Cash is king and the life-blood in affairs of a banking business. Banks create money by taking deposits from the public (savers) and giving them out as loans to borrowers (spenders) to earn income.
To sustain their businesses means that banks must mobilise more deposits from the public. In Ghana, the regulations allow only deposit-taking institutions – which include the universal banks, savings and loans companies, finance houses, rural banks and Tier-2 (two) microfinance institutions – to take funds from the public through a basket of products.
One of the products the institutions use to mobilise funds from the public to do their business is the investment account, which we usually call fixed deposits. As the name implies, it allows people to invest their money for a fixed period and earn interest on maturity. Even though customers have the right to terminate their fixed deposit investments on demand, a penal rate is applied for such an inconvenience to the deposit-taking institutions.
Like Oliver Twist, deposit-taking institutions – especially the banks – will always ask for more of such funds without being oblivious to anti-money laundering laws. In the case of Tier-2 (two) Microfinance Institutions, there is a limit to the fixed deposits they are allowed by regulation to take from a single customer.
Thus, Microfinance Institutions’ Business Operating Rule 37(4) states inter lia, “all deposit-taking MFIs shall not take a deposit from one customer which exceeds fifty thousand GH¢50,000 including outstanding balances or as may be determined by the Bank of Ghana from time to time”. Apart from the cap of GH¢50,000.00, the rules also enjoin the Tier-2 Microfinance Institutions in their liquidity management to maintain at least 10% of their total deposits representing cash at hand (in vaults), balances in current accounts, and call accounts with banks and other licenced financial institutions.
With regard to secondary reserves, the Microfinance Institutions are to keep at least 20% of same total deposits in the Bank of Ghana’s advertised securities, and savings deposits and fixed deposits with other financial institutions. Indeed, the underlying reason behind these reserves is to enable these institutions to have an adequate amount of funds to meet customers’ demands at all times, all things being equal. But what are the implications of the absolute cap on fixed deposits for Tier-two (2) Microfinance Institutions’ operations?
Clearly, by not allowing the MFIs to go beyond the cap, they are being denied the benefits of taking extra deposits from the same customers who have found their rates favourable and willing to do business with them. It also poses practical challenges for the institutions to decline fixed deposits above the limit from a customer, considering the fact that cash is their main resource. To navigate around such a limitation at this time when they need more funds to keep them afloat, many therefore tend to accept those funds as loans.
It is a fact that fixed deposits offer relatively cheap funds to the institutions, since the rates of interest normally paid on them are lower as against the high-interest rates the institutions pay when they accept the same amount of funds as loans. But the regulatory limit has become the push-factor to accept such funds above GH¢50,000 as a ‘convenient’ way to avoid breaching rule 37(4). They on-lend the funds with higher margins, and in effect make their loans more expensive, which culminates in defaults. By extension, their non-performing loans balloon even further.
What’s more, rule 37(4) indicates that the amount of GH¢50,000 may be determined or reviewed by the regulator from time to time. This means that the amount can either be decreased or increased at the regulator’s discretion. The reality is that it is tenable from the regulatory underpinnings to incline toward increasing it to give operators leeway to accept fixed deposits above GH¢50,000 from a single customer. In the same vein, one could also put forward a strong case that since the absolute cap is subject to review from time to time, it should instead be scrapped.
It is a statement of fact that we have identified moral hazard as one of the challenges in managing banking institutions in the country, and have therefore made efforts at strengthening regulation to safeguard sanctity of the sector. This is commendable, but the issue of an absolute cap on fixed deposits needs to be reconsidered. I humbly submit my opinion. Thank you for reading! God Bless!
This script was written by a Chartered Banker with a flair for feature writing. Apart from his work schedules, he edits or proof-reads corporate material for his colleagues, executive managers – including distinguished professionals working in various fields outside Banking. Through this column, his articles feature on third-party online media platforms in Ghana and outside.