Banks must balance risks, rewards of investments -CDS Africa

Independent think tank, Africa Center for Democracy and Socio-economic Development (CDS Africa) have asked banks to carefully balance the risks and rewards of their investment and lending strategies, considering the speci c economic and market conditions in which they operate.

According to a Senior Research and Policy Analyst at CDS Africa, Dr. Frank Bannor, while government securities may o er some degree of safety, it is important for banks to also consider that they may not be entirely insulated against risk as had been the case over the past years.

He added that it is important for banks to have a diversi ed portfolio of assets and investments, rather than relying too heavily on any one type of investment. It is also important for regulators to ensure that banks are adequately capitalized and have effective risk management practices in place to mitigate the risks associated with their investments.

Further, he stated that the Bank of Ghana must pursue a deliberate policy of encouraging banks to increase their lending to the private sector, particularly to SMEs. In doing so the Bank of Ghana will be supporting the growth and development of the private sector, which is essential for long-term economic growth and job creation.

CDS Africa, in a press statement also called on the Bank of Ghana to ensure a balanced approach that supports both the growth of the private sector and the stability of the banking architecture. Such a measure is essential for sustainable economic development.

Background

The statement also revealed that banks facilitate the ow of funds throughout the economy. Through the issuance of loans and credit, banks can help businesses and individuals access the capital they need to invest in new projects, purchase goods and services, and grow their businesses.

Banks also act as intermediaries between savers and borrowers, allowing savers to earn interest on their deposits while providing borrowers with access to the funds they need. Banks also play a crucial role in providing nancial services to individuals and households.

Through checking and savings accounts, credit and debit cards, and other nancial products, banks provide individuals with a safe and convenient way to manage their money. This can help individuals save for the future, access credit when needed, and make purchases and transactions with ease, the statement noted.

Further, CDS Africa acknowledged that banks play a critical role in providing nancial services that support economic growth and development, including providing loans and credit facilities to individuals and businesses. However, they reckon, it also important for banks to operate in a safe and sound manner, subject to e ective regulatory oversight, to ensure they do not take on excessive risks that could jeopardize their nancial stability and the wider economy.

“The situation in Ghana highlights some of the challenges that banks face in balancing their role as providers of credit with the need to manage risk e ectively. Many banks in Ghana have a signi cant portion of their investments in government securities and instruments, which may be seen as a relatively safe and stable invest- ment compared to lending to private businesses. The government's debt restructuring exercise has highlighted the risks associated with such a strategy. If banks are too heavily exposed to government debt, they may be vulnerable to shocks or changes in government policy that could have a signi cant impact on their balance sheets. In the case of Ghana, the debt restructuring exercise may require banks to take haircuts, which could lead to losses and potentially impact their ability to lend to private businesses.” the statement captured.

The statistics from the Bank of Ghana shows that the banking sector's holdings of government securities have increased signi cantly. In December 2019, the sum of the banks' bills and securities investments climbed by 27% to GH48.45 billion. Similarly, bank investments in government instruments increased by 33.6% in 2018.

Additionally, banks in Ghana held 30.6% of the total outstanding government bonds in 2020, compared to 17.2% in 2019. The data suggests that at the end of December 2019, commercial banks in Ghana had a largely skewed investment portfolio towards long-term debt instruments, with securities making up 68.2% of their investments.

This is an increase from 66.5% in December 2018. Conversely, the proportion of short-term bills in total investments declined from 32.4% in December 2018 to 30.9% in December 2019. The trend is more worrying when compared to 2016 and 2017 gures. In 2016, banks’ investment in securities was 19.1% with 79% investment in bills. By 2017, banks’ investment in securities had climbed to 41.2% with investment in bills decreasing to 57.3%.

By Eugene Davies

This shift towards long-term debt instruments is consistent with the trend of banks investing more heavily in government securities, as these tend to be longer-term instruments that provide a steady stream of income over time.

The increase in investment in government bonds by commercial banks, other things being equal, means a decline in lending to the private sector.

This preference for investing in government bonds over lending to private businesses leaves much to worry about as a nation. It has the tendency of hindering the growth of the private sector and has a negative impact on economic growth and job creation, particularly in the small and medium sized enterprise (SME) sector.

This is because SMEs often have limited access to credit, and the reduction in lending by banks to the private sector may exacerbate this problem. Furthermore, the increased investment in government securities by banks may lead to a crowding-out e ect, where the government bor- rows more from the domestic market, reducing the availability of credit to the private sector. This could hinder private sector growth and job creation, which are essential for economic development.

It is also true that the Covid-19 pandemic has had a signi cant impact on the global economy, including in Ghana. The uncertainty and increased risk associated with default have made it more di cult for banks to make lending decisions.

As a result, some banks have turned to investing in Government of Ghana securities, which are relatively safe and o er high interest rates. However, this strategy carries its own risks. As mentioned, any restructuring of the government's debt through bond swaps or zero-coupon bonds could pose liquidity problems for banks that depended on coupon payments. Additionally, by investing heavily in government securities, banks may have missed out on lending opportunities to individuals and businesses, which could have generated higher returns but also carried lower default risk.