Dr. Redeemer Yao Dornudo Krah, Senior Lecturer and Head of Accounting Department, Faculty of Accounting and Finance (FAF) at the University of Professional Studies Accra (UPSA) has advised financial institutions to focus on minimizing operational cost in order to increase profitability.
Financial institutions, most especially banks and insurance firms have lamented about the adverse implications they are already experiencing with the introduction of government’s Domestic Debt Exchange Programme (DDEP). Banks are crying out about liquidity and probable insolvency in the long term, whereas insurance firms fear they wouldn’t be able to respond to claimants who turn to make requests of their funds.
On how these institutions can survive the turbulent seasons they so tend to find themselves, Dr. Krah, who also doubles as a public sector accounting and financial management expert and consultant, advised that financial institutions give attention to their operational expenses in order to recover a bit in the short term.
“…The best thing they can do now, giving the current macroeconomic conditions is try to minimize cost as much as possible now. So right now, the best thing they can do is look at their operational cost to see how best to minimize it, in order to increase their profitability because the revenue, they can’t do much about it. So they have to look at costs and all that to be able to analyze their value addition activities and then, concentrate on those ones alone. Those that do not add value into the business value chain, should be cut off.
“It may be that some employees need to be laid off, if there is no need for them. There may be the need for outsourcing some of the activities instead of in-house staff and there may be cost minimizing strategies, where they will send signal across the entire entity, that everybody should minimize costs of everything that they do. So, everything should be based on cost minimization.”
Dr. Redeemer Krah
T-bill rates dropped to 19.04% as at the end of last business week, decreasing below the inflation rate. This, Dr. Krah explained means the financial sector should be looking forward to charter severe cuts. Because the economy is hard, the default rates of banks are also going to be high. Many people are not going to do things and it’s because they are using the IFRS as one consultancy, he added. When this happens, he said: “we have to impair our assets and impairing the assets means you are going to deepen your losses”.
“In fact, posterity measures should not be for only government. It should also cut through the organization if they [financial institutions] want to survive. They don’t have any other choice than to hold on to whatever revenue shore they have and minimize their costs and improve their efficiency. That is the only way they can minimize their losses.
“They can’t maximize their profits; they can minimize their losses. So we need to do a critical value added analysis, in order to know where the values are coming from and concentrate on those ones. The non-value activities should be taken off or reduced as much as possible. In that way, they will be able to sustain the ‘hit’ but not to make any good returns.”
Dr. Redeemer Krah
Furthermore, the Financial Management expert urged financial institutions, specifically insurance companies to conscientize the key stakeholders in the industry about the consequences ahead.
“The shareholders must be aware and all other interest groups: the investors, especially [those in the insurance companies]. They should be alerting their clients about the possible repercussions and how they can deal with them…The insurance companies for example, are now picking up. So if they don’t send a good signal and they start to default, then the trust of the citizens, the customers will go down again. Then they will go back to square-one.
“So they have to do everything and need to be very transparent when it comes to customers and let them know how things will affect them… They should inform them ahead before the event happens. The whole thing is a shared responsibility. It’s for everybody so, we must also try to let people know how they are going to share them. And I think everybody should be able to take the hit.
Dr. Redeemer Krah
Banks urged to be internally resilient to avert the negative outcomes of the DDEP
About the central bank’s provisional fund to support the commercial banks, Dr. Krah advised that this will only help matters when the central bank fairly administers the Fund on equitable basis, where it would not be another avenue for corruption, thus advises banks to be internally resilient.
“Banks can pray that government does something about it but they must be internally resilient to avert the issues.”
“In the future, I don’t see anything better off for [government] to fulfill its obligations. But it will be better for government to do everything possible to meet the obligation. We[Ghanaians] can only be hopeful. It depends on the resilience of government. If government is not resilient and willing to be fiscally disciplined, we are doomed. We should see fiscal discipline in all of government’s spending.”
Dr. Redeemer Krah
These were Dr. Krah’s words in response to what he thinks will be the plight of investors who have signed on to the DDEP. His reasons come on the back of the failure of government to promptly effect payment of coupons and principals to individual bondholders in recent times.
The fiscal and monetary space is not about figures
Speaking to the surging inflation in the country, and how best it can be addressed and tamed, Dr. Krah said:
“The fiscal and monetary space is not about figures. They are reflections of what you are doing. It is the aggregate of all your activities. So where we are now, it is not by policy that we change it or government pronouncements that will change it. If we force the figures down, they will go up again, because the whole issue is as a result of the way we do things.
“So we have to know the source of the inflation and remedy it through the cause of the inflation not by any artificial [means]; maybe pumping in some money… Those things are temporal measures, which will not give any big result.”
Dr. Redeemer Krah
Dr. Krah, on this note, advised that Ghana uses its current economic crisis as an opportunity to re-examine its macroeconomic space to see what is being done right and not, so as to make room for change.
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