The collapse of banks always begins with liquidity freezing.
As long as money keeps flowing in and out of a bank it can continue to remain operational. If for any reason the flow stops or drops, it results in a crisis situation and if not resolved can result in what we witnessing in our banking sector.
I am not an economist but these elementary economics makes understanding of these matters very easy. Unlike a finance company which raises funds from fixed tenure, a large portion of funds raised by our banks includes that which needs to be paid back immediately on demand. I heard a commentator linking President Mahama to the mess in our banks claiming, the crisis began under his administration.
It is not only funny, but mischievous. I know that problems of a bank do not start overnight. Loans go bad over a period of time. The current crisis which has witnessed the collapse of about seven banks, has further underlined the failure of profit first, iniquitous capitalist system and the incapacity of the neo liberal principles that put private institutions at the driving seat of economic development.
The fact that the state has had to intervene is a shinning example of the limit of private ownership; it is a political blow against the seismologists of neoliberalism and privatization. Yea the crisis was there during the time of Mahama but the difference is this – Terkper team searched for appropriate initiatives- identified and clarified all factors responsible for the problems in the sector.
They critically evaluated each factor to ascertain the degree of its contribution to weakness. Government has deliberately suspended payment of contractors. What do banks do ordinarily? They essentially intermediate between the deposits that customers bring in and the borrowers who take it as at an interest rate. Depositors are mostly government contractors and the middle class people. The borrowers are mostly well heeled industrialists or businessmen. It means that the banks will definitely go red if government because of political reasons decides to suspend payment monies owe contractors. If there is anything that all well meaning stakeholders in Ghana banking industry look forward to, it is a banking sector that is healthy and stable. A banking sector where investors, depositors, operators,regulators, etc can after a hard day’s work, go to sleep with eyes closed and without the anxiety before dawn something amiss will happen. This was what this administration failed to ensure. The administration gave the indication it wasn’t going to cooperate with other stakeholders the way the previous regulators did with the removal of the Governor of Bank of Ghana and his deputies against the spirit and letter of the constitution. Since then, the banking industry and its environment have never enjoyed the stability they enjoyed over the years. And the consequences have been very grave for the economy, especially in the area of loss of wealth, public confidence in the system and of course a mandatory management that has become more challenging with large amount of currency now in circulation outside the banking system.
Government must increase its capital expenditure to enable money flow through the various outlets. Government’s own policies including the hastily packaged and implemented free SHS has contributed to the mess. Contractors are unable to pay back loans to the banks increasing the stock of bad loans in their books. It is time for government to make the political stream, problem stream and policy stream to interact to create policy Windows for the creation of bond market and restricting lending to bigger industries and enterprises. These steps must be approached professionally with the nation’s interest taking precedence over all other interests. Government tinkering with the rules of the game, going for 100 year bond etc.
The Akufo Addo government is enjoying unprecedented oil revenue flow, gold price has improved, the Atuabo gas, price of cocoa on the international market has increased and a stable power regime.
The administration did not meet the cracking challenges the Mahama administration faced when it took over in 2012-13.
In order to combat rising inflation without slowing down the economy and creating unemployment the Mahama administration aimed at reducing Reliance on the banking sector for financing the deficit, by reviving the structure of interest rates to furnish incentive to the public to hold government paper. To make up for the shortfall in government revenue from exports, the rates of taxation were reasonably revised and new taxes introduced. The administration strengthened the revenue collecting agencies as part of its IMF initiative, to ensure that all Ghanaians contributed their shares to tax revenue.
These are the practical steps government must follow to resuscitate the failing economy instead of pushing populist policies which are weakening the solid pillars bequeathed to it by the previous administration.
The President and his propagandists must be told that they inherited a stable and sound banking sector. The non performing loans was 17 percent it is now 22 percent.