The Chief Executive Officer of the Ghana Association of Banks, John Awuah, says commercial banks have been compelled by the current economic environment to tighten their precautionary measures in lending to customers.

In 2022, most banks reported significant losses on the back of the mark-to-market valuation losses on their respective holdings in the government of Ghana bonds following the implementation of the Domestic Debt Exchange Programme, DDEP.

Other losses were due to higher impairments on loans and rising operating costs.

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The Non-Performing Loans (NPL) ratio of banks in Ghana deteriorated to 18% in April 2023 from 14.3% in April 2022, according to a report by the Bank of Ghana. The Governor of the central bank, Dr. Ernest Addison made this known at the monetary policy committee meeting on Monday, May 22, 2023.

Speaking on PM Express Business Edition, the CEO of the Ghana Association of Banks, John Awuah, said banks have no choice but to be more cautious than they have been in the past due to the current economic environment, as commercial banks struggle more to recover loans.

“In our view, we have a strong industry that is ready to support economic activities. Of course, we have to also mimic the economic sentiments of the country. And therefore if things are not working very well economically in other sectors, you are definitely going to see this reflection within the banking system. And that is why we are very cautious and very careful in blowing the horn out of proportion. Yes, the banks are recovering, but there's a lot more we can do. We believe that the market rates must move in a direction that enables us to do more.”

"As it is now, if you are a bank and you're bullish on loans, you may be taking quite significant risks because where the market rates are, very good businesses can struggle during periods such as this. That is why we are all working to get the rates at the right place. Of course, we are cautious because we do not want to unduly leverage the balance sheet in a manner that you sanction loans today and tomorrow you are writing them off.”

The challenges notwithstanding, Mr. John Awuah maintained that good projects and deals will not be denied financial support.

“The industry wants to lend but in a more secure and safe manner that does not unduly open the industry to risks. And in times like this, you need to work with your bank closely so that your demands are better understood by the institution and perhaps the product delivery is made in a way that synchronizes with your exact requirements so you do not overburden yourself because in times like this, the tendency is to keep borrowing, but perhaps this is the time to really look at your liquidity profile to understand exactly what you need."

"We're not necessarily scaling back, we are just making sure that, the loans that are sanctioned are loans that you have a very good expectation of getting the money back. As for caution, it has always been part of the playbook of banks. We lend, but we lend with caution. It's not always just about giving the loans, it is also about advising the customer and asking 'Do you really need this loan now at this cost? Is there another financial product that perhaps you may have to explore?' So, it's also about engaging with the customers to ensure they have the capacity to pay back as well.”

The Ghanaian financial sector has been in severe distress, characterised by an insolvent banking system as a result of the domestic debt exchange in 2022.

Using the 16% discount rate for the Net Present Value calculation for government bonds, the Domestic Debt Exchange Programme losses of 22 banks stood at ¢37.7 billion with the private domestic banks and state-owned banks accounting for losses of ¢19.9 billion, while foreign-owned banks accounted for ¢17.8 billion.

The DDEP impairment losses have technically rendered some Ghanaian local-owned banks insolvent that would require additional capital support from shareholders or participate fully in the Ghana Financial Stability Fund.

According to the International Monetary Fund, IMF, Country report (23/168), the World Bank, other donors and the Government of Ghana were expected to provide GFSF of $1.5 billion equivalent in cedis to facilitate the build-up of capital buffers for qualifying banks.

The local or indigenous banks have already submitted their credible time-bound plans to rebuild capital buffers on a phased basis in line with timelines set in the country’s financial sector strategy. These recapitalised plans would have to be reviewed by the Bank of Ghana and finalized by banks for approval by the Bank of Ghana by the end of September 2023.

According to financial analysts, the present economic challenges may compromise the ability of individuals and businesses to pay their loans that would heighten the impairment levels.
This has consequential effects on banks, for example, as the liabilities of these agents’ form assets of financial institutions.