The past few years have been tumultuous for Ghana’s banking industry, with the country’s central bank implementing a number of reforms aimed at strengthening the sector and reducing risk. One of the key changes was an increase in the minimum paid-up capital requirements for banks, which came into effect in 2019.
However, the Bank of Ghana has recently announced that banks have a maximum of four years, ending in 2025, to restore the minimum paid-up capital. This deadline has been extended due to capital shortfall arising solely from the derecognition losses.
According to the Bank of Ghana, derecognition losses emanating from the Domestic Debt Exchange Programme (DDEP) will be spread equally over a period of four years, effective 2022, for the purposes of Capital Adequacy Ratio (CAR) computation. The International Financial Reporting Standards (IFRS) defines derecognition as the removal of an asset or liability (or a portion thereof) from an entity’s balance sheet.
The DDEP was implemented in 2022 to help Ghana manage its growing public debt. The initiative involved the exchange of domestic bonds for new bonds with longer maturities. While the exchange was intended to be beneficial for the country as a whole, it had a significant impact on Ghana’s banking sector.
Due to the impact of the DDEP on the banks, the Bank of Ghana announced some policy and regulatory reliefs for banks that fully participated in the debt exchange to reduce the effect on their operations. These policy and regulatory reliefs were informed by stress tests on banks that revealed the potential impacts of the exchange on banks’ solvency, liquidity, and profitability.
The reliefs include a reduction of the Cash Reserve Ratio (CRR) from 13% to 12% on foreign currency deposits to be held in foreign currency, as well as a reduction of the Capital Conservation Buffer from 3% to zero. This effectively reduces the minimum Capital Adequacy Ratio (CAR) from 13% to 10%. The Central Bank also set the risk-weights attached to New Bonds for CAR computation at 0%, and at 100% for Old Bonds.
Despite these reliefs, banks in Ghana have recorded significant losses as a result of the impact of the DDEP on their operations. In 2022 alone, banks reportedly recorded more than ¢10 billion loss. Some banks that usually record profits and have published their results ahead of the April 30, 2023 deadline have recorded losses.
The Bank of Ghana has acknowledged the difficult situation faced by banks and has indicated that it is fully equipped to provide liquidity support to banks. Banks can also access the Emergency Liquidity Assistance (ELA) using the New Bonds as collateral. The Central Bank has also extended the deadline for banks to publish their 2022 audited financial statements by one month, to the end of April 2023, following necessary adjustments by external auditors to fully reflect the impact of the DDEP.
While the extension of the deadline for banks to restore the minimum paid-up capital will come as a relief to some banks in Ghana, the impact of the DDEP continues to be felt across the sector. It remains to be seen whether the policy and regulatory reliefs announced by the Bank of Ghana will be enough to help banks weather this storm.