The Bank of Ghana’s decision to set higher cash reserve requirements for commercial banks could impact negatively on credit to the private sector, a research led by Dr. Richmond Atuahene has revealed.

According to the Bank of Ghana March 2024 Monetary Policy Committee report, private sector credit growth by banks remained sluggish, with February 2024 showing a 5.1% increase compared to 29.5% growth in February 2023. Conversely, investments by banks in Government of Ghana (GOG) and Bank of Ghana (BOG) instruments surged to GH¢53.6 billion, marking a 67.6% year-on-year rise, contrasting with a 36.9% increase in the corresponding period of 2023.

The Central Bank at its last Monetary Policy Committee meeting in March 2024 announced an adjustment for the existing Cash Reserve Ratio of 15% with a now graduated ratio based on the existing loan to the loan-to-deposit ratio. They were banks with a Loan to Deposit ratio above 55% will have to meet a CRR of 15%, banks with a Loan to Deposit ratio between 40% to 55% will have to meet a CRR of 20% and banks with Loan to Deposit ratios below 40% will be required to hold a CRR of 25%.  

But the research by Dr. Richmond Atuahene (Banking Consultant), Isaac Kofi Agyei (Data & Research Analyst), and K.B Asante (Chartered Certified Accountant) warned of a probable banking sector crisis in the medium and long term as a result of this policy.

This situation, it explained, could ultimately result in the collapse, merger, and acquisition of commercial banks as a measure to safeguard depositors' funds.

“If the central bank decides to maintain the increase in the Cash Reserve Ratio, there's a high probability of another banking sector crisis emerging in the medium and long term. This situation could ultimately result in the collapse, merger, and acquisition of commercial banks as a measure to safeguard depositors' funds”.

BoG’s CRR has a notable flaw

The report also stated the BoG’s policy on the New Cash Reserve Ratios has a notable flaw in that it overlooked the GH¢50.6 billion worth of government bonds that were previously restructured during the Domestic Debt Exchange Programme (DDEP). These bonds constituted part of the commercial banks’ total deposits of GH¢224 billion, with customers' deposits being utilised for purchasing these government bonds.

Consequently, it said the Bank of Ghana should have considered the GH¢50.6 billion of bonds that were restructured before implementing the new, higher Cash Reserve Ratios; otherwise, it amounts to double accounting. The government bonds have a final maturity period in 2031.

BoG urged to reconsider reducing CRR

The report said while it can be beneficial for central banks to implement higher Cash/Primary Reserve ratios to control inflation and stabilise the local currency's value, excessive ratios can lead commercial banks to hold more cash with the central bank, thereby limiting their ability to lend.

Conversely, lower cash reserve ratios allow banks to maintain less cash with the central bank, boosting their lending capacity.

The report urged the Bank of Ghana to reconsider reducing the mammoth cash reserve ratios by taking into account the GH¢50.6 billion of customers’ deposits used to purchase restructured government bonds with an extended maturity period until 2031.

Furthermore, it wants the Bank of Ghana and commercial banks to exert significant effort to reduce the current Non-Performing Loan (NPL) ratio from 24% to around 10% to fortify the banking sector's resilience, adding, “a resilient banking sector encompasses more than just profitability; high NPLs can lead to poor capitalization among banks, liquidity challenges, and even insolvency for some institutions”.

Over the past two years, the private sector has suffered due to the government's overwhelming presence in the treasury bill market.

The report said to revitalize the private sector, authorities must focus on lowering short-term bill rates below 20% to foster competitiveness in the domestic market. Additionally, efforts should be made to curb the increasing diversion of credit from the private sector to the central government.