Banks in the country for the year 2020 borrowed over Ghs 2.57 billion from the Central Bank.
Loans taken by banks from the Central Bank was due to increased demand for cash by businesses as a result of the adverse impacts of the Covid-19 pandemic.
Credit from the Bank of Ghana (BoG) to banks as contained in the BoG’s Statistical Bulletin report, increased year-on-year from Ghs 872.96 million in October 2019 to Ghs 2.57 billion in October 2020, representing a 195 percentage points increment in liquidity support from the BoG.
Speaking on the subject in an interview, risk management expert Francis Owusu-Achampong, noted the BoG’s liquidity support to banks indicate how the coronavirus pandemic devastated the private sector and made it difficult for them to repay their loans thereby affecting the capital of banks and forcing them to go to the BoG for liquidity support.
“Certainly, it is a reflection of the havoc caused by COVID-19. Customers’ businesses have been devastated by lockdown and general depression. Just imagine the effects COVID-19 has had on specific sectors like the hospitality, aviation, entertainment, shipping industries which traditionally are cash cows. With heavily reduced operations, other sectors that fed on these have similarly had diminishing prospects. The effect has been difficulties in meeting loan repayments,” he stated.
“This automatically leads to high impairment provisions which significantly impact Capital Adequacy Ratios. The liquidity support is designed to ameliorate diminishing capital before they hit insolvency levels and create systemic crises. Note also, that costs of production have risen significantly across board due to high human capital costs, accelerated IT and other business continuity measures in the wake of dwindling revenue streams,” he added.
Also sharing his thoughts on the issue, former banker and chartered accountant, Stephen Asare, noted that the development does not mean the banking industry is in crisis but only reflects high demand for cash by businesses and households within the period under discussion.
“When it is getting to the last quarter, businesses have high demand for cash. The Bank of Ghana is the lender of last resort and so they come in temporarily to support the banks as and when needed. The data is just a reflection of businesses and households request for money. Banks are required by law to retain a certain portion of their deposits with Bank of Ghana.”
“And after depositing that money, banks must also have some in their vault to meet the withdrawal demands of customers. So if withdrawal demands increase and what you have in your vault is not enough, you can go to the central bank and ask for money. The liquidity support is usually not for the banks own use. It is driven by demand of customers of banks. So eventually that money oils the economy rather than impact on it negatively,” he stated.
“If however, it becomes a constant demand from banks to go to the central bank for liquidity support for a prolonged period of time, that will signal that something is happening in the industry that could impact the economy negatively. But on the face of it, it doesn’t raise any alarm when Bank of Ghana provides liquidity support to banks temporarily,” Mr Asare emphasized.
