The government’s imposition of a financial sector clean-up levy of 5% to be charged on banks, although well-intentioned, it’ll rather increase the cost of doing business and thereby stifle investment.
According to Hon. Osei Kyei-Mensah Bonsu, the caretaker Finance Minister, the levy is on the banks’ profit-before-tax. The levy is instituted for the purpose of defraying outstanding commitments in the sector.
“Mr. Speaker, Government will, therefore, introduce a financial sector clean-up levy of 5% on profit-before-tax of banks to help defray outstanding commitments in the sector. The levy will be reviewed in 2024.”
Effect of Levy on Financial Sector
Although the financial sector has proven to be resilient all throughout the pandemic, the pandemic’s impact still lingers. Therefore, to place too much emphasis on the sector’s performance to charge such a levy may trigger a negative net effect on the sector.
The repercussions of this move is the tendency to erode the gains made by the financial sector. These include regressing gains from financial inclusion and resulting in a further increase in interest on loans for businesses.
Already, the impact of the pandemic on the baking sector has compounded the decline in the percentage of depositors. A consequence that began with the banking sector clean up.
The burden of the imposition of this levy transferred to depositors through the increment of bank charges. This may further worsen the decline in patronage of the banks as well as financial inclusion.
Furthermore, the government by this action risks worsening the cost of doing business. Businesses have complained about the high interest on loans. Thus, a further increase will be a huge bane on business progress and investment.
In his speech, Hon. Osei Kyei-Mensah Bonsu intimated that the financial sector clean-up has finally brought back investor confidence. And has saved the hard-earned funds of depositors.
“The financial sector clean-up and the refund of monies to depositors have restored investor confidence and protected the hard-earned savings of millions of Ghanaians. However, this has come at a huge cost of over GHS21.0 billion to Government.”
Breakdown of cost of the Financial Sector Clean-up exercise
The Bank of Ghana embarked on the clean-up exercise of the financial sector due to the severe challenges. These challenges include solvency, liquidity and asset quality that plagued the sector. This crack down on the financial sector saw the exit of many financial institutions, the collapse and merging of others.
As earlier noted, the cost incurred on the clean-up by the government is a whopping GHS21 billion in total. A cost breakdown suggest that as at the first quarter of 2020, a total spending of GHS13.6 billion representing 3.5% of GDP.
The cost covers the resolution of failed banks, Specialized Deposit-taking Institutions (SDIs), Micro Finance Institutions (MFIs), the establishment of the Consolidated Bank Ghana Limited (CBG) and the capitalization of the Ghana Amalgamated Trust (GAT).
Meanwhile, in his speech, the honourable Member of Parliament highlighted the need for the approval of an additional GHS5.5 billion. This was for the purpose of paying customers with locked up funds in asset management companies.
“Mr. Speaker, for the Securities and Exchange Commission to fully settle investors of the remaining 17 AMCs, an amount of GH¢5.5 billion (1.3% of GDP) is required.
“For this reason, we have come to this august House once again to seek for your approval to raise an amount of GH¢5.5 billion in 2021. To complete the asset management industry bailout, including Gold Coast Fund Management Ltd (now Blackshield Capital Management), First Banc Financial Services Limited, Liberty Asset Management, Beige Capital Asset Management Ltd, Ideal Capital Partners Ltd, and Frontline Capital Advisors Ltd.”
The government must therefore engage stakeholders’ in a dialogue or have engagements between the government and the banks in order to ensure that other avenues are explored. Such avenues that could better improve the sector’s gains.