEMI). The provisions include stringent KYC on the agents before registration, monthly returns on the activities of the agents, prosecution of the agents for mobile money fraud, etc. The mobile network operators are required to pay interest at the rate of 6% p.a. on the float on the mobile wallet.
Proposal
The Board of Directors of Excellent Telephone Service Ltd at a recent meeting discussed the possibility of opening a new unit to provide mobile money service to take advantage of the newly regulated industry. The Finance Director has presented a five-year estimates for the new venture as:

For taxation purposes, capital allowances will be available against the taxable profits of the venture, at 25% per annum on a reducing balance basis and in year 5 any balance would be granted as additional capital allowance. The rate of tax on taxable profits is 25% and tax is paid one year in arrears. The capital assets will have a zero-salvage value at the end of 5 years. The after-tax weighted average cost of capital is estimated to be 24% per anum.
Required:

Recommend THREE strategies which the Board of Directors could implement to give Excellence Telephone Service Ltd a competitive edge.                                                                                                                                                            (6 marks)

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  • Opening more sales points or outlets.
  • Giving promotional items to customers.
  • Operate with all the available mobile operators.
  • Embark on advertisements and publicity.

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Finance perspective : Investment AppraisalLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

Nov 2017 Q1 d.

MOBILE MONEY SERVICE
Introduction
The government of Ghana has been concerned with low savings culture, low financial inclusion as well as high cash-based transactions in the country. In the year 2005, the government decided to pursue policies to grow the financial services industry (FSI) since it was indispensable to the accelerated economic growth required to make the country middle income country. The key service providers include banks, non-bank institutions, and mobile network operators (MNOs). By the close of 2017, 52% of the population would remained excluded from any form of financial services

There is generally high cost of credit in the country as the banks complain of difficulty in mobilizing deposits. Ghana is said to have one of the highest lending rates to the world, placing second in the latest ranking released by Trading Economics, a development which has been identified as a disincentive for the business community. The government budget deficit as a percentage of Domestic Product (GDP) decreased from 8.7% in 2010 to 8.5% in 2016 respectively. In the past, the government relied on external capital markets to fund the budget deficits but, following the worsening deficit figures, international financial organisations have raised concerns about the need for the government to ensure fiscal discipline.
The major development that revolutionized the FSI was the launch of mobile money solution in 2009 by the four MNOs. Mobile money rides on the backbone of the mobile telephony infrastructure of the mobile networks operators. This allows mobile money to be operated from wherever there is network coverage. It is estimated that there is 65% mobile network coverage in Ghana.
The MNOs deliver mobile financial services largely through thousands of registered mobile money agents throughout the country. This effectively makes agents closer to the customers than traditional banks and non-bank financial institutions. Most of the traditional banks’ branch networks are concentrated in the urban centres to the exclusion of peri-urban and rural communities. The combination of these two factors enables mobile money services to be administered quickly and efficiently, and in the most remote areas. The capital requirement for registration as mobile money agent is GH¢4,000 and the daily transaction limit is currently at GH¢5,000. On the average, agents operate one network mobile money, while very few agents have signed up to two or more different mobile money solutions. The total number of agents have increased from about 17,467 in 2013 to 93,376 as at close of 2016, and National Communication Authority (NCA) has projected rapid annual growth for the next three years (2017-2019).
The Environment
Mobile money started in the country largely with two products – airtime purchases and domestic remittances for small amounts. With the passage of time, mobile money service offerings have expanded to include bill payments, Point of Sales (POS) payments, fund transfers in increasingly larger amounts, and deposit collection by banks and non-bank financial institutions. The
expansion of the product offerings from mobile money makes it more appealing to a broad spectrum of mobile subscribers in the country. Customers are, therefore, keeping larger amounts in their wallets than they used to, and are using the expanding offerings from mobile money at the expense of existing products from the banks. There is growing mobile phone penetration rate as increasing number of mobile phone users are subscribing to more than one mobile network.
Furthermore, mobile money has become very popular among middle and lower income earners who make up about 80% of the population. The operation of mobile money on the handset is very easy and convenient and can be done from the comfort of one’s location. All that prospective mobile money customers require are a registered SIM card on the network of choice and a valid national ID. With these they can be set up and ready to use their mobile wallets within minutes. The processes for setting up and using bank accounts are however more complex due to stricter Know Your Customer (KYC) requirement by the Central Bank. Remittances through mobile money is instant at a fee of 1% of amount remitted or received. Mobile money transactions in Ghana reached GH¢679.17 million by the end of June 2016, according to the Bank of Ghana’s Payment Systems Department and it is expected to hit GH¢35 billion by the close of 2017. Until very recently, the income from mobile money was not taxed but the Minister of Finance in his 2017 mid-year review hinted of plans to impose a tax on the fees from mobile money operations.
The mobile money operations face the issue of network instability and system downtime as mobile network operators have not correspondingly expanded their infrastructure to match the growing subscribers. Sometimes, the agents are unable to meet cash demands of the customers due to mismatch in net remittances. This is more pervasive in the rural communities. Due to the weaknesses inherent in the issuance of valid Identity Cards (IDs), there are many fake ID cards and this has resulted in fraudsters having a field day. Some agents and customers have lost sums of money to fraudsters.
The customers and other players in the FSI have expressed concerns about their inability to carry out mobile money services across the various networks. Accordingly, the Central Bank has tasked its Payment Systems Department to ensure interoperability of mobile money across all networks in the country by June 2018. The government believes that mobile interoperability will deepen financial inclusion.
Regulation
Mobile money services it has operated without any regulatory framework. The industry players, according to a recent survey, suggested that the long-term survival of the mobile money service require stringent regulation. The Central Bank has now published guidelines for mobile money operators to be licensed as Dedicated Electronic Money Issuers (DEMI). The provisions include stringent KYC on the agents before registration, monthly returns on the activities of the agents, prosecution of the agents for mobile money fraud, etc. The mobile network operators are required to pay interest at the rate of 6% p.a. on the float on the mobile wallet.
Proposal
The Board of Directors of Excellent Telephone Service Ltd at a recent meeting discussed the possibility of opening a new unit to provide mobile money service to take advantage of the newly regulated industry. The Finance Director has presented a five-year estimates for the new venture as:

For taxation purposes, capital allowances will be available against the taxable profits of the venture, at 25% per annum on a reducing balance basis and in year 5 any balance would be granted as additional capital allowance. The rate of tax on taxable profits is 25% and tax is paid one year in arrears. The capital assets will have a zero-salvage value at the end of 5 years. The after-tax weighted average cost of capital is estimated to be 24% per anum.
Required:

Determine the viability of the project using Net Present Value (NPV) technique and advise the Board of Directors whether to invest or not.                                                                                                                                                                      (12 marks)

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