BOG to Explore New Prudential and Market-Conduct Measures for Banks

The industry’s capital adequacy ratio—computed in accordance with the new Capital Requirement Directive (CRD) under the Basel II/III capital framework—stood at 18.9% in October 2019, well above the 13% minimum regulatory benchmark. Furthermore, the asset quality improved while the nonperforming loan (NPL) ratio declined to 17.3% in October 2019, from 20.1% in October 2018. Adjusting for the fully provisioned loss category, the NPL ratio declined to 8.1%, from 11.4% over the same comparative periods. The NPL ratio is projected to further decline as banks intensify loan write-offs and recovery efforts. Increased innovation and technological changes in the payment ecosystem have supported the Bank’s objective of promoting inclusive finance.

In addition to the assessment of macroeconomic conditions, the Monetary Policy Committee undertook a deep review of the lending practices in the banking sector. Following the recapitalization of banks, a rebound and gradual pick-up in credit extension by banks is taking place. Also, BOG is exploring a number of new prudential and market-conduct regulatory measures to help foster more competition in the banking sector and in the process help lower lending rates:

• To further provide increased activity in the small and medium enterprise (SME) sector, BOG is setting aside 2% of the banks’ primary reserve to support targeted lending to SMEs as part of the Enterprise Credit Scheme announced in the 2020 budget. These funds will be held at BOG and will be available to banks that participate in the scheme.
• To support and strengthen the growth of credit to the private sector, BOG will explore the possibility of setting a minimum loan-to-deposits ratio to ensure that more deposits mobilized by banks are channeled to viable private-sector projects. BOG will hold further consultations with the banking industry to determine the impact of such a regulatory measure, and if warranted, determine the level of such a ratio and appropriate monitoring and enforcement mechanisms to promote its effectiveness.
• BOG will be working closely with banks to ensure that banks do not pass on their operational inefficiencies and overhead costs to their clients. To do this, steps will be taken to align compensation with overall bank performance by linking it to clear parameters, including the quality of a bank’s assets. BOG will scrutinize compensation policies for Chief Executive Officers and key management personnel as well as Board of Directors of universal banks. 
• To further deepen transparency in the determination of lending rates, banks will be required to develop and publish a clear framework on the risk premium build-up that impacts the credit profiles of individual borrowers. 
• BoG is in discussion with key stakeholders to explore a pilot project (in a sandbox environment) on central bank digital currency with the possibility of issuing the "e-cedi" in the near future.

Related Link: Press Release (PDF)

Keywords: Middle East and Africa, Ghana, Banking, NPLs, Capital Adequacy, Prudential Measures, Governance, Operational Risk, Basel III, Credit Risk, BOG