BoG’s monetary policies ‘blamed’ for making Ghana’s banking sector one of the most profitable in Africa

The Central Bank’s monetary policies, according to the Paramount Chief of the Asogli State, Togbe Afede XIV, have over the years succeeded in making Ghana’s banking sector one of the most profitable banking sectors on the African Continent.

According to Togbe Afede XIV, this is primarily due to the high-interest rates set by the Bank of Ghana (BoG) through its monetary policy rates underpinned by its inflation-targeting framework.

Togbe Afede XIV in a recent article argues that commercial banks in the country have benefitted from the high interest rates set by the BoG which is evident in the profitability levels of the various commercial banks.

“BoG has over the years succeeded in creating one of the most profitable banking sectors in Africa per the accounting reports, while ensuring a growth-stifling high  inflation→ high interest rate→ high inflation environment, with disastrous consequences for the cedi and the economy.

“BOG’s astronomically high monetary policy rates have burdened our economy over the past 20- plus years. It has not only fueled increases in money supply over the years, fueling price  increases, but has also undermined the cedi. Contrary to their claims, we cannot use “higher interest rates to maintain exchange rate stability”, especially when they have failed to protect the cedi as the only legal tender in Ghana. High interest rates have not and will not help us “maintain exchange rate stability”.  

“Just a few months before our economy run into trouble,  BOG was praising the banking sector, claiming, “The banking industry’s performance has defied  the general economic downturn with strong growth across key metrics including total assets and deposits, as well as sustained improvement in profitability within the industry during the first half  of 2022.” And that, “The sector’s total assets increased by 22.8 percent to GHS200billion at the  end of the period. The domestic component of total assets recorded a higher growth rate of 23.5  percent in June 2022 compared to a growth of 18 percent in June 2021”. They added further that  “…the higher growth in the industry’s assets by mid-year was primarily on the back of an upsurge in deposits and borrowings during the review period”.

“The commercial banks benefitted from the high interest rates.

“But the undeniable truth is that all these “growths” were fueled by high interest  rates and were, effectively, a transfer of assets from government, the public, and the real sectors to the banking sector. BOG and the commercial banks’ huge parasitic profits put a lot of stress not only on the private sector, but on the public sector as well. They imposed a huge burden on those outside the banking sector and frustrated the realisation of the structural changes needed in the economy.  

“BOG’s approach to inflation targeting has not worked.BOG’s persistence in trying to fight inflation in Ghana using high interest rates does not make logical sense, and especially when it is indexed to (historical) year-on-year inflation.

“BOG is still pursuing the same, growth-stifling, demand-side approach to the inflation problem,  and we find ourselves locked in the vicious circle of high inflation→ high interest rate→ high  inflation. It is sad that the IMF has encouraged the use of the wrong monetary policy and inflation concept over the years. As our “advisors”, they share the blame for the mess we are in and have an obligation to help. I suspect some other African countries outside the French block have suffered similarly,” he quipped.

The total assets value of Ghana’s banking industry according to the BoG registered a commendable annual growth of 3.2%, reaching GHS 257.9 billion by the end of October 2023.

Deposits within the banking sector surged to GHS 199.9 billion, marking an impressive annual growth of 16.2%, underlining the sector’s attractiveness to depositors.

Despite an increase in the Non-Performing Loan (NPL) ratio to 18.3%, the banking sector maintains a robust position with a capital adequacy level of 13.4%, surpassing the BoG’s regulatory minimum.

According to the Governor, profitability in the sector continues to ascend as banks strategically invest in high-yielding short-dated instruments issued by the Bank of Ghana (BOG) and Government of Ghana (GOG) with the sector’s proactive measures contributing to its resilience in the face of economic challenges.

Source:norvanreports