A new analysis from Black Star Brokerage unveiled that around GH¢16.2 billion – equivalent to $1.2 billion – may move from banks to the Bank of Ghana (BoG) once the new Cash Reserve Requirement (CRR) policy takes effect.
Starting from April 1, 2024, the new policy requires banks with loan-to-deposit ratios (LDR) surpassing 55 percent to reserve 15 percent of their deposits (CRR). Conversely, banks with ratios below 40 percent must reserve at least 25 percent of their deposits.
The analysis focused on 21 banks, excluding UBA and CBG due to lack of data.
Société Générale had the highest LDR at 74.6 percent, above the 55 percent threshold. Six banks fell between 40 and 55 percent: ADB (52.37 percent), Bank of Africa (47.83 percent), First National Bank (47 percent), CAL Bank (42.81 percent), Republic Bank (41.59 percent), and Prudential Bank (40.28 percent). Their CRR would increase to 20 percent.
Moreover, thirteen banks had LDRs below 40 percent: Ecobank (37 percent), ABSA (36.60 percent), UMB (35.56 percent), FBN Bank (33.65 percent), GCB (32.48 percent), and Stanbic Bank (31.29 percent).
Others include Fidelity Bank (24.95 percent), First Atlantic Bank (23.67 percent), ACCESS (23.51 percent), and Zenith (20.00 percent). Standard Chartered (19.44 percent), GT Bank (17.52 percent), and OmniBSIC (14.84 percent) will see their CRR rise to 25 percent upon the directive’s implementation.
During the 117th Monetary Policy Committee (MPC) meetings’ press briefing, central bank Governor Dr. Ernest Addison revealed a significant drop in credit extended to businesses and individuals, plummeting from 29.5 to 5.1 percent between February 2023 and February 2024.
This decline signified a notable reduction in available funds for businesses to invest, expand, and generate employment opportunities. Governor Addison acknowledged that this trend is attributed to banks’ preference for investing in government securities.
Data indicated a surge in bank investments in short-term Treasury and Bank of Ghana (BoG) instruments, with year-on-year growth reaching 67.6 percent in February 2024, totaling GH¢53.6 billion.
Cash Reserve Requirement refers to the minimum percentage of deposits that banks are required to keep as reserves with the central bank. These reserves are typically held in the form of cash or deposits with the central bank itself and are not available for lending to customers or investing in securities.
The primary purpose of imposing a cash reserve requirement is to ensure the stability of the financial system and control the money supply in the economy.
By regulating the amount of reserves that banks must hold, central banks can influence the lending capacity of commercial banks and thereby control the amount of money circulating in the economy.
Furthermore, when the central bank increases the CRR, banks are left with less money to lend, which can help to reduce inflationary pressures by limiting the amount of money available for spending.
The New CRR Policy And Its Economic Implications
According to GCB Capital, “With the BoG also facing high-interest costs – around the policy rate – for its OMO operations amid the need to mop up excess liquidity to douse inflation, the directive will sweep substantial liquidity from the system – without the bank’s response – at no cost to the regulator.”
This would result in a tightening of cedi liquidity and a potential appreciation of the cedi in the short term.
Moreover, GCB Capital described the new CRR directive as the end of an era of ‘free money’, anticipating a decline in banks’ reliance on Treasury bills in favor of increased credit creation.
“It appears the era of ‘free cash’ from passive investments driving profits is over as banks will now have to ‘earn’ their profits. As a result, we expect a drastic decline in banks’ appetite for T-bills in favor of credit creation to avoid the higher brackets of the new CRR directive.”
GCB Capital
Furthermore, GCB Capital anticipated a shift in the central bank’s stance toward a more aggressive approach to credit, which could impact the government’s deficit financing operations and the real sector.
Analysts believe high competition for quality credit could lower lending rates and stimulate growth through increased investments. However, they warned that the reducing demand for Treasury bills could lead to higher interest costs for the Treasury’s funding operations.
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