There is always a buzzing furore surrounding banks’ financial statements whenever they are released. This, to a large extent, can be attributed to the mammoth amount of investments managed by the sector; and how the overall performance of the sector directly and indirectly influences other sectors of the economy. However, there are instances where banks’ performance indicators are interpreted in a manner that may positively or negatively affect market sentiments and investor confidence. While some of these interpretations could be borne out of parochial interest, others are done out of sheer ignorance.
In a recent thought leadership programme organised by the Chartered Institute of Bankers (CIB) on the 16th of May, 2023, Mr. John Awuah, CEO of the Ghana Association of Banks (GAB), who was a member of the panel, addressed concerns surrounding the involvement of banks in the current Domestic Debt Exchange (DDE) quagmire; and shed light on the composition of investment in securities on banks’ balance sheets.
Responding to questions pertaining to the low loan-to-deposit ratio in the banking industry; and the perception that banks divert significant portion of customers’ deposits into buying government securities rather than lending to the real sectors of the economy, Mr. Awuah chided and refuted the claim, emphasising the need for analysts to understand the intricacies of banks’ investments in Securities. Mr. Awuah stated:
The assertion by most analysts that banks do not lend to businesses, but rather use depositors’ funds to purchase government bonds is misleading. It is important to understand and know the composition of Investment in Securities on the balance sheet before jumping to unsubstantiated conclusions because some of these half-baked expositions pose systemic risk to the sector.
Mr. Awuah elaborated on the composition of securities in the banks’ books, which encompasses local bonds, ESLA bonds, Daakye bonds, T-bills and others. He highlighted the origins of these securities, providing context for their presence. For instance, he explained:
The ESLA bond originated from a loan extended by banks to the energy sector, specifically the Volta River Authority (VRA) and losses accrued to Bulk Oil Distribution Companies (BDCs); due to forex under-recovery during the years when petroleum price was not deregulated. Due to VRA and the BDCs’ inability to repay their loans, an arrangement was reached between government and the banks to set up a Special Purpose Vehicle to be called ESLA Plc which issued bonds to the banks to be repaid from the ESLA levy in the petroleum price build up. This resulted in the reclassification of the loan from “Loans and Advances to Customers” to “Investment in Securities” in the banks’ financial statements.
Similarly, Mr. Awuah pointed out, Daakye bonds were the result of loans provided to contractors of the Ghana Education Trust Fund (GETFund) who were not being settled by the fund. In response, the government set up the Daakye Trust Plc (an SPV) which issued bonds to settle these loans and enable the Fund to embark on new investments in educational infrastructure in the country; thereby converting these outstanding loans into bonds. He asserted:
In addition to ESLA and Daakye bonds which were loans and advances to customers before metamorphosing into government securities, there are other bi-lateral government-related loans which were settled with bonds instead of cash as enshrined in the facility contract. Again, some of the government securities have underlying transactions in swaps with Bank of Ghana and other transactions of similar nature. We should also not lose sight of the fact that in 2018, a new bank was set up and capitalised almost entirely with government bonds thereby distorting the loan deposit ratio further and increasing the industry’s holdings in government securities.
With these insights, Mr. Awuah urged caution when interpreting banks’ variables and emphasised the significant sacrifices banks have had to make to ensure stability of the economy during these difficult times. That explains why the banking sector took the difficult decision of prioritising stability of the economy by supporting the government on the DDE programme to get the economy back on track, he emphasised.
Further, Mr. Awuah stated the banks’ commitment to promoting growth and sustainable development by extending loans to the real sectors of the economy. He however, expressed that banks’ decisions to extend loans to customers are hinged on numerous factors, critical among them being the general difficult credit culture of most borrowers. Mr. Awuah lamented the dubious nature of some borrowers, who deploy the inefficiencies in our judicial processes to make loan recovery almost impossible through the court process:
While we complain about the low loan-to-deposit ratio in the banking industry, it is important we take a look at the behaviour of a typical Ghanaian borrower. Most of these borrowers come for loans with premeditated mindset of not paying back. How would the bank then be able to get extra funds to lend to the next person, household or business who may be in dire need of credit to boost their finances or business? The banking sector is heavily regulated; and banks would always ensure due diligence by rigorously following credit covenants designed to facilitate loan disbursement in order to minimise losses in their books. So, while it’s important for banks to extend loans to the real sectors of the economy, let’s also take a critical look at the dishonesty of most borrowers; and in some instances, institutional failures of the judicial system, lands commission, registrar general, etc., making the credit environment difficult to navigate, he noted.
He hailed rollout of the credit reference bureaus, Ghana card and digital addressing system as three key positive developments towards improving the credit culture; and called on judges to deal with loan recovery cases with urgency; and not treat banks as ‘elephants’ and defaulting borrowers as ‘ants’ in such cases.
In sum, Mr. Awuah’s remarks shed light on the composition of investment in securities on banks’ balance sheets, providing clearer understanding of the factors contributing to the level of investment in government securities. By addressing misconceptions, he aimed to promote more nuanced and informed discussion about the role of banks in supporting the economy; and ensuring its stability. He further tasked the media to solicit accurate information and clarification from bankers before putting certain information into the public domain. He pledged the Ghana Association of Banks’ readiness to discuss issues relating to the banking sector, when called upon.
GAB Research Report.