GAB: Banks in good financial standing despite losses due to debt exchange programme
Ghana’s banking sector has reportedly remained strong in its financial position, despite facing losses due to the Domestic Debt Exchange Programme (DDEP), according to a recent assessment conducted by Dr. Richmond Atuahene and K B Frimpong. The analysis revealed that the banks are set to lose an additional ¢6 billion due to the reduced coupon rate and an extension of the maturity period from five to 15 years.
However, the President of the Ghana Association of Banks (GAB), John Awuah, has emphasized that the capital position of the banks remains robust, and the financial system has enough liquidity. Speaking on the Super Morning Show, Awuah stated that the situation was expected, and adequate measures were put in place to protect banks in the country.
He also suggested that the strong liquidity in the financial system could be attributed to the recent decision by the Bank of Ghana to hike the policy rate to mop up excess funds and control inflation. Furthermore, the central bank has implemented several measures to cushion commercial banks from the shocks caused by the debt exchange program, and the financial sector stability fund is also in place to support banks in lending to businesses and promoting economic growth.
Despite the measures taken, an analysis of the DDEP has shown that the 23 banks operating in Ghana are set to lose an additional ¢6.1 billion due to reduced coupon rates and an extension of the maturity period from five to 15 years. Dr. Atuahene and Mr. Frimpong’s liquidity gap analysis found that the banks would have generated positive cash flow of around ¢10.1 billion over the period, with the original coupon rate of 19.3% per annum. However, following the implementation of the DDEP, the reduced coupon rate and the extension of the maturity period will impact their earnings heavily.
The liquidity gap is a result of the drop in the average bond rate of 19.3% to a weighted average rate of 9% per annum, leading to a nominal negative liquidity gap of 10.3%. The liquidity gap is expected to worsen if the average customer deposit rate was around 10% per annum but later declined to a weighted average rate of 9% per annum. For instance, Bank A, with the bond value of ¢9,I06,452,000 and an average coupon rate of 19.3% per annum, would have had cash flow of ¢1,821,290,000. However, with the DDEP’s effective rate of 9% per annum, the cash flow is set to drop to ¢720,927,000, resulting in a liquidity gap of ¢1,100,363,000.
Despite the challenges faced by the banking sector, the Ghanaian government and the Bank of Ghana have taken various measures to ensure that the sector remains strong and resilient. The banking sector’s resilience is vital for promoting economic growth and ensuring the stability of the financial system. The government’s efforts to improve the business environment and attract foreign investment, coupled with the Bank of Ghana’s measures, will undoubtedly strengthen the banking sector’s financial position and boost economic growth in the country.
