The share of foreign borrowing to total borrowing shoots up by 2.05 percent in the banking sector, as indicated by the 2019 Financial Stability Review Report released by the Bank of Ghana on Wednesday, 30th September 2020.
Based on the Financial Stability Review Report, the proportion of foreign borrowings in total borrowing increased to 50.49 percent in December 2019 from 48.44 percent in December 2018, depicting a year-on-year upsurge of about 2.05 percent.
“The share of foreign borrowings in total borrowings as at end-December 2019 was 50.49 percent as compared to 48.44 percent at end-December 2018”.
The report added that these funds which were obtained from foreign sources were used to support funds that were mobilized domestically.
“Banks continued to access funds from foreign sources to support fund mobilisation from domestic sources”.
Again, the Bank of Ghana’s Financial Stability Review Report revealed that the sudden surge in foreign borrowing within the banking industry is mostly as a result of an increase in the exposure of the industry to foreign exchange risk. However, the report said that this foreign exchange risk had been well confined by the sector.
“The appreciation in banks foreign borrowing represents an increase in the sectors exposure to foreign exchange risk. That notwithstanding, foreign exchange risk remains broadly contained”.
A chart of figures by the Bank of Ghana on the composition of borrowings showing the share of both foreign and domestic borrowing in total borrowing provided in the report also made it known that there was a steady and consistent increase in the share of foreign borrowing in total borrowing for every year from 2017 up to 2019. The figures provided in the chart revealed that in December 2017, foreign borrowing was a little over 20 percent and domestic borrowing was extremely high at close to 80 percent. The percentage of both foreign borrowing and domestic borrowing in December 2018, however, hovered around 48 percent although domestic borrowing was slightly higher. By December 2019, the proportion of both foreign and domestic borrowing stood at approximately 50 percent but foreign borrowing overshadowed domestic borrowing to an extent. These estimations from the report suggested that year-on-year the banking sector continued to resort to foreign sources to obtain funds to supplement funds obtained from domestic means.
The report further assessed the developments in the banking sector’s offshore activities. It indicated that stable institutions that usually handle offshore placements and that approximately 90.17 percent of offshore funds belonging to the banking industry were held by the industry’s topmost 5 correspondent banks. Additionally, the report indicated that these stable institutions remained so up to the end of December 2019, and as such all possible threats that could originate from cross-border exposures were subdued.
“Offshore placements are largely with stable institutions. The banking sector’s top 5 correspondent banks held about 90.17 percent of the industry’s offshore funds as at end-December, 2019. These institutions were largely rated as stable at end-December, 2019, suggesting that potential vulnerabilities that could emanate from cross-border exposures were muted”.
Overall, the report suggests that irrespective of the banking sector’s exposure to foreign exchange risk due to its continued access to foreign borrowing to supplement domestic funds mobilized, this risk is well managed and as such the sector remained profitable and resilient.
