The role of the banking system in the modern economic world cannot be overstated. Banks facilitate the flow of funds throughout the economy. Through the issuance of loans and credit, banks can help businesses and individuals access the capital they need to invest in new projects, purchase goods and services, and grow their businesses. Banks also act as intermediaries between savers and borrowers, allowing savers to earn interest on their deposits while providing borrowers with access to the funds they need. Banks also play a crucial role in providing financial services to individuals and households. Through checking and savings accounts, credit and debit cards, and other financial products, banks provide individuals with a safe and convenient way to manage their money. This can help individuals save for the future, access credit when needed, and make purchases and transactions with ease.
It is true that banks play a critical role in providing financial services that support economic growth and development, including providing loans and credit facilities to individuals and businesses. However, it is also important for banks to operate in a safe and sound manner, subject to effective regulatory oversight, to ensure they do not take on excessive risks that could jeopardize their financial stability and the wider economy.
The situation in Ghana highlights some of the challenges that banks face in balancing their role as providers of credit with the need to manage risk effectively. Many banks in Ghana have a significant portion of their investments in government securities and instruments, which may be seen as a relatively safe and stable investment compared to lending to private businesses. The 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 haircuts, which could lead to losses and potentially impact their ability to lend to private businesses.
The statistics from the Bank of Ghana shows that the banking sector's holdings of government securities have increased significantly. In December 2019, the sum of the banks' bills and securities investments climbed by 27% to GH48.45 billion. Similarly, bank investments in government instruments increased by 33.6% in 2018. Additionally, banks in Ghana held 30.6% of the total outstanding government bonds in 2020, compared to 17.2% in 2019. The data suggests that at the end of December 2019, commercial banks in Ghana had a largely skewed investment portfolio towards long-term debt instruments, with securities making up 68.2% of their investments. This is an increase from 66.5% in December 2018. Conversely, the proportion of short-term bills in total investments declined from 32.4% in December 2018 to 30.9% in December 2019. The trend is more worrying when compared to 2016 and 2017 figures. In 2016, banks’ investment in securities was 19.1% with 79% investment in bills. By 2017, banks’ investment in securities had climbed to 41.2% with investment in bills decreasing to 57.3%. This shift towards long-term debt instruments is consistent with the trend of banks investing more heavily in government securities, as these tend to be longer-term instruments that provide a steady stream of income over time.
The increase in investment in government bonds by commercial banks, other things being equal, means a decline in lending to the private sector. 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 the 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, where the government borrows more from the domestic market, reducing the availability of credit to the private sector. This could hinder private sector growth and job creation, which are essential for economic development.
It is also true that the Covid-19 pandemic has had a significant impact on the global economy, including in Ghana. The uncertainty and increased risk associated with default have made it more difficult for banks to make lending decisions. As a result, some banks have turned to investing in Government of Ghana securities, which are relatively safe and offer high interest rates. However, this strategy carries its own risks. As mentioned, any restructuring of the government's debt through bond swaps or zero-coupon bonds could pose liquidity problems for banks that depended on coupon payments. Additionally, by investing heavily in government securities, banks may have missed out on lending opportunities to individuals and businesses, which could have generated higher returns but also carried lower default risk.
To address these challenges, CDS Africa proposes the following action points.
- That 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 government securities may offer some degree of safety, it is important for banks to also consider that they may not be entirely insulated against risk as had been the case over the past years.
- That it is important for banks to have a diversified portfolio of assets and investments, rather than relying too heavily on any one type of investment. It is also important for regulators to ensure that banks are adequately capitalized and have effective risk management practices in place to mitigate the risks associated with their investments.
- That 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 the growth and development of the private sector, which is essential for long-term economic growth and job creation.
- The Bank of Ghana must ensure a balanced approach that supports both the growth of the private sector and the stability of the banking architecture. Such a measure is essential for sustainable economic development.
Dr. Frank Bannor
Senior Research & Policy Analyst
Dr. Abena Boateng
Director of Research