BoG clean up responsible for banks’ resilience to COVID-19 shocks – Consultant

A banking consultant, Nana Otuo Acheampong  has said the financial sector cleanup carried out by the Bank of Ghana, is responsible for the resilience of banks amidst the COVID-19 pandemic.

A new report by the Bank of Ghana has established that even though banks have been resilient to shocks amidst the COVID-19 pandemic, the same cannot be said for Specialized Deposit-Taking Institutions such as Savings and Loans Companies and Microfinance firms.

Nana Otuo Acheampong told Citi Business News the capital base of the 23 banks in the country have become stronger than all 317 Specialized Deposit-taking Institutions (SDIs) put together.

This he says can be credited to the financial sector clean-up which saw the revocation of licenses of nine commercial banks aside from the twenty-three insolvent savings and loans companies and finance houses, and the 347 microfinance firms that were also declared insolvent.

“The capital base of the Banks is now stronger than the others put together. The Bank area is where the regulator has reformed and increased their capital base from 70 million to 400 million. The rest, their capital base is relatively small so when it comes to banking, people tend to flock to the those who have bigger capital base”.

The report showed that the robustness of the Specialized Deposit-Taking Institutions sector was negatively affected by the adverse impact from the COVID-19 spread. For instance, the Specialized Deposit-Taking Institutions sector showed constrained liquidity conditions and capital shortfalls.

And according to Otuo Acheampong, “ The other factor, which goes against the principle of banking where we say that “Banking is based on the Law of Large numbers’, that is to say that more people will deposit than withdraw, but we see the reverse in the non-universal banking sector (SDIs) but the withdrawals there are relatively higher as opposed to deposits, while with the universal Banks, the deposits are relatively higher because people feel more secure. They can see that the banks have the capital to withstand any immediate shock in terms of liquidity and credit.”

As people increased withdrawals as against deposits during the first few months of the pandemic, Nana Otuo Acheampong believes liquidity risks await some of these SDIs if the Covid-19 situation persists.

“People are withdrawing the cash, and because those people who bank with SDIs usually live from hand-to-mouth like market women, traders and so on, they need access to cash more than those who put their monies with the banks, that is, medium to large corporate entities,” he explained.

A liquidity stress test conducted by the Bank of Ghana indicated a decrease in the survival rate of the Specialized Deposit-Taking Institution sector over time.

Source: Citibusiness