COVID-19 Crisis: The Fate of Ghana’s Fragile Banking Sector Lending

Governor of Bank of Ghana, Dr. Ernest Addison

Accra, Ghana, May 11, 2020//-The devastating effect of the tragic coronavirus disease 2019 (COVID -19) pandemic affects all aspects of human lives including businesses and the global banking sector is no exception.

 Ghana is one of the hardest hits in terms of bank lending because the banking sector in Ghana is fragile because ofthe recent Bank of Ghana (BoG) shake ups which resulted in the collapse of some of nine banks.

According to World Health organization (2020), the global statistics of the infected person hit a staggering figure of over 4 million confirmed cases of COVID-19, with over 283,000 deaths.

In Ghana, according to the Ghana health Service (2020), the total infected persons stood at 4,700 persons with 22 deaths – a condition many admitted has caused the world life and economy.

COVID-19 Effects on Banks’ Lending Decisions

The banks’ lending are affected because economic activities as whole are distorted and there are cuts in the flow of incomes of businesses and individuals who might have gone to these banks for loans for many purposes as a result of fear of catching the virus and the lockdown.

Also due to the “stay home” directives and the ban on social gathering which has been extended to the end of May 2020, most individuals and businesses who are customers of the banks are operating at minimum level.

The banks with the fear of whom the pandemic will carry away next, have curtailed their lending capacity. Funds which could have been channeled to lending are now diverted to human relief programmes by the banks to save lives.

Banks which are highly levered, that is, heavily dependent on deposit, or on Bank of Ghana support, or interbank support will be struggling under tremendous debt burdens since the already loaned monies will suffer repayment.

The potential effects are that, businesses which are heavily relied on bank lending will die off quickly and banks are prone to imminent closure if the pandemic lasts long especially the few microfinance houses left, unless the regulatory capital is released (Minimum Capital Requirement) to boost lending capacity of the banks.

The glut of non-payment of loans and the force rebate in terms of payment of reduced loans, and the holiday granted by the banks to borrowers not to pay as regularly as before affect the lending activities of the banks both in the short run and in the long run.

Again, the weaker banks are more vulnerable (banks which are heavily dependent on the Bank of Ghana and other banks for financial supports) since this can lead to their colonization by their creditors.

More generally, the umbilical cord between the bank and businesses when cut, the tendency of any of the banks surviving is slim because repayment becomes a problem because lending is the main core business of the banks.

The basic principle is that, if a bank cannot lend out loans to the business community and cannot honour depositors’ funds, it is better to close doors.

Frnacis Gamli–Dovene, CEO, FTMAS Consult Gh

Therefore, the banks are bound to suffer from the lending activities during this time and it will be more pronounced due to already exposed some of the banks are due to the recent clean up exercise undertook by the BoG.

Steps to Mitigate the Effect of Coronavirus on the banks and the way forward

According to Financial Outsourcing Solution (2020), loan portfolios, born out of lending typically have the largest impact on the overall risk profile and earning of banks more especially during this COVID -19 tragic period.Financial institutions are faced with tough times (Abbas of Klynveld Peat Marwick Goerdeler KPMG, 2020).

Immediately, the credit policies of the banks must be reviewed to suit the current COVID-19 conditions as economic activities are shrinking. This necessitates banks to critically look at their lending operations. Credit rating system should be vigorously pursued, and loan approval or authorization should be centralized the more.

Another step the banks can adopt to mitigate depends on technology to cater for their loans and repayment and they must examine closely the business continuity plans.

Banks should not at this time concentrate their lending and at the same time, they must do selective lending – those who are trusted over the years.

Therefore, the Ghanaian banks must leverage on digital operations, bolster cyber resilience, and mitigate third-party risks to still enjoy regular flow of stream of money from lending activities.

In a nutshell, the banks should review their credit policy immediately, centralized loan approval, revise the credit rating scheme to make informed decision, and leverage on technology to ensure regular flow of money through electronic system, and for those banks who are not technologically inclined, a  special taskforce team must be set up to undertake loan recovery.

Why banks Need Financial Assistance

This crucial time coupled with the already fragile banking environment as a result of the unexpected banking sector cleanup recently carried out by the BoG, the commercial banks need support from external source – preferably from the “Kinkon” -BoG,  the lender of Last Resort.

The businesses and the individuals depend on the banks for cash and without the banks, the economy may come to a halt and the impact of the recession will be more pronounced.

Banks provide direct and indirect jobs in any economy. Lending is the main productive operation of banks from which they make profit (Interest income).

The imminent economic recession associated with the COVID-19 pandemic puts banks in a rather difficult situation. So, they warrant financial assistance from the BoG because, they need to remain in business to maintain their staff and also save jobs downstream associated with the business community that depend on these banks for loan to financially power their activities.

Furthermore, financial intermediation is the process where the banks act as middle entity to the depositors who have surplus funds and the borrowers who has deficit fund to ensure that, the two parties (depositors and borrowers) are satisfied.

With the insurgence of the COVID-19, this function of the banks is distorted. The banks which heavily relied on depositors will face lending crisis – a situation that will have a telling effect on the Ghanaian Economy.

To ensure that this does not occur, the BoG needs to intervene to ensure smooth financial intermediation role by the banks. Lowering interest is only a short-term measure and this is not the way interest rate is used to spark economic activities. It must be thoughtfully and carefully planned to ensure continuity.

Financial sector by nature of their operations and the parameters set by regulation within which they must operate, and the strategic position they assume in an economy, and their daily support for funds for daily activities make them send sharp signals when something little is wrong.

Lack of funds because the banks cannot afford to lend to the investor community, the BoG should extend financial assistance to Ghanaian commercial banks at a reduced if not zero discount rate in order to prevent bigger looming danger.

To prevent any financial epilepsy in the economy, and to also avoid sending bad signals to the investor community, the BoG should act quickly to save the banking sector from eminent collapse with the many businesses that are hooked unto the banks by both foreigners and the indigenes thereby putting Ghana on map.

 Conclusion

COVID-19 caused a lot of havoc which are both financial and non-financial. The banking sector is even more pronounced due to the critical role they in an economy.

Many banks are curtailing their lending capacity because of myriads of risks they are exposed to especially at the COVID-19 pandemic period.

There is a looming credit crunch crisis and the banks need to strategize to mitigate their risk exposures. The BoG need to support the commercial banks at this crucial time to save the banks, save jobs and the entire business community in Ghana.

And the banks must leverage on technology to ensure smooth lending and repayment. The BoG needs to increase intervene to commensurate with the effect of the tragic pandemic to also ensure sound financial intermediation and save jobs.

We need badly these financial institutions even after CoVID-19 because government already is saddled with financial problems; and because election is going to divert serious attention to real solving of economic problems.

By Frnacis Gamli–Dovene, CEO, FTMAS Consult Gh

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