Ghana‘s banking sector is undergoing a quiet transformation, despite previous liquidity concerns that raised doubts about the system’s ability to withstand shocks.
Today, the numbers tell a different story, banks are holding more cash, managing their risks better, and fortifying themselves against financial turbulence. But beneath the surface, a tightrope act is unfolding. While banks are stronger, lending is slowing, and a rising tide of bad loans threatens to shake the foundation of this newfound stability.
The data paints a clear picture. Core liquid assets to short-term liabilities, which measure how well banks can cover immediate financial demands, jumped from 30.4% in March 2023 to over 43.0% by June 2024.
Similarly, core liquid assets to total assets, which indicate how much of a bank’s resources are easily accessible, rose from 25.1% to 37.1% in the same period. This means banks have built stronger liquidity buffers, ensuring they have enough reserves to weather uncertainties rather than tying up funds in long-term, risky ventures.
The shift has been dramatic. In October 2023, liquidity levels were still weak, with core liquid assets to total assets hovering at just 26.3%. But by December, banks had pushed this figure to 30.7%, and by May 2024, it had surged to 35.9%.
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Unlike the erratic swings seen in 2023, liquidity levels in 2024 have been steadier, stronger, and more predictable. The banking sector isn’t just sitting on cash, it’s expanding. Between December 2023 and June 2024, total banking assets grew significantly.
But this liquidity boost comes at a cost. The Bank of Ghana‘s new cash reserve ratio (CRR) rules require banks with a loan-to-deposit ratio (LDR) below 55% to hold back more reserves, meaning less money available for loans.
Since the sector’s LDR is expected to remain low in 2024, many banks will be forced to stockpile cash instead of lending it out. While this policy strengthens liquidity, it also tightens access to credit, which could slow down business expansion and consumer spending.
An even bigger concern is the alarming rise in bad loans. Non-performing loans (NPLs), representing loans that borrowers have stopped repaying, surged to 25.7% by April 2024, up from 16% at the end of 2022. More than a quarter of all loans are now in default, raising serious concerns about the financial health of borrowers.
If this trend continues, banks will have to set aside even more funds to cover potential losses, further squeezing credit availability for businesses and individuals.
Ghana’s banks are in a stronger position than they were a year ago, with higher liquidity buffers and more financial muscle to withstand economic shocks. But this newfound resilience could come at a price. Tighter reserve requirements are already limiting credit growth, and if loan defaults keep rising, the banking sector could soon face a different kind of crisis.
Source: thehightstreetjournal.com