The COVID-19 pandemic has triggered a state of emergency around the world, with the global economy reeling under its scourge. The effects of this pandemic has been felt in every economy across the world and no sector of the economy has been spared the brunt of this once in a century pandemic. From the manufacturing sector to entertainment, sports, tourism etc., every sector of the Ghanaian economy have had to deal with the harsh effects of the COVID-19.
One sector of the economy which has been in the discussions during this period has been the financial sector, which is the fulcrum around which all economic activities in the country evolve and the life blood of every economy. With every sector being impacted in a different way, the banking sector is the latest to start showing signs of the negative impact of the virus.
Over the last couple of months, international firms like the KPMG, Deloitte, PwC, among others have outlined some of the implications the COVID-19 could have on the banking sector in Ghana and the latest report of the Monetary Policy Committee of the Bank of Ghana on developments in the sector in the first quarter of the year appears to be confirming the fears of these institutions. The report expressed concerns that banks in the country were beginning to feel the pinch of the pandemic, as all the key performance indicators of the sector contracted in the first quarter of 2020.
Under the period under review, assets grew by 3.5 percent which was lower than the 5.7 percent growth recorded in the first quarter of 2019. Deposits also grew by 0.7 percent, lower than the 6.9 percent growth in 2019, with credit growth also dipping due to the slowdown in demand for credit and tight credit stance by banks.
The central bank believes the slower growth rates recorded during the first quarter of 2020 reflects the emerging impact of the economic slowdown and rising risk aversion because of the COVID-19. On an annual basis, although the industry’s balance sheet growth performance was strong, the banks’ quarterly assessment point to a slowdown in business activity emanating from the COVID-19.
With borrowers facing job losses, slow-down in business activities, and declining profits, banks in the country were expected to start feeling the pinch of the pandemic. Hotels, Arline’s, pubs, nightclubs, tourist sites for instance have seen no business or cash flow since March, but, however have expenditures such as rents, utilities and salaries to pay. This has led to laying off of workers, with those remaining receiving half salaries. This clearly was expected to have an impact on banks deposits.
Due to the lockdown, many businesses were shut down, with others also operating at half capacity, a situation which affected their cash flows and ability to repay loans they have taken from banks. Many predicted this was going to have a severe impact on the non-performing loans ratio of banks and the report from the BoG confirmed this fears, as the non-performing loans ratio of the industry inched up in March 2020.
“This was mainly due to the decision of banks to slow credit extension while monitoring the impact of the COVID-19 pandemic on the economy. In the outlook, the evolving economic and operating environment could pose some challenges to the sector. Banks continue to project tightening of credit stance to protect their balance sheet although credit demand could pick up,” - BoG
Banks in the country as at May ending had granted loan repayment holidays to the tune of GH¢1.6 billion to customers and businesses who have been affected by the pandemic.
Banks resilience to shocks
Over the years, banks have demonstrated their resilience to shocks and the COVID-19 pandemic represents one of the many shocks banks have had to deal with in the past. In the last two years for instance, Ghana’s banking industry witnessed some turbulence which led to some banks losing their licenses and just when things appeared to be stabilizing, the COVID struck.
The business of banking is managing risk so while COVID will present real first time risk to some sectors and institutions, banks are used to such risks due to the financial crisis of 2008 and several other financial meltdowns in the past, which means that banks should be in a better position to manage the risk emanating from the COVID-19. With banks always being at the forefront of managing risks, customers therefore do not need to panic because of this latest set-back as banks have some fundamental pillars on how to manage risks.
Frontview of the Bank of Ghana
The BoG, in its report assured the public that this was no cause for alarm as its latest stress tests suggested that banks were resilient and well positioned to withstand mild to moderate liquidity and credit shocks, which could emanate from the emerging operating environment.
“The lower-than-expected growth rates in the key performance indicators during quarter one reflect the challenging operating environment for the banking sector due to COVID-19. Notwithstanding this, the financial sector soundness indicators remained healthy. The latest stress tests conducted in April 2020 suggest that banks remain well positioned to withstand mild to moderate liquidity and credit shocks based on strong capital buffers and high liquidity positions. Capital Adequacy Ratio was well above the revised regulatory limit of 11.5 percent, liquidity remains strong, and efficiency indicators have improved,” - BoG
Key Financial Soundness Indicators (FSIs)
Policy measures by BoG
To help banks withstand the COVID-19 shocks, the central bank rolled out a couple of measures to support them. The Primary Reserve Requirement was reduced from 10 percent to 8 percent to provide more liquidity to banks to support critical sectors of the economy and the Capital Conservation Buffer (CCB) for banks of 3 percent was also reduced to 1.5 percent to enable the banks provide the needed financial support to the economy. This effectively reduced the Capital Adequacy Requirement from 13 percent to 11.5 percent.
The central bank as part of the measures also lowered the Monetary Policy Rate 150 basis points to 14.5 percent to enable banks to lend to customers at a reduced rate. The BoG in its report expressed confidence that these policy measures would help boost the sector’s credit operations and moderate emerging risks in the outlook.
” Measures by banks to control operational costs, minimize operational losses, and contain credit risk while supporting credit expansion to critical economic sectors will be crucial in balancing growth and stability in the sector,” the report noted.
Changes in retail banking
Although the pandemic has come with its own challenges to banks, it has not all been gloom as we have also seen some positives in terms of banks customer’s adoption to their digital channels. Prior to the COVID-19, banks were faced with the challenge of getting their customers to adopt their online channels. With the pandemic forcing banks to close some of its branches and some staff, having to work from home, customers who were slow in adopting the digital channels of banks were left with no other option than to use these channels.
Forbes reported that at its peak in April, the COVID-19 pandemic resulted in an estimated 3 billion people worldwide being in lockdown, which meant that businesses and consumers had little choice but to use online services. This has led to an increase in the usage of banks digital channels within this period. While this may come as good news to the banks as it reduces their cost of operation, the question that has been on the minds of most people have been whether the pandemic has changed the banking business for good or whether customers would return to the brick and mortar structures to transact their businesses post COVID.
Speaking at a Webinar, the President of the Chartered Institute of Bankers, Mrs. Patricia Sappor, said banks could no longer go back to their old ways of operating since the needs and psyche of customers had changed significantly as a result of the COVID-19.
She said investing in large and expensive edifices to accommodate employees could be curtailed as banks have found ways for workers to work more remotely and digitally.
“This will reduce the operating costs of banks since lesser expenses on utilities and depreciation are incurred.”
The pandemic has also given the government’s initiative of moving the economy to a cashless society a shot in the arm, as people are now increasingly moving towards digital payments. Mrs. Sappor said this presented banks with the opportunity to aggressively drive the digital agenda whilst encouraging customers to jump onto the digital train using channels like Mobile Apps, USSDs, Internet Banking, and ATMs to facilitate transactions.