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Category: Previous Syllabus

ICAG Previous Syllabus, Level 1 - 3
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)

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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)

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  • 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.

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  • 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)

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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)

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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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Level 2 - Corporate Strategy, Ethics & GovernanceOrganizational missions & objectivesPrevious Syllabus

Nov 2017 Q1 c.

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:

Identify and explain FOUR critical success factors for the successful mobile money service operations                     (6 marks)

View Solution

Critical success factors for the successful mobile money service operations

  • Network reach – there is currently only 65% coverage of Ghana by the network operators. For effective remittances across the whole country, there must be expansion of network to unreached areas.
  • Network stability – stable network and zero-down time is a prerequisite for the confidence in mobile money solution. Customers may feel frustrated if the network is not stable. Network instability is one major challenge identified.
  • Product offering – continuous expansion of services offered on mobile money will guarantee its long-term profitability and success.
  • Mobile Technology Infrastructure – the mobile money runs on the mobile telephony technology provided by network operators without which mobile money solution would be impossible. Mobile money solution survival will depend on the survival of network operators.
  • Regulation – to protect customer’s money and build confidence stringent regulations have been called for and that has been put in place effective 1 December 2017. This will ensure long-term survival of mobile money operations in Ghana.

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Level 2 - Corporate Strategy, Ethics & GovernancePorter’s five forcesPrevious Syllabus

Nov 2017 Q1 b.

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:

Analyse the competitive environment of mobile money segment using Porter’s Five Forces.                                    (10 marks)

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Threat of New Entrant

  • Capital requirement – the minimum capital required by an agent is GH¢4,000 which appears to be reasonably within the reach of average Ghanaian. This may be deduced from the number of people joining as agent rising from 17,467 in 2013 to 93,376 in 2016 and projected annual rapid growth in the next 3 years.
  • New Legislation and KYC requirements – with introduction of new legislation and KYC requirements, some people who may have questionable record may not be allowed to operate mobile money. But this may not constitute serious entry barrier since once a person does not have any criminal record he/she can pass the KYC test.
  • Switching cost– since the mobile money appears to be standardised service and not differentiated it will not cost customers anything to switch from one agent to another hence new agents can always attract customers and will not constitute any significant entry barrier.
    From the above analyses entry barriers are generally low and this will make competition much keener as more new agents join the fray.
    Rivalry among existing agents
  • Number of agents – there are large number of agents and the number is increasing and therefore competition for customers is going to be very intense all things being equal.
  • Sector/industry growth rate – the mobile money service looks to be in growth stage. Given the number of agents joining the business one can assert that the segment is yet not at maturity or declining stage. With the potential for growth competition is likely not to be intense as compared to maturity or declining stage.
  • Pending implementation of mobile interoperability – successful implementation of intended mobile interoperability which will allow transactions across all the four networks, this is likely to intensify the competition among the agents.
  • Standard nature of service – the mobile money service is not differentiated in any way among the various networks. The fees charge is the same across the four networks hence this is likely to intensify competition since a customer can walk to any nearest point and get the service.
  • Low switching cost – due to low switching cost there will be intense rivalry among mobile money providers.
    Bargaining Power of Customers/Buyers
  • Self-service – the customers are able to do a number of mobile transactions by themselves including airtime purchase, transfer from one mobile wallet to another, pay utility bills etc. The only point that mobile money agents are most needed is where a customer wants to either put money on his or her wallet or physically withdraw from the wallet. This makes customers somehow power and effectively deny agents some fees.
  • Low switching costs – the customers really are not facing any switching costs hence mobile agents are at their mercy and can chose to transact business with any agent at any place of convenience. Perhaps to have repeated business the agents would have to do extra work to encourage customers to always return to them for business. This makes customers very powerful.
  • Access to many agents – the number of agents are increasing and it is projected to further increase. The gives the customer many alternatives and that makes the customer bargaining power very strong.
    Bargaining power of suppliers
  • Concentrated or Dominant or Few Suppliers – the main suppliers to the agents are the four network providers. These operators are large and can dictate the terms of the relationship. The agents are very small relative to the network operators. Again, most of the fees end up with the operators. Hence the operators are very powerful.
  • There are no alternatives/substitutes – the mobile money service was launched and is being operated by mobile network operators and are leveraging on their existing nation-wide infrastructure. There are no other companies that have nation-wide capability to deliver mobile money solution apart from the four network operators. This even makes the bargaining power of network operators very potent and veritable.
  • The agent group is not an important customer of the network operators group – the network operators core business is voice and data which make up the substantial source of revenue. Mobile money service is just ancillary to their main lines of business. This makes the bargaining power of suppliers still very strong.
    Threat of substitute products
  • Less attractive substitute services from banks – given less stringent KYC requirements of mobile money compared to higher KYC requirements, convenience of mobile money compared to the banks, increasingly mobile money services are more attractive. This make bank services as substitute less of a threat to mobile money.
  • Low/zero switching cost for customers – it does not cost customer to switch to mobile money for remittances and other transactions executable on the mobile money solution. This again makes banking services as substitute no threat to mobile money.

 

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Level 2 - Corporate Strategy, Ethics & GovernancePESTEL FrameworkPrevious Syllabus

Nov 2017 Q1 a.

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:
Assess THREE environmental factors faced by Excellence Telephone Service Ltd.                                                    (6 marks)

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Assessment of the macro-environment
The case study under consideration has a number of environmental influences or variables to be considered, including the following: Economic, Legal, and social-cultural factors.
Economic Factors
There are a number of economic factors in Ghana that pose serious threats to business operations and these include:

  • High interest rates – the interest rate regime in the country is high, second highest in the World. This means that businesses looking to raise debt capital would have to pay high cost and this can negatively affect businesses relying on debt.
  • Growing budget deficit – the increasing budget deficit coupled with the government heavily relying on domestic money and capital markets to make up for shortfall, the government is essentially competing with the private sector for limited credit. This will crowd out the private sector and push up cost of credit and this will deprive businesses of needed capital for investment.
  • Concerns raised by international financial organisations about the need for financial discipline. The government need to contain expenditure so as to reduce worsening budget deficit.
    Legal
    There are some issues that have legal underpinnings and these include the following factors:
  • Introduction of taxation – the introduction of taxes on the mobile money services will obviously increase the cost of doing business. For the agents to remain profitable as before the introduction of taxes they may be forced to increase the charges on remittances.
  • Law to regulate operations of mobile money– With the passage of new law the KYC requirements have been made stringent and this places higher burden on both the agents and operators. This to some extent is likely to limit the number of people who can do agency since if you have prior criminal record you may not be allowed to be an agent.
    Socio-cultural Factors
    A number of factors can be considered here:
  • Low Savings culture – there is generally low savings culture among the citizens of the Ghana. This has implication of capital formation and deposit mobilization by the financial sector. This limits amount of credit that will be available to deficit/spending units in the country.
  • Financial Inclusion – a sizeable number of the citizens of Ghana remained outside financial services sector. This could be one of the factors accounting for low savings culture in the country.
    Technological factors
  • Inadequate technological infrastructure – the mobile network operators have failed to match the growing subscribers and the attendant demands on the mobile infrastructure resulting in network instability as well as down time. This is impacting mobile money service negatively.
  • Innovation – 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.

 

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Agency ProblemsLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

May 2017 Q6 b.

Agency problems are inherent in static corporate structures. This conflict arises when separate parties in a business relationship, such as a corporation’s managers and shareholders, have disparate interests. Corporations employ several dynamic techniques to circumvent static issues resulting from agency problems.
Required:
Identify FOUR measures which shareholders may seek to resolve any agency problems that arise.                                (4 marks)

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  • One of the measures that can be taken to overcome this problem is the way of financial rewarding of the managers. The best way is to calculate their bonuses as a percentage of the realized profit of the company.
  • To resolve any agency problem and the development of the company, the external and internal audit is of the great importance to be made. It helps to evaluate the efficiency of the company, to detect and stop the eventually inefficient operations as well as to protect the assets and the capital. The most effective way in this situation is to engage external audits who would periodically value the reality and objectivity of the company’s financial reports. Precise financial reporting is critical to ascertaining that the results are stated fairly and the management has not manipulated results for personal gain.
  • Share options. This gives directors and possibly other managers and staff the right to purchase shares at a specified exercise price after a specified time period in the future. The options will normally have an exercise price that is equal to, or slightly higher than, the market price on the date that the options are granted. Options can be used to encourage cautious directors to take positive action to increase the value of the company – for the benefit of shareholders.
  • Performance-related bonuses. The performance-related elements of executive directors’ remuneration need to be carefully designed in order to ensure that the behaviours and actions that are promoted as a result of the targets are aligned with the long term success of the company and the interests of shareholders and at the same time are stretching. Remuneration incentives should be compatible with risk policies and systems and criteria for paying bonuses should be risk-adjusted. However, non-executive directors should not be remunerated by shares or other performance-related elements, since this will compromise their independence.
  • The threat of take over. Another market force is the threat of takeover by another firm that believes it can enhance the target firm’s value to restructuring its controlling, processes, and funding. The constant threat of takeover tends to motivate management to act in the best interest of the firm’s owner.
  • Annual General Meetings. AGMs are a means to engage shareholders and allow them to participate actively in the running of their companies. This way, agency problems would be reduced since shareholders are involved in the decision making regarding their companies.

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