Financial sector clean-up made banks resilient but not liquid – Economist

Financial Economist, Dr. Lord Mensah, has said although the financial sector clean made banks robust against unforeseen shocks, it had less impact on liquidity.

His comment comes on the back of the central bank of Ghana alluding that its clean-up exercise that led to collapse of some nine local banks in 2018 inadvertently prepared the financial sector to deal with the impact of the Coronavirus pandemic.

Speaking to GhanaWeb, Dr. Lord Mensah stated that the clean-up reforms did not give banks enough funds to propagate their core business of granting loans.

“Some of the banks were even lending one day that is overnight lending amongst themselves and not even extending facilities to persons who can borrow up to maybe 3 years and above. So this tells you that banks were suffering.

“That is why, the Bank of Ghana came in and had to find a way to make sure that the banks have access to enough funds by scrapping banks’ reserve requirements at the central bank”.

He further expressed doubts that the clean-up exercise made existing banks better hence called for major reforms to be put in place to boost liquidity.

“Clean up alone was not enough, further measures were expected. After the clean-up, liquidity was frozen and banks were struggling for funds.”

Background of banking sector clean-up

A regulatory crackdown on poor business practices and weak capital positions in Ghana’s banking sector has resulted in a series of market exits since August 2017.

The Bank of Ghana (BoG) puts the total costs of its clean-up operation at some GHS21bn ($4bn), equivalent to just over 3% of the nation’s GDP in 2019.

About 4.6 million depositors could have lost their monies completely had the regulators not taken the action.

The financial sector clean-up saw the licenses of some nine local commercial banks and over four hundred financial institutions revoked.