Home / Business / Finance / Prof. Gatsi writes: Liquidity Support is not free money to Banks; BoG Benefits from Same

Prof. Gatsi writes: Liquidity Support is not free money to Banks; BoG Benefits from Same

Prf. John Gatsi

The Bank of Ghana (BoG) is the lender of last consideration to universal banks. Liquidity support to universal banks has become a common word after the ownership change in seven(7) universal banks. The term actually means borrowing from the Central Bank and the purpose of such borrowing is to provide liquidity to banks to meet withdrawals by

depositors and for general financial intermediation.

This borrowing, called liquidity support, attracts very high rates normally at the policy rate to universal banks. It is structured for repayments every three months which generates interest income for the BoG. It is therefore very misleading to portray liquidity support as some free money to universal banks.

It is true that asymmetric information in banking and regulatory governance can lead to adverse selection and moral hazard for both universal banks and BoG. It is for this reason that proper credit governance is crucial. The BoG seems to assume that poor loan recovery and nonperforming loans by the banks are due to poor credit governance including improper assessments of loan applications. The huge grant of liquidity support (loan to universal banks by BoG) with the disappointing misapplication in some of the defunct banks means there is equally weak appraisal and “below the standard procedure” in granting requests for liquidity support.

The BoG cannot be any different from the weaknesses demonstrated by the defunct banks. Should it be said that income generation from the grant of liquidity support is a great motivation?

Using Unibank as an example, it means, while government and other state institutions including BoG were indebted to Unibank of about one billion Ghana cedis (GH¢ 1B) without the commitment to repay, Unibank was paying or supposed to be paying accrued interest to BoG. So this issue about liquidity support is all about debtor -creditor relationship of which the purpose of the debt by Unibank and other universal banks is to support liquidity position.

Perhaps, the Borrowers and Lenders ACT may also help address this issue and to correct the impression that liquidity support is free money.

However, misapplication of the loan, called liquidity support, especially to the personal benefits of directors and shareholders must not be taken lightly in the scheme of present discussions about the role of boards in the defunct banks.

About Prof. John Gatsi | Columnist

Check Also

Hallucinating Dr. Bawumia

Ghana is getting interesting and your likes cannot stop amazing me. I understand you are …