Banking sector strong after reforms – Bank of Ghana

The Bank of Ghana (BoG) has noted in the Executive Summary of its Financial Stability Review report that the banking sector remained sound and robust to severe stress test scenarios, featuring significant increases in credit impairments, extreme movement in interest and exchange rates, and liquidity pressures.

The BoG added also that risk emanating from cross-border exposures remained contained.

The broad level of risk containment in the banking sector was underpinned by strong capital and liquidity positions, placement of offshore funds with stable institutions and improvement in asset quality, earnings and efficiency.

Going forward, favourable economic prospects in the near term and the gradual phase in of Basel II/III are expected to firm up gains achieved through the banking sector reforms, the report added.

Global macro-financial vulnerabilities remained broadly subdued in spite of a slowdown in global economic growth.

In 2019, heightened uncertainties emerging from geopolitical factors including the US-China trade tensions and prolonged Brexit negotiations slowed down economic activities and dampened global economic growth. Improvement in global financing conditions induced by an accommodative monetary policy stance, in most advanced economies, moderated downside risks to global growth and financial stability.

On the domestic front, the BoG said, favourable macrofinancial developments reduced vulnerabilities stemming from the domestic economy. Domestic output remained strong at 6.5 percent in 2019, while headline inflation continued to decline.

In the review period, a balance of payments surplus was also observed as a result of a narrowing of the current account deficit.

This is expected to support stability of the local currency – the Cedi – and lead to improvements in the Gross International Reserves. On credit developments, the Creditto-GDP gap was below its potential level, indicating that the economy has the capacity to absorb more credit without a significant build-up of risks.

“The banking sector remained sound and robust to severe stress test scenarios, featuring significant increases in credit impairments, extreme movement in interest and exchange rates, and liquidity pressures. Also risk emanating from cross-border exposures remained contained. The broad level of risk containment in the banking sector was underpinned by strong capital and liquidity positions, placement of offshore funds with stable institutions and improvement in asset quality, earnings and efficiency. Going forward, favourable economic prospects in the near term and the gradual phase in of Basel II/III are expected to firm up gains achieved through the banking sector reforms,” the regulator emphasized.

“The performance of the insurance sector broadly improved in 2019, with the outlook for premium growth, risk retention and insurance penetration remaining positive. Policy reforms and a favourable operational environment improved premium income, assets and capital positions. Despite these improvements, persistent underwriting losses and declining investment yields continued to drag on profitability.

“In the near to medium term, the introduction of the new minimum capital regime is expected to improve efficiencies through consolidation. In addition, insurance penetration is expected to improve on the back of a broad-based introduction of innovative insurance products and comprehensive policy reforms aimed at strengthening the insurance industry.

Driven by strong growth in private pension funds, the pensions sector continued to expand in spite of emerging vulnerabilities from weak investment outturns, weakened contribution growth and rising benefit payout. Notwithstanding these vulnerabilities, the pensions sector exhibits a strong potential for growth in the medium to long term as policy measures are targeted at increasing contributions flows and inclusion.

“In the capital market, the performance of the stock exchange declined in the period under review posing a risk to large equity holders such as the public pension fund. The declining performance reflects the reductions in the size, access, and efficiency dimensions of the stock market. Despite these developments, capital flight remained low as foreign investors increased their presence on the domestic capital market, partly due to restored banking sector stability and favourable macroeconomic prospects.

“The financial sector also continued to witness policy reforms aimed at safeguarding financial and macroeconomic stability.”

The reforms included the resolution of insolvent institutions, increase in minimum capital requirements, enhancement of supervisory regimes, establishment of a regulatory forum for AntiMoney Laundering and Combatting the Financing of Terrorism, establishment of a Financial Stability Advisory Council, and operationalisation of the Ghana Deposit Protection Corporation, among others.