You are here: HomeWallOpinionsArticles2018 08 13Article 676287

Opinions of Monday, 13 August 2018

Columnist: Prof. John Gatsi

Liquidity support is not free money to universal banks, BoG benefits from it

The Bank of Ghana (BoG) is the lender of last consideration to universal banks. Liquidity support to universal banks has become a common word after the ownership change in seven(7) universal banks. The term actually means borrowing from the Central Bank and the purpose of such borrowing is to provide liquidity to banks to meet withdrawal by depositors and general financial intermediation.

This borrowing called liquidity support attracts very high rates normally at the policy rate to universal banks. It is structured for repayments every three months which generate interest income for the BoG. It is therefore very misleading to portray liquidity support as if it is free money to universal banks.

It is true that asymmetric information in banking and regulatory governance can lead to adverse selection and moral hazard for both universal banks and BoG. It is for this reason that proper credit governance is crucial.

The BoG seems to assume that poor loan recovery and nonperforming loans are due to poor credit governance including improper assessments of loan applicants. The huge grant of liquidity support (loan to universal banks by BoG) with the disappointing misapplication in some of the defunct banks means there is equally weak appraisal and “below the standard procedure” in granting request for liquidity support.

The BoG cannot be any different from the weaknesses demonstrated by the defunct banks. Should it be said that income generation from the grant of liquidity support is a great motivation?

Using Unibank as an example, it means, while government and other State Institutions including BoG were indebted to Unibank of about one billion Ghana cedis (GHC 1B) with no plan to repay, Unibank was paying or supposed to be paying accrued interest to BoG. So this issue about liquidity support is all about the debtor-creditor relationship of which the purpose of the debt by Unibank and other Universal banks is to support liquidity position.

Perhaps Borrowers and Lenders ACT may help address this issue and to present the picture that liquidity support is free money is inaccurate.

However, misapplication of the loan called liquidity support especially to the personal benefits of directors and shareholders must not be taken lightly.