Create Stability Fund to finance future banking reforms — CIB

Ms. Sappor

The central bank must create a stability fund and operationalise the Deposit Protection Act in order to maintain the gains made in the recent banking sector reforms, and to have a ‘ready-made’ fund for any future reforms, the Chartered Institute of Bankers (CIB) has said.

“It is paramount for the Bank of Ghana to come up with a funding mechanism or a stability fund for resolving failed banks without endangering the stability of the financial system, and without putting the burden on the taxpayer,” the institute said in an article titled ‘Post recapitalisation and its resultant effect on the Ghanaian banking sector’.

In an interview with the B&FT, Mrs. Patricia Sappor-President of the CIB, noted that operationalising the Deposit Protection Act and the creation of a stability fund that is financed by fines and penalties issued by the central bank on recalcitrant banks – and topped up with a percentage of the stabilisation levy charged on banks and other financial institutions – will provide the requisite funds for any future reforms without burdening the taxpayer.

“The current stabilisation levy the banks are paying is 5 percent of their taxable profit. Should this levy continue, a percentage of it should be allocated to stability of the financial sector via the stability fund. Should it be abolished, government could consider making an allocation into this fund from the total tax revenue paid by the banking industry.

“Also, the Ghana Deposit Protection Act, 2016 (Act 931) was enacted to provide a legal framework for banks and specialised deposit-taking institutions to insure depositors under a scheme operated by the Ghana Deposit Protection Corporation. Operationalisation of Act 931, which seeks to protect depositors’ funds, will in turn bring financial stability,” she said.

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So far, some GH¢12.1billion has been spent to secure the deposits of nine insolvent universal banks and 386 microfinance institutions, with an announcement for the savings and loans and finance houses imminent. Also, the process saw the establishment of Consolidated Bank with a stated capital of GH¢450million.

The reforms also led to creation of the Ghana Amalgamated Trust (GAT), which Ken Ofori-Atta – the Finance Minister, recently noted has provided funds to capitalise solvent indigenous banks that were struggling to meet the enhanced minimum paid-up capital.

The CIB further added one of the recapitalisation programme’s main advantages is that it has resulted in greater economic efficiency, in the form of lowering operational cost and boosting productivity of banks.

“Perhaps the greatest benefit associated with the recapitalisation programme lies in banks having the ability to leverage on opportunities to provide support for new market segments and businesses within the economy as more loanable funds become available. Small and Medium Scale Enterprises (SMEs) can be supported by banks to play important roles in transformation of the Ghanaian economy,” it said.

With capital adequacy ratio, liquidity and asset quality being key measures of financial soundness in the banking sector, the industry’s capital adequacy ratio was 21.9 percent in December 2018 as a result of the recapitalisation programme, which was against the capital adequacy ratio of 18.5 percent recorded in December 2017.

The sector, according to the Bank of Ghana, remains liquid – which implies that banks have sufficient funds to pay depositors when their investments mature. “The industry’s liquidity position improved to 28.4 percent in December 2018, mainly as a result of the recapitalisation programme. This guarantees confidence that banks can create new loans without having to call on the existing ones,” the CIB analysed.

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As a result of the loan-write off directive issued in June 2018 by the Bank of Ghana, asset quality in the banking sector generally improved while industry loans witnessed growth. The total assets of the banking sector stood at GH¢107.34billion at the end of December 2018, recording an annual growth rate of 14.7 percent as against the December 2017 growth rate of 13.3 percent.

The industry’s ratio of non-performing loans to gross advances improved to 18.2 percent in December 2018 from 21.6 percent in December 2017.  Also, credit allocation to the private sector grew from 5.6 percent in April 2018 to 19.8 percent in April 2019 – with the industry’s non-performing loans reducing to 18.9 percent in April 2019.

The CIB also noted that since the introduction of directives such as the Corporate Governance Directive and the Fit and Proper Test, governance structures of banks have been substantially improved.

“The improvement in the banking industry has created a platform for banks to positively impact on the Ghanaian economy. Banks are now in a better position to contribute to economic growth. We should continue to strive for a banking sector that is profitable and stable. Stability implies that banks can play their roles effectively and can withstand any shocks,” the institution not

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