Beyond the microfinance challenges
The recent media report about the collapse and lack of liquidity in the microfinance sector cannot be overemphasised. However, there are widespread fears about the wider challenges facing the general financial sector especially the banking industry.
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In a recent interview, Dr Mahamudu Bawumia, the Vice-Presidential candidate of the New Patriotic Party (NPP) warned that the banking industry would be hit with a crisis if the government failed to settle debts owed bulk oil distribution companies (BDCs) soon.
That is just one single transaction and there are limits of exposure each bank can undertake, and if this single transaction can threaten the whole banking system then it only makes sense to believe that there are other factors affecting the banking sector which needs to be addressed.
The latest financial stability report published by the Bank of Ghana (BoG) suggests that banks in the country are struggling to mobilise deposits. According to the report, Time Deposits popularly called fixed deposits recorded a decline of 24.0 per cent in March 2016 compared with 32.6 per cent growth in January 2016. The fall means a whooping Gh¢960 million was lost in the first month of 2016. And this trend does not seem to reverse anytime soon. According to the report, liquidity in the banking sector reduced to 18.1 per cent at the end of March 2016 as against 29.6 per cent in the first month of this year and 19.3 per cent in February 2016 while non-performing loans stood at 16.2 per cent at the end of quarter one of 2016, higher than the 15.6 per cent at the end of February 2016.
All these are results of the challenging economic environment underpinned by tightness in monetary policy of the Bank of Ghana (BoG) with the attendant adverse effect on liquidity in the banking sector and the general economy as a whole. The failure in the microfinance sector is just a microcosm of greater challenges facing the overall financial sector. It is also believed that a number Non-Bank Financial Institutions (NBFI) are facing similar challenges. Only time will tell when the authorities will have another set of challenges on their hands. Banks are quickly approaching their “automation tipping point,” and they have been downsizing in the past three years, some on the quiet and others are in the public domain. A case in point is Standard Chartered Bank Ghana.
Drawing from the above, the deep macroeconomic unbalances had left their mark on the microfinance institutions and other players in the sector. The current challenges in the sector are, as a consequence of a crisis in the financial system which was evidenced by a fall in GDP over the years, restricted availability of liquidity and increases in non-performing loans. Though pockets of microfinance companies were involved in unapproved activities, the large majority are doing genuine businesses; giving loans to poor entrepreneurs often without collaterals and stressing the importance of entrepreneurship as a tool for poverty reduction. In effect, it will not be right to solely blame the ‘failure’ on these institutions, because as per their nature, they are very sensitive to market risk and they are already battling with issues of capital adequacy, asset quality and management capability.
What must government do?
Banks lend when they are confident that they will be repaid. So if the economy is wobbly, banks will prefer to limit their lending. Although they reduce the amount of new loans they give out, the public still have to keep up repayments on the debts they already incurred. The problem is that when money is used to repay loans, that money is ‘destroyed’ and disappears from the economy. Now it’s time for the government and the Bank of Ghana to help create jobs, stabilise the economy, and support the environment through a package of “Quantitative Easing.” It is understandably difficult for people to get their head around the idea that the government has invested so much in infrastructural development like roads, hospitals and schools running into billions of cedis in an effort to get increased economic activities, but this money has completely failed to reach small businesses in the real economy which urgently need support after three years of power crisis. One most single factor that has contributed to the bad state of the economy is the issue of dumsor (load shedding). With dumsor across the nation over the past three years, one can only imagine how much money the country has lost; the unemployment it has created and its catastrophic ripple effect on living condition of the average Ghanaian and businesses.
Push for diversification
In the coming years, oil revenues will no longer be sufficient for governments to act as the main employer of their fast-growing young populations. Therefore, policymakers must find new ways to promote private sector development and help their economies diversify away from oil.
The gulf countries already benefit from high-quality infrastructure, but are hindered by bureaucracy and lingering gaps in their legal and regulatory frameworks. They could also further improve the quality of education.
Institutional quality could be enhanced in Central Asian oil-exporting countries and Algeria in a number of areas, including contract enforcement, corruption and access to finance.