Why is the Economy not growing as expected
The managers of the economy require that commercial banks deposit 20% of their deposits with the Bank of Ghana (BoG). This amount with BoG doesn't attract interest. The commercial banks are supposed to give interest on the remaining amount. Ask yourself where the banks will get money to give interest when their 20% is locked up with the BoG without interest. The banks will have to price this in the loans they give out especially to the private sector. No wonder the average lending rate is hovering around 33%. Since the private sector borrows at high interest rate and given that the Non Performing Loan (NPL) is high, the banks prefer to invest in government of Ghana securities e.g. Treasury Bills (T.Bills) instead of lending to the public or private sector. The implication is that the private sector which is the engine of growth will continue to suffer. Unemployment rates will be high and our economy will continue to be difficult.
Any banking sector that has NPL above 20% is sitting on a time bomb. This is according to literature and I'm not the one saying it. The Ghana's NPL is currently above 20%. No one needs to tell us that the banking sector is facing challenges notwithstanding the fact that it was recently re-capitalized. I'm not an economist but with the economics I learned in undergraduate, postgraduate and chartership (professional), I'm not empty of some amount of Economics.
To therefore re-capitalize, it is necessary to tackle why there are losses first. If you re-capitalize without those issues addressed, it's just a matter of time and you will lose all again and be back to square one.
In my candid opinion, I strongly recommend that the Insurance sector should not rush to re-capitalize because banks are doing so. The two sectors are not the same. The National Insurance Commission (NIC) should therefore take caution in this regard. All General and Life Insurance companies aren't doing well when it comes to Underwriting Losses. Banks price NPL in their loans. Insurance companies can't do same by factoring Underwriting Losses in quoting premiums. If they do so, people can't buy Life Insurance which is already low in terms of penetration rate. I therefore admonish that the NIC does something about underwriting losses first before considering recapitalizing. If they fail and go ahead to re-capitalize, it's just a matter of time and all money will be used to pay claims. They will be back to square one just as the banks are facing.
A word to the wise is in the North!
Roland Naab Timbil
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