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12.06.2007 Business & Finance

Banks accused, but Central Bank director says it will ok

By Ghana Market Watch

Renowned economic consultant, Dr. Nii Moi Thompson has said that financial intermediation in the country is still weak, translating into a poor credit market despite a number of reforms.

Speaking on the challenges of urban economies at a World Bank/Government of Ghana round-table discussion on Urban Development and Economic Growth in Accra last week, Dr Nii Moi Thompson expressed the view that the financial system in the country was not supporting the growth of businesses as expected, and consequently did not impact much on the development of the country's economy.

The Ghana Market Watch newspaper quotes Nii Moi Thompson as saying that in addition to the unavailability of required infrastructure that made doing business in the country very expensive, lack of credit facilities hindered the growth of businesses and dragged behind the course of development.

Dr. Joe Abbey, the Executive Director of the Centre for Economic Policy Analysis (CEPA), speaking as a discussant at the same programme expressed similar concerns and called for a complete reform in the country's financial sector in order to enhance national development and to meet the current needs of a developing economy

"The country's financial services sector must be dealt with. This is an area crying for reforms", he said.

Later in an interview with Ghana Market Watch, Dr Abbey confirmed that the country's financial system does not enhance the growth of businesses.

He said current rates on deposits are so low that it hardly encouraged people to save, translating into shortfalls in loanable funds and high interest rates and spreads.

"Borrowers and lenders must be brought together through an effective financial intermediation system", he stated.

Dr Abbey said this situation caused people to go into establishing businesses not because they have the competence and expertise required to manage them, but because they do not see investment within the financial system as rewarding.

The CEPA boss also expressed the worry that the banks sat on so much money, which they still invested largely in government securities.

"Even after abolishing the secondary requirements, the banks still hold significant proportions of their deposits with the central bank.

"The banks cannot simply say they operate in a risky lending environment and keep their resources. This is simply unacceptable," he lamented.

Dr Abbey stated that heightening competition among the banks was not enough, but there was the need to reorient the banks' focus for them to realise the need to go into financing investments and grow businesses.

He said the banks have to finance development since the process of a growing economy based on higher productivity will require that we have a financial policy that makes sure that the needed working capital is provided for the growth of businesses.

Dr Ernest Addison, Director of Research at the Bank of Ghana however believes that the financial sector reforms are having desirable impacts on the economy as a whole.

In a separate interview with the Ghana Market Watch in Accra, Dr Addison indicated that the credit portfolios of the banks have been growing since the abolition of the secondary reserve requirements.

He noted that the change occurred more with the smaller banks, who had limited financial resources, "meaning that the higher secondary reserve requirements were more binding for the smaller than the bigger banks".

With the abolishing of the requirements, more resources were freed, which statistics indicate are being pumped into the small and medium scale enterprises (SMEs), he stated.

"Let's not forget that the smaller banks reach a more significant proportion of SMEs than the bigger banks", he reiterated.

Available data indicate that Deposit Money Banks' credit to the private sector has seen much improvement, growing by 40.5% in December 2006 and 56.2% at the end of March 2007.

On the composition of the stock of credit, the source reports that the private sector attracted a share of 80.0% in the past year as opposed to 76% in 2005.

Dr Addison further explained that the quality of banks' loan portfolios continued to improve as the ratio of non-performing loans, loan loss provision to total loan ratio and non¬performing loans net of provisions to capital ratio declined. Non performing loans dropped to 7.8 % at the end of March this year compared to 12.4% a year ago.

"The fact that the banks are now recording non-performing loan ratios in single digits is a signal that the banks would now have confidence in borrowers and would be prepared to give out more loans" he said and added, "more importantly, macro risks resulting from such factors such as high inflation rates is minimising as a result of prudent economic policies".

On the issue of interest spreads, he said they are gradually declining in the face of bank competition. "High value accounts are being remunerated competitively", he said.

Source: Ghana Market Watch

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