One of the proceeds of the untactical banking sector reforms

ONE of the things time does in human life is to expose the future consequences of our present decisions. This is what has happened to the NPP government over a policy they took on the financial sector in 2017.

In 2017, the NPP government took a firm decision that was titled “FINANCIAL SECTOR CLEAN UP” and ended up collapsing about 9 different banks, 23 different Savings and Loans companies, 386 different Microfinance companies, and 53 fund management institutions in the country.

With time, it has become clear that was and has been draconian to the Ghanaian economy to a level where a new tax has been introduced to sweep money from the pockets of Ghanaians to settle part of the debt.

According to an article published on the OXFORD BUSINESS GROUP website titled “Ghana’s banking sector clean-up has created a more sustainable industry”, the Bank of Ghana conducted an asset quality review in 2015 and 2016, and came out with a report that there were severe challenges with solvency, liquidity and asset quality in Ghana’s banking industry, with some banks showing significant under-provisioning and capital shortfalls. In response to this, the new administration led by Nana Akufo-Addo decided to salvage the situation by implementing regulations and directives to strengthen the sector and restore public trust in the financial sector.

Several regulations were put in place but the striking was the abnormal increase in reserves: a fraction of the banks’ deposits that are to be paid to the Bank of Ghana for the banks to be able to operate. The reserve is taken for safety purposes, after paying the

reserves, the excess deposit, or the surplus deposit is what the banks use to manufacture loans.

The new administration decided to raise the required reserves from GHS 120 million to GHS 400 million and instructed the banks to meet this requirement by 2018. This increased in required reserve led to some banks merging whiles 9 banks were collapsed because they could not meet the requirement at the stipulated deadline.

The financial sector clean-up did not only affect banks, it also affected savings and Loans companies, Microfinance companies fund managers in the country. Between 2017 to the end of 2018, about 23 different savings and Loans companies, 386 Microfinance companies, and 53 fund managers were collapsed, according to the NPP manifesto 2020 (page 14). Even though there are some improvements in respect of asset growth and profit in the sector, there have been negative trends in deposit growth, loan growth, and also cost of borrowing has increased substantially.

The relative comparison of the financial sector before the reforms and after the reforms indicates that there has been an improvement in the financial sector. An excerpt from Page 18 of the 2021 budget statement highlight reads that “The financial sector clean-up and the refund of monies to depositors have restored investor confidence and protected the hard-earned savings of millions of Ghanaians. But this has come at a huge cost of over GHs 21 billion to the Government. We, therefore, propose the introduction of a financial sector cleanup levy of 5 percent on profit-before-tax of banks to help defray outstanding commitments in the sector. The levy will be reviewed in 2024.”

From the above, even though the government boast of some improvement, it still admits that the policy has cost the Ghanaian economy abnormally. This matter of cost raises questions on the economic logic of the policy that: WAS IT ECONOMICALLY GOOD FOR SUCH A POLICY TO BE IMPLEMENTED?

From the side of the ruling NPP, they had stated in their 2020 Manifesto that “The alternative would have been millions of depositors losing their savings and over 10,000 individuals losing their jobs”. By using the word “ALTERNATIVE” instead of “ALTERNATIVES”, the NPP government implied that they did NOT have many policy alternatives to choose from and that ONLY ONE policy alternative existed contrary to what they…