Reserve Ratio of Banks' Cash Reserves Restored to 14 Percent

Reserve Ratio of Banks' Cash Reserves Restored to 14 Percent

Let's Chat About the BoG's Moves to Tackle Excess Liquidity

Hey there! The Bank of Ghana (BoG) ain't messin' around, folks. The governor, Dr. Ernest Addison, recently announced a hike in the cash reserve ratio (CRR) on local currency deposits for banks, increasing it from 12 percent to 14 percent as of April 13, as part of a plan to address the issue of excess liquidity in the market.

Back in December, the BoG had lowered the ratio to 12 percent, as part of a package of measures designed to assist banks participating in the domestic debt exchange program (DDEP).

Remember when the BoG bumped up the primary reserve requirement of banks from 12 percent to 15 percent after an emergency meeting in September last year? Well, this was executed in three phases, starting with a rise to 13 percent on September 1, followed by 14 percent on October 1, and finally reaching 15 percent on November 1.

In March 2022, the BoG announced a 400 basis points (bps) increase in the rate, pushing it above the pre-pandemic level of 10 percent and projected to siphon off as much as GH¢6 billion in liquidity from the market.

But Dr. Addison reckons it's time for another move to maintain stability within the financial sector. He went on to say that "The Committee also decided to reset the cash reserve ratio on domestic currency deposits for banks from 12 percent to 14 percent, effective April 13, 2023... The Committee will continue to monitor developments in the banking sector and deploy other macro prudential tools to ensure financial stability."

He also mentioned that additional measures will be deployed to tackle the surplus liquidity situation.

Industry Happenings

Despite the hurdles the industry's faced, the banking sector's total assets grew by 16.4 percent to GH¢209.4 billion in December 2022, thanks to growth in deposits and exchange rate variations on banks' balance sheets. However, total investments declined by 22.1 percent to GH¢64.8 billion, and total credit increased by 28.5 percent to GH¢69.1 billion during the same period.

The industry's minimum capital adequacy ratio (CAR) got reduced from 13 percent to 10 percent as of December 31, 2022, and losses from the DDEP are to be reflected in the computation of CAR over a period of up to three years. This caused the industry's average CAR – adjusted for regulatory reliefs – to drop slightly from 16.6 percent in December 2021 to 15.7 percent in December 2022, mainly due to losses on investments.

The non-performing loans (NPL) ratio stayed at 15.1 percent in December 2022, similar to the 15.2 percent recorded at the end of 2021, and was attributed to "higher growth in credit, which outpaced the growth in the NPL stock."

Dr. Addison noted that banks' external auditors are still completing audits of commercial banks' 2022 financial performances and making necessary adjustments to fully reflect the DDEP impact. The audited financial statements are expected to be published by the end of April 2023, following a one-month extension granted by the BoG.

The Monetary Policy Committee (MPC) will keep a close eye on domestic and international developments that might affect Ghana's macroeconomic stability and will respond swiftly to any issues that may emerge, according to Dr. Addison. He reiterated that the Committee remains committed to achieving its core mandate of price stability and financial stability to foster sustainable economic growth and development.

Now that you're up to date with the BoG's latest moves, keep an eye on the financial sector for further developments!

Insights:

1. The BoG has implemented a dynamic CRR mechanism based on banks’ Loan-to-Deposit Ratios (LDRs), aiming to encourage private sector lending and better manage monetary policy.
2. Starting June 2025, banks will hold reserves in the same currency as their deposits to enhance financial stability and monetary policy efficacy.
3. These changes aim to tackle several economic challenges, including promoting private sector lending, enhancing financial stability, and improving monetary policy effectiveness.
4. The Bank of Ghana (BoG) is adjusting the cash reserve ratio (CRR) based on banks' Loan-to-Deposit Ratios (LDRs), with the goal of promoting private sector lending and better managing monetary policy.
5. From June 2025, banks will be required to hold reserves in the same currency as their deposits, to bolster financial stability and increase the efficacy of monetary policy.
6. The government recently published a report showing that, despite a decline in total investments, the banking sector's total assets grew significantly in December 2022. The report highlights an increase in total credit and a drop in the banking industry's average Capital Adequacy Ratio (CAR).
7. The Monetary Policy Committee (MPC) aims to maintain Ghana's macroeconomic stability through close monitoring of domestic and international developments. They remain committed to achieving their core mandate of price stability and financial stability, which will foster sustainable economic growth and development.

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