The Bank of Ghana (BoG) has urged Development Finance Institutions (DFIs) to grant foreign currency loans to ONLY foreign currency earners and not engage in trading of foreign currency.
According to BoG, the aggregate foreign currency borrowing of a DFI should not exceed 75% of its regulatory capital at any given time.
This was contained in an exposure draft requirement for Development Finance Institutions released by the Bank of Ghana. The Exposure Draft sets out the Bank of Ghana’s proposed prudential requirements for Development Finance Institutions.
Following the passage of the Development Finance Institutions Act, 2020 (Act 1032), the Bank of Ghana initiated measures towards operationalizing the relevant sections of the Act to give full effect to its provisions. In this regard, the BOG developed the prudential requirements to guide the operations of DFIs pursuant to sections 21, 28, 84 and 85 of Act 1032.
BoG therefore, called for inputs from the general public before the final requirements for DFIs operating or which seek to operate in Ghana are published.
“The Bank of Ghana invites feedback on the proposed prudential requirements, including suggestions on areas to be clarified or elaborated further and alternative proposals that BOG should consider. The responses should be constructive and supported with clear rationale and appropriate evidence. Where appropriate, please specify the applicable section and provide examples and illustrations”.
Bank of Ghana
Capital Adequacy and other Requirements
In terms of capital adequacy requirements, BoG’s draft stated that a Development Finance Institution (DFI) shall maintain at all times, a risk-based Capital Adequacy Ratio (CAR) of not less than 10% which must be computed in accordance with the methodology as specified by the Central Bank.
BoG further explained that the eligible capital for the computation of CAR shall be the regulatory capital which is the sum total of Tier I Capital and Tier II Capital as defined by Act 1032 with the appropriate adjustments. The draft clearly specified the qualifying criteria for Tier I Capital and Tier II Capital. However, BoG warned that Tier II Capital must not exceed 100% of Tier I in accordance with Basel I capital accord.
Furthermore, BoG noted that DFIs must maintain a Net Open Position (NOP) of 5.0% for single currency and 10.0 % for aggregate currency. The Bank of Ghana clearly noted that the methodology for the computation of NOP shall be in accordance with the short-hand method which was clearly as specified in the draft document.
“A capital charge for market risk shall be computed as 50% of NOP. A capital charge for operational risk shall be computed in accordance with the Basic Indicator Approach (BIA) as 100% of three (3) years average annual gross income (defined as Net Interest Income + Other Income)”.
Bank of Ghana
Regarding Leverage Ratio, BoG highlighted that a DFI must maintain, at all times, a non-risk based minimum leverage ratio of 4.5% which should be computed in accordance with the methodology as specified in the draft.
Also, DFIs are to maintain, at all times, a minimum operational Liquidity Ratio of 10%. Lending by a Wholesale Development Finance Institutions (WDFI) is to be restricted to a maximum of 50% of the shareholders’ funds unimpaired by losses of a Participating Financial Institution (PFI). This is in addition to the single obligor limits prescribed under Act 1032.
The documents also specified Limits on Foreign Currency Borrowings, Limits on Investments, Prudential Returns, as well as Corporate Governance Arrangements for DFIs.
