Harry Yamson Advocates Strict Enforcement of Single Obligor Rule Post-Debt Default
The Chief Executive Officer of Ishmael Yamson & Associates, Harry Yamson, has urged Ghana’s financial regulator and local banks to strictly enforce the Single Obligor Rule (SOR) on public sector lending in the aftermath of the country’s debt default and Domestic Debt Exchange Programme (DDEP).
According to him, adherence to this regulation, which limits a bank’s exposure to a single borrower or group of connected borrowers, is essential for financial stability and mitigating systemic risks.
Significance of the Single Obligor Rule
The SOR is designed to prevent financial institutions from excessive exposure to a single entity, thereby promoting credit risk diversification and prudent lending practices.
Ghana’s central bank guidelines stipulate that a bank’s exposure to a single obligor must not exceed a set percentage of its net worth.
This framework aims to safeguard the banking system from potential shocks.
Ghana’s Debt Challenges
Ghana’s economic struggles culminated in a debt default and the restructuring of GHS137 billion in domestic notes and bonds under the DDEP.
The programme was a pivotal step toward restoring debt sustainability and fostering economic recovery.
However, the process exposed vulnerabilities within the banking sector, particularly in public sector lending practices.
Key Arguments for SOR Enforcement
According to Mr Yamson, the need for enforcement of the SOR rule include;
- Risk Mitigation: The debt default underscored the dangers of excessive public sector lending. Enforcing the SOR would compel banks to diversify their portfolios, reducing the risk of significant losses.
- Financial Stability: Concentrated exposure to government debt left banks vulnerable during the restructuring. Adhering to the SOR would enhance their resilience to future economic shocks.
- Regulatory Compliance: The Bank of Ghana’s guidelines mandate SOR compliance to uphold sound banking practices and improve risk management.
- Private Sector Growth: Limiting lending to the public sector could encourage banks to extend more credit to the private sector, driving entrepreneurship and economic diversification.
Challenges to Enforcement
Challenges to the implementation of the SOR, Mr Yamson, however, asserts, may include the following;
- Implementation Challenges: Adjusting portfolios to comply with the SOR may be difficult, particularly for banks holding substantial government debt.
- Government Financing Needs: Strict enforcement of the rule could limit domestic borrowing options for the government, necessitating alternative funding mechanisms.
Path Forward
Given Ghana’s debt challenges and the vulnerabilities highlighted during the DDEP, enforcing the Single Obligor Rule on public sector lending is critical. This approach can safeguard the banking sector, mitigate systemic risks, enhance financial stability, and promote economic diversification.
While challenges remain, the rule’s benefits for sustainable development and long-term economic recovery outweigh its implementation difficulties.
