Accra, Ghana, August 13, 2018//- A renowned Ghanaian economist and Professor of the University of Cape Coast, John Gatsi says the liquidity support that Bank of Ghana (BoG) extended to some of the seven collapsed banks is not free money.
According to him, the BoG as the lender of the last resort has benefited from the liquidity support.
“Using Unibank as an example ,it means , while government and other State Institutions including BoG were indebted to Unibank of about one billion Ghana cedis (GHC1billion) with no plan to repay, Unibank was paying or supposed to be paying accrued interest to BoG.
So this issue about liquidity support is all about debtor – creditor relationship of which the purpose of the debt by Unibank and other Universal banks is to support liquidity position”.
Perhaps Borrowers and Lenders ACT may help address this issue and to present the picture that liquidity support is free money is inaccurate, Prof Gatsi stated.
“However, he misapplication of the loan called liquidity support especially to the personal benefits of directors and shareholders must not be taken lightly”.
Liquidity support to universal banks has become a common word after the ownership change in seven universal banks.
He explained: “The term actually means borrowing from the Central Bank and the purpose of such borrowing is to provide liquidity to banks to meet withdrawal by depositors and general financial intermediation.
This borrowing called liquidity support attracts very high rates normally at the policy rate to universal banks” .
It is structured for repayments every three months which generate interest income for the BoG. It is therefore very misleading to portray liquidity support as if it is free money to universal banks, Prof Gatsi stated.
“It is true that asymmetric information in banking and regulatory governance can lead to adverse selection and moral hazard for both universal banks and BoG. It is for this reason that proper credit governance is crucial”.
The BoG seems to assume that poor loan recovery and nonperforming loans are due to poor credit governance including improper assessments of loan applicants.
The huge grant of liquidity support (loan to universal banks by BoG) with the disappointing misapplication in some of the defunct banks means there is equally weak appraisal and “below the standard procedure” in granting request for liquidity support.
The BoG cannot be any different from the weaknesses demonstrated by the defunct banks. Should it be said that income generation from the grant of liquidity support is a great motivation , Prof Gatsi who is also the Head of Finance Department at the Business School of the University of Cape Coast questioned.
African Eye Report
