The central bank is envisaging tough times ahead for the banking sector, as Non-Performing Loans (NPLs) are set to rise further and banks’ capital is expected to be eroded due to the impact of COVID-19 – but it has also devised strategies to ensure a robust financial sector that will support economic planning.
Dr. Ernest Addison, Governor of the Bank of Ghana, noted that COVID-19 has brought a lot of pressure on the financial sector to support economic growth and in some cases, beyond their thresholds. “The economic impact of the pandemic may result in higher non-performing loans (NPLs) and some capital erosion for banks,” Dr. Addison said at the 2020 Chartered Institute of Bankers (Ghana) Annual Dinner.
According to the central bank’s latest Summary of Macroeconomic and Financial Data, the percentage of NPLs in the banking sector rose from 13.6 percent in January 2020 to 15.3 percent by October 2020.
Therefore, going forward, Dr. Addison said, the Bank of Ghana will be putting greater focus on identifying early warning signals and initiating prompt corrective actions to ensure the operations of commercial banks continue to be strong.
“The symptoms of a weaker bank are usually poor asset quality, lack of profitability, loss of capital, excessive leverage, excessive risk exposure, poor conduct and liquidity concerns. These symptoms could occur due to an economic downturn, but are often caused by inappropriate business models, poor governance, poor decision-making by senior management, and misalignment of internal incentive structures with external stakeholder interests. The Bank of Ghana will continue to strengthen all the regulatory measures implemented over the last three and half years to maintain confidence and safeguard financial stability,” he said.
To further strengthen the system, Dr. Addison added that in the pandemic’s aftermath, the regulator will have to follow a careful unwinding of countercyclical measures which have been implemented and allow the financial system to function without the regulatory forbearance that has been put in place.
He urged banks to be vigilant and upgrade their capabilities, and improve their governance and risk culture; an approach he is optimistic will build a robust, resilient and capable financial sector to support Ghana’s Beyond Aid Agenda.
Cleanup helped sustain BoG’s COVID-19 measures
The Governor stated that measures the central bank has outlined to fight impacts of COVID-19 pandemic on the economy have yielded positive results. According to him, the COVID-19 pandemic presented a major test to the banking sector’s resilience and robustness; however, the Bank of Ghana rose to the challenge with policy measures to protect the financial system and support the real economy.
“It is by providence that the financial sector clean-up was undertaken at the time that it took place heading into the pandemic. Ghana had turned its banking system around and restored confidence in the sector. All the financial soundness indicators, measured in terms of earnings, liquidity and capital adequacy showed significant improvement.
“We had put into place a framework to strengthen banks’ capital. The overall capital adequacy ratio for banks had increased to 20 percent, well above the regulatory requirement. The NPL ratio had declined from 21.3 percent at the end of December 2017 to 15.3 percent. Liquidity in the industry has improved and profitability has been on the uptrend,” Dr. Addison said.