Banks lack strong risk strategies – CDS Africa


The Domestic Debt Exchange Programme (DDEP) has exposed the weak risk strategies of banks, civil society organisation Africa Centre for Democracy and Socio-Economic Development (CDS) Africa has said.

The debt restructuring exercise, it noted, has highlighted certain challenges faced by banks in balancing roles and managing risks effectively.

“Government’s debt restructuring exercise has highlighted the risks associated with such a strategy. If banks are too heavily exposed to government debt, they may be vulnerable to shocks or changes in government policy that could have a significant impact on their balance sheets. In the case of Ghana, the debt restructuring exercise may require banks to take hair-cuts, which could lead to losses and potentially impact their ability to lend to private businesses,” the research think-tank said in a statement.

In the statement signed by Dr. Frank Bannor and Dr. Abena Boateng, Senior Research and Policy Analyst and Director of Research respectively, CDS Africa said it is important for banks to carefully balance the risks and rewards of their investment and lending strategies, considering the specific economic and market conditions in which they operate.

While it is the case that government securities may offer some degree of safety, it said it is important for banks to also consider the dire effect that over-reliance on that may have on their balance sheets in times of policy changes – such as the current debt restructuring.

The consequence of this, the statement added, will render banks unable to support private businesses and also impact economic growth…with small and medium-sized enterprises (SME) being the most impacted.

“This preference for investing in government bonds over lending to private businesses leaves much to worry about as a nation. It has the tendency of hindering growth of the private sector and has a negative impact on economic growth and job creation, particularly in the small- and medium-sized enterprise (SME) sector.

“This is because SMEs often have limited access to credit, and the reduction in lending by banks to the private sector may exacerbate this problem. Furthermore, the increased investment in government securities by banks may lead to a crowding-out effect – whereby government borrows more from the domestic market, reducing the availability of credit to the private sector,” the statement further said.


Among the recommendations, CDS Africa urged banks to have a diversified portfolio of assets and investment rather than relying too heavily on any one type of investment. It is also of the view that regulators should ensure banks are adequately capitalised and have effective risk management procedures in place to mitigate the risks associated with their investments.

“The Bank of Ghana must pursue a deliberate policy of encouraging banks to increase their lending to the private sector, particularly to SMEs. In doing so, the Bank of Ghana will be supporting growth and development of the private sector, which is essential for long-term economic growth and job creation,” it further urged.

The statement also noted that data from the Bank of Ghana (BoG) show the banking sector’s holdings of government securities have increased significantly; adding that in 2020, for instance, banks in Ghana held 30.6 percent of total outstanding government bonds compared to 17.2 percent in 2019.

“The data suggest that at the end of December 2019 commercial banks in Ghana had a largely-skewed investment portfolio toward long-term debt instruments, with securities making up 68.2 percent of their investments.

“This is an increase from 66.5 percent in December 2018. Conversely, the proportion of short-term bills in total investments declined from 32.4 percent in December 2018 to 30.9 percent in December 2019. The trend is more worrying when compared to 2016 and 2017 figures,” CDS Africa said.

Measures to protect the financial sector

The Minister of Finance, Ken Ofori Atta – in his address to parliament on details of the debt exchange programme last week, assured of government’s willingness to protect and support banks and other financial institutions

He informed parliament of a Financial Stability Fund that is being established to cushion banks, pension funds and insurance companies, among others, to shore-up their liquidity.

“In addition, a Financial Stability Fund (FSF) is being established by government with the help of development partners to provide liquidity and solvency support to banks, pension funds, insurance companies, fund managers and collective investment schemes, to ensure that they are able to meet their obligations to clients as they fall due,” he stated.

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