BoG broadens scope of eligible collaterals for financial exposure computation by FIs
The Central Bank has issued a new directive that seeks to provide guidance and outline eligible instruments that maybe be held as “deductible” collateral in the computation of financial institutions’ financial exposure to borrowers.
According to the Bank of Ghana, under Section 156 of Act 930, financial exposure in relation to a bank, SDI, or Financial Holding Company (FHC) with respect to a person is the aggregate of:
a. the loans, advances, placements, and credit facilities including off-balance sheet obligations given to that person; and
b. the value of the holdings by that bank, SDI, or FHC of shares and debentures and other debt securities issued by that person.
The Central Bank in the directive titled “Eligible Collaterals Directive” noted ESLA bonds and Other Fixed Income Securities issued and listed on the Ghana Fixed Income Market and guaranteed by the Government of Ghana, are among the new instruments to be added to the existing eligible collaterals.
The existing eligible collaterals, the BoG notes in the directive are;
• cash
• lien on term deposit with the bank or SDI
• market value of Treasury Bills, government securities, bank securities and
• any other security of a similar nature approved by the Bank
Collaterals that are not eligible for financial institutions’ computation of financial exposure to borrowers include; landed property, motor vehicles, inventories, foreign sovereign debt securities, plant and equipment, among others.
Collateral in the lender-borrower relationship serves as a mechanism for mitigating the lender’s exposure to credit risk arising from information asymmetry that exists between the lender (creditor) and the borrower (also referred to as the obligor) by securely binding the obligor to agreed repayment terms and schedules.
The availability of collateral also conveys a positive signal to creditors, helping to alleviate problems that may arise from adverse selection and issues of moral hazard inherent in lending
Read details of the directive below:
Eligible Collaterals Directive 05 JUL 2022 by Fuaad Dodoo on Scribd