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Digitalisation offers brighter future for banks amid pandemic

It was all going well until…. Yes, many individuals, businesses and other organisations could identify with those words in the past few months. For businesses especially, this year looked very promising because of the upcoming general election in December – which would have increased government’s spending across all sectors.

But, unfortunately, all those aspirations turned out to be a mirage when a certain coronavirus disease became a pandemic and caused disruption and devastation in economies all over the world. In fact, all the big economic super-powers have seen growth contract for the first time in many years.

Ghana’s banking sector was not spared the destructive power of the virus. Prior to the pandemic, the country’s banking industry was in top form after the regulator introduced measures to reform it. These included raising the minimum capital requirement to GH¢400million from GH¢120million, and introducing corporate governance directives to address the structural and managerial deficiencies that led to the collapse of some nine indigenous banks.

After the reform exercise in 2018, the industry started seeing impressive growth. Lost confidence, which resulted in massive panic-withdrawals, rebounded as deposits started growing again. According to the Banking Sector Report (January 2020), of a total GH¢83.4billion deposits mobilised by banks in the country as of December 2019, domestic deposits – i.e. monies deposited by local residents only – was more than GH¢83billion, which represents 99.6 percent of the total.

However, just two years ago growth in deposits dropped by 8.8 percentage points from September to December 2018; growing at 17.4 percent in 2019. So, for the same industry to overcome this and grow by 22.2 percent in December 2019 means nothing but restoration of lost confidence.

Besides the deposits that showed increasing confidence, growth in total assets of banks further cements the argument. The report indicates that total assets of the banking sector amounted to GH¢129billion in December 2019, representing a 22.8 percent year-on-year growth compared with 12.3 percent growth in December 2018.

The stronger total assets growth in December 2019 reflected higher growth in both domestic and foreign assets of the banking sector. Domestic assets rose by 23.1 percent to GH¢118.6billion, compared to the 12.5 percent growth recorded in the previous year; while foreign assets grew by 19.8 percent to GH¢10.3billion during the same period, compared to 9.6 percent growth in December 2018.

So this year, 2020, was expected to be much bigger and better for the industry – especially with the looming December polls. But unexpected impacts of the coronavirus pandemic have partially shattered such high hopes, as recent figures show the sector is reeling under pressure from the virus.

The Banking Sector Report (May 2020) reveals that the industry’s profit-after-tax outturn was GH¢960.4million in the first quarter, representing a growth of 16.3 percent – less than half of the 37.3 percent growth recorded in the first quarter of 2019.

According to the central bank, the declining profit growth was mainly due to a sharp increase in operational expenses. Operating expenses growth shot up by near double to 16.2 percent during the first-quarter from 8.8 percent a year ago. It recorded GH¢1.7billion against the previous year’s quarter performance of GH¢1.4billion.

This, the report says, was due to the sharp 21.5 percent increase in banks’ operational costs; which could be attributed to costs associated with the protocols and containment measures of COVID-19 as well as activation of Business Continuity Plans (BCPs) – which essentially are preventive and recovery systems put in place to ensure companies continue to operate in the midst of disasters.

The other incomes category – which raked in GH¢376million for the industry in first quarter of 2019, representing 31.5 percent growth over same period in 2018 contracted by 14.2 percent and recorded GH¢322million.

Also, total deposits grew by 15.1 percent year-on-year to GH¢84.1billion as at end March 2020, lower than the 20.5 percent increase recorded a year earlier. All these depict a sector hit hard by the pandemic.

But all is not lost. Despite disruption caused by the pandemic, one thing comes out positive – the digital drive. The report indicates an astronomical jump in demand for banks’ digital services – which means there is still a window of escape for banks to drive-up profits. Due to the surge in usage of electronic banking services, net fees and commissions grew impressively, by 16 percent from 3.6 percent recorded in first quarter of last year.

This indicates that the stay at home orders and social distancing protocols brought on by the pandemic have awakened customers’ desire to limit the use of cash in their business transactions, as well as their frequent movement and visits to banking halls, and they have resorted to online services made available on bank apps. This suggests that even in the midst of the pandemic, the industry could still utilise its electronic platforms to generate income which can be used to support the private sector in the form of loans.

This position is underscored by risk management expert and a retired banker Francise Owusu-Acheampong, who says that if banks remain alert to the opportunities brought by the pandemic, the industry stands a better chance of keeping profits up even with impacts of the virus.

“There is a future for the industry as well as associated risks…The pandemic is opening our eyes to other avenues that we have not exploited to the full. From my perspective, I think the pluses will be more than the minuses. The most important thing is to identify the risks and manage them well, and then you can get residual profits out of them.

“So, the increase in mobile banking and other electronic platforms show there are a lot of pointers to a growth trajectory which any serious bank should begin to look at and see what they can make out of these opportunities,” he told B&FT in an interview.

When the pandemic hit the country on March 12, 2020, the Bank of Ghana swiftly introduced measures to mitigate the impact it would have on the banking sector. Some of the policies it introduced included the reduction in Primary Reserve Requirements from 10 percent to 8 percent for banks, aimed at releasing extra liquidity for banks to channel into lending – including to support critical sectors of the economy.

Another one is the reduction in Capital Conservation Buffer (CCB) for banks from 3.0 percent to 1.5 percent. This policy effectively reduces the minimum Capital Adequacy Ratio (CAR) from 13 percent to 11.5 percent and complements the policy of supporting credit growth. It therefore removes credit extension constraints that some banks may face due to CAR limitation.

And again, the central bank further reduced the Primary Reserves for Savings and Loans companies, finance houses from 8 percent to 6 percent; and microfinance companies and rural and community banks by 200 basis points. This liquidity release is to support extension of credit to the micro, small and medium-sized enterprises, and low-income households during these challenging times.

The Bank of Ghana says due to these and other measures, it is confident that the industry will be able to “withstand mild to moderate liquidity and credit shocks, based on strong capital buffers and high liquidity positions”.

So, yes, the pandemic has hit the economy hard; but the reforms the banking industry went through has given it a thick skin and the resilience to withstand the destructive power of the virus. There is therefore a bright light at the end of the tunnel for the industry.

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