Fitch, a rating agency, has issued a warning about the future profitability of banks in Ghana. This caution comes in light of a recent move by the Bank of Ghana (BoG) to tie cash reserve ratio (CRR) requirements to loans/deposits ratios (LDRs).
Under this new system, banks with low LDRs will face higher CRR requirements. The aim behind this change is to encourage more lending by banks.
Fitch anticipates that the pressure to increase lending could strain the banks’ profitability in the coming period.
However, the rating agency expects banks to tolerate the higher CRR requirements rather than significantly increase lending to avoid them, given Ghana’s difficult macroeconomic conditions, adding, “The higher requirements will weaken profitability as cash reserves at the BoG are unremunerated”.
“Substantially higher cedi cash reserves at the BoG will weaken banks’ net interest margins (NIMs) and profitability in 2024, which are already under pressure from declining treasury bill yields. However, we expect NIMs to remain high by regional standards as treasury bill yields, although declining, will remain high, ensuring that profitability remains a key strength of Ghanaian banks’ credit profiles despite the new CRR regime.”
Fitch
The Bank of Ghana (BoG) rolled out a new set of rules starting on March 25, 2024, which directly ties cash reserve ratio (CRR) requirements to loans/deposits ratios (LDRs) on a tiered basis.
Here’s how it works: Banks with LDRs lower than 40% will now face a CRR of 25% of their deposits. Those falling between the 40% and 55% range will have a 20% CRR, while those surpassing the 55% mark will be held to a 15% CRR.
This new policy represents a significant change, especially for banks with low LDRs, since the previous requirement stood at 15%. The implementation of these regulations is expected to be completed by the end of April 2024.
The LDR in the banking sector dropped to a mere 36% by the end of 2023, down from 43% in 2022. This decline was mainly due to sluggish credit growth. Consequently, a large majority of banks will now need to adhere to a CRR requirement of 25%.
Credit Growth To Remain Weak
“We do not think the penalty of higher unremunerated cash reserves will stimulate a material increase in credit growth,” the UK-based firm said.
“We believe banks will prefer to suffer the opportunity cost of not being able to deploy such liquidity into high-yielding treasury bills than to risk large loan impairment charges as a result of extending credit in the current economic climate.”
Fitch
It continued that prospects for credit growth are also constrained by the banking sector’s tight capitalization following Ghana’s domestic debt exchange program, which imposed large net present value losses on creditors.
Some Strategies for Individuals and Business
For the average Ghanaian, this news could potentially affect access to credit and interest rates offered by banks. If banks are under pressure to increase lending to meet the new CRR requirements, they might tighten lending standards or raise interest rates.
This could make it more challenging for individuals and businesses to obtain loans or credit, impacting investment plans, business expansions, and personal finances.
To prepare for possible fallout, individuals and businesses should consider diversifying their sources of funding and exploring alternative financing options such as microfinance institutions or peer-to-peer lending platforms.
It’s also crucial to maintain good creditworthiness and financial health by paying bills on time and managing debts responsibly. Additionally, staying informed about changes in banking regulations and seeking advice from financial experts can help navigate any challenges that may arise.
