BoG urged to issue FSSF Bonds for financial sector stability
In a bid to tackle the pressing solvency challenges faced by financial institutions in Ghana, Dr. Richmond Atuahene, a distinguished banking consultant, has put forward a compelling recommendation urging the Bank of Ghana (BoG) to issue Financial Sector Stability Fund (FSSF) bonds. This proposal, developed in collaboration with financial analyst K.B. Frimpong, comes at a time when the government seeks to alleviate its fiscal burden while simultaneously facilitating the much-needed restructuring and recapitalization of local banks that have incurred losses through the Domestic Debt Exchange Program (DDEP).
Under Dr. Atuahene’s proposed framework, the losses incurred through the DDEP would be transferred from banks’ capital, where they are currently recognized in financial records, to the Financial Sector Stability Fund Secretariat Office at the apex bank. To fill the resulting capital shortfalls, the central bank would issue interest-bearing FSSF bonds, projected to yield an annual interest rate ranging from seven to nine percent. These bonds would have an initial statutory life of four years.
Elaborating on the mechanism, Dr. Atuahene emphasized the significance of this recommendation, stating, “By transferring DDEP losses from banks’ capital to the Financial Sector Stability Fund Secretariat Office, the burden on banks is alleviated. The issuance of interest-bearing FSSF bonds by the Bank of Ghana replaces the capital shortfall, ensuring a viable pathway for banks to recover and thrive.”
The issuance of FSSF bonds, according to Dr. Atuahene, would not only provide the much-needed capital support for the restructuring and recapitalization of eight local banks but also ease the fiscal burden on the government. Additionally, shareholders of banks would commit to repaying the Ghana Financial Sector Stability Fund within a four-year timeframe, thus underlining the shared responsibility between banks and the government in restoring stability to the financial sector.
To further incentivize banks to expedite the restructuring process, Dr. Atuahene proposed that banks be prohibited from distributing dividends and subjected to restrictions on risk exposures. Furthermore, they would be subject to enhanced monitoring if they fail to meet minimum capital adequacy ratios. Early recapitalization efforts would receive support from the Financial Sector Stability Fund, thereby creating a conducive environment for sustainable recovery.
The recommendation draws inspiration from successful international models, such as Greece’s state-sponsored recapitalization of banks during their debt restructuring in 2013. Furthermore, Ghana has previously implemented a similar model during a severe banking crisis in 1985. At that time, with support from the World Bank, the country established the Non-Performing Assets Recovery Trust (NPART) as part of the Financial Sector Adjustment Programme (FINSAP), which facilitated the restructuring and recapitalization of major state-owned banks.
Dr. Atuahene emphasized the need to build upon Ghana’s past experiences, including the successful implementation of FINSAP between 1988 and 1997, incorporating the lessons learned and international best practices into the current Financial Sector Stability Fund Program (FSSFP).
Amid growing calls for the Ministry of Finance and the Bank of Ghana to expedite the operationalization of the GH¢15 billion FSF fund, the proposal gains significance. This fund aims to provide capital support not only to the eight local banks that participated in the debt exchange program but also to state-owned banks, ensuring a comprehensive approach to addressing the challenges facing the domestic financial sector.
The solvency and liquidity issues plaguing Ghana’s financial sector have been fueled by a confluence of factors, including high inflation rates, currency depreciation, and inadequate financial policies. As the nation grapples with these complexities, Dr. Atuahene’s recommendation offers a strategic and forward-thinking approach to stabilize the sector, restore investor confidence, and pave the way for sustainable growth in the Ghanaian economy.
As stakeholders eagerly anticipate the response from the Ministry of Finance and the Bank of Ghana, the successful implementation of the proposed FSSF bonds holds the potential to reshape the financial landscape and foster a healthier and more resilient banking sector in Ghana, positioning it for a prosperous future.
