Flow of Funds of Commercial Banks in the country is massively skewed towards investment in Government securities, foreign assets and balances with Bank of Ghana (BoG) to the detriment of credit allocation to the private sector.

The provisional figures for the second quarter of 2021 showed that the proportion of commercial banks’ funds allocated to investment in Government securities, foreign assets and balances with Bank of Ghana increased, while proportion of funds allocated to bank credit, and other assets decreased relative to that of the corresponding quarter in 2020.

According to the Bank of Ghana, the proportion of banks’ funds allocated to Government securities increased significantly to 53.9 percent in Q2 2021, up from 45.5 percent recorded in Q2 2020. The BoG attributed this to “an increase in the proportion of funds flow to investments in both short-term and medium- to long-term securities”.

The proportion of fund flows allocated to investment in short-term bills increased from 4.7 percent in Q2 2020 to 6.7 percent in Q2 2021, while the proportion of fund flows to investment in medium-to-long-term Government instruments increased from 40.8 percent to 47.2 percent over the same comparative quarters.

Similarly, BoG disclosed that the proportion of fund flows to foreign assets and balances with Bank of Ghana increased to 2.5 percent and 19.0 percent, respectively in Q2 2021 from 0.4 percent and 8.5 percent respectively in Q2 2020

Decrease in fund flows to bank credit

The BoG, in its Second Quarter Bulletin, highlighted that the proportion of fund flows to bank credit, however, decreased to 9.7 percent at the end of Q2 2021, from 23.6 percent in Q2 2020. This was also lower than the 11.4 percent recorded in Q4 2020 and 10.2 percent realized in Q1 2021. Similarly, the proportion of fund flows to other assets decreased to 14.9 percent in Q2 2021, from 22.0 percent over the same comparative period.

This demonstrates the continuous crowding-out of private sector investment due to the Commercial Banks’ growing appetite to hold government securities. Major international institutions, especially the IMF, have cautioned against this practice, which they believe, has devastating impacts on the growth of the economy.

Sources of funds for Banks

According to the BoG, deposits are the main source of funds for financing of banks’ assets. BoG revealed that the share of deposits in the sources of funds of commercial banks increased to 64.2 percent in Q2 2021, from 47.5 percent in Q2 2020. This compares with 89.0 percent recorded in the last quarter of 2020 and 82.2 percent in Q1 2021.

“The increase in flows from total deposit for the period under review, was due to increases in fund flows from both domestic currency deposits and foreign currency deposits”.
Bank of Ghana

The proportion of fund flows from domestic deposits increased from 36.2 percent in Q2 2020 to 48.6 percent in Q2 2021. Component analysis of flow of funds showed that demand, savings and time deposits all accounted for the increased flows from domestic currency deposits during the review period, the BoG stated.

Similarly, the share of funds from foreign deposits increased from 11.4 percent in Q2 2020 to 15.6 percent in Q2 2021. This signals increased use of foreign currencies in the country.