Promote purchase and, if necessary, merger of banks and NBFIs – IMF tells government

The International Monetary Fund (IMF) has proffered three policies, including acquisitions and mergers of banks and non-banks, to mitigate the possible systematic financial instability in Ghana.

These policies, captured under the Risk Assessment Matrix contained in the recent IMF country report on Ghana, aim to mitigate risks and ensure the stability of the banking and non-bank financial institutions (NBFIs).

The first policy suggests strengthening financial safety nets and closely monitoring the liquidity and asset quality of banks and NBFIs.

The second policy involves designing an appropriate strategy to recapitalize banks and NBFIs. Lastly, the IMF encourages acquisitions and mergers as a means to address any necessary consolidation in the financial space.

“Strengthen financial safety nets and closely monitor bank and NBFI liquidity as well as asset quality.
“Design an adequate bank and NBFI recapitalization strategy.”
“Encourage acquisitions and mergers if needed.”
According to the IMF, countries with weak banks and non-bank financial institutions are at risk of insolvencies when they experience significant fluctuations in real interest rates, risk premia, and asset prices. These fluctuations are often observed during economic slowdowns and policy changes.

The IMF emphasises that such insolvencies can have far-reaching consequences, causing disruptions in markets and unfavourable effects that extend beyond national borders.

“Sharp swings in real interest rates, risk premia, and asset repricing amid economic slowdowns and policy shifts trigger insolvencies in countries with weak banks or non-bank financial institutions, causing market dislocations and adverse cross-border spillovers,” it stressed.

Encourage acquisitions and mergers of banks and NBFIs if needed, the IMF tells the government.
Although the likelihood of this happening is tagged as medium, the Fund, however, indicated that global factors have intensified the consequences of substantial reductions in domestic debt on banks’ capital adequacy. These haircuts directly impact the banks’ holdings of sovereign claims and have adverse effects on their ability to lend. As a result, this situation hampers credit availability for the private sector and ultimately dampens economic activity; the potential impact on Ghana’s financial sector could be high.

The IMF also revealed that the recent Domestic Debt Exchange Programme (DDEP) in Ghana, which exchanged old sovereign bonds for new ones, has affected the health of the country’s financial sector. Banks and other financial institutions had invested a significant amount of money in government bonds, but now the government has reduced the interest rates and extended the time they have to be paid back. As a result, the value of these bonds has decreased, causing financial institutions to face a significant financial challenge.

“Domestic bonds were widely distributed across the financial sector in Ghana, representing the most important asset class held by commercial banks, pension funds, asset management companies, and insurance companies. Banks held 30 to 50 percent of their total assets in government securities before the DDEP—with especially high exposures in the state-owned banks—and relied significantly on income from these securities.

The coupon reductions and maturity extensions in the recently completed DDE mean that the value of these assets will decline to about 70 percent of their par value. This revaluation represents a significant shock to the balance sheets of these financial institutions,” the report indicated.

In announcing the success of the DDEP, the government indicated it was putting plans in place to establish a GH15 billion ($1.5 billion) Ghana Financial Stability Fund (GFSF), which will be supervised by the Bank of Ghana. The GFSF is to provide liquidity to banks that participated in the DDEP. The World Bank has committed $250 million to support the racialization plan, with the remaining amount expected to be funded by the government.

According to the IMF report, “government solvency support will be designed to minimise costs and moral hazard, incentivize private capital injections, foster structural reforms improving operational efficiency, and allow for an orderly, early government exit.

“When acting in its capacity as shareholder, i.e., for state-owned banks, the government will frontload any necessary recapitalizations of state-owned banks, which will be underpinned by credible plans to ensure the future viability and a level playing field with private banks.”

Ghana’s financial sector has already gone through a lot of turmoil during the 2017 banking sector clean-up, which saw a reduction in the number of banks operating in Ghana from 34 to 23, while 347 micro-finance institutions, 15 savings and loans, and eight finance houses had their licences revoked. This exercise cost the state about GH25 billion and takes a pivotal position in Ghana’s sustainable debt portfolio.

The IMF country report on Ghana has disclosed that “the fiscal cost of the financial sector recapitalization (estimated to have reached 7.1 percent of GDP over 2017–21) has led to an increase in the government deficit and debt. Additional recapitalization costs are expected in the coming years resulting from the domestic debt restructuring envisaged in 2023—some 2.6 percent of GDP are included in the DSA’s baseline.”

Banks operating in Ghana have until September 2023 to provide their respective recapitalization plans to the Bank of Ghana.