Question

1.​The recent collapse of some banks and financial institutions and the merger of others in ghana is proof that the financial system which consists of institutional units and markets that interact, typically in a complex manner, for the purpose of mobilizing funds for investment and providing facilities, including payment systems, for the financing of commercial activity remains unprotected in spite of the the presence of the Regulator and a solid legal system backing it. From the discussion in class and available literature, examine some of the difficulties associated with the financial system and how these challenges have been addressed by the Banks and Specialised Deposit Taking Institutions Act 2016 (Act 930). Are there any novel ways by which some of the challenges may be resolved in your opinion?

Answer 1

Banks play a very important financial intermediary role in any economy. This role is heavily regulated from the commencement of the banking business, that is licensing, and regularly during the operations of the bank.

The regulation of banks have been supported by many in times past including Adam Smith who, generally is not a fan of government controls but advocated strongly that “banks redeem all notes in specie upon demand”.

It is needless to state the role played by banks as financial intermediaries providing transaction services with demand debt; their susceptibility to runs and panics; their role in creating and destroying money; and their custodianship of the payment system.In fact, a bank’s susceptibility to runs is the main reason why deposit protection is necessary. All customer deposits, be they current, savings or time deposit accounts are called debts to the banks. That is, the deposits are liabilities that the bank invariably owes to its customers. A bank uses the deposits received from customers to advance loans, overdrafts etc to persons that it carries out business with. In order for banks to be able to serve their customers, they need to maintain a fine balance between customers’ deposits and the ones they have given out as loans. This is called reserves.  

Because most firms and individuals can safely predict their cash needs, they are able to put some into illiquid projects. But banks cannot know for certain how much of their debt will become due on any given day because most of their debt takes the form of deposit payable on demand. It is easy for banks to keep all their deposits in the vault awaiting customers’ withdrawal but vault money do not earn interest.

Therefore, banks survive when one depositor is depositing cash, another is taking out cash and because these two acts are independently driven the aggregate demand and supply are predictable. Depositors who would otherwise have left their money in the bank withdraw it at once. In view of the above, if most depositors in a single day decide to withdraw large amount of money, there would be a total chaos and the bank cannot find all the money needed for them on a single day since some of the money have been advanced to other customers as loans, overdrafts etc and have not been paid back; the bank can come to it knees within a few days.

This intention of the Act was a noble one but one wonders why the framers either by accident or intentionally decided to deviate completely from that path.

The Act establishes a Deposit Protection Scheme as a form of insurance to protect the deposits of small depositors. Section 3 of Act 931 which provides for the object of the Scheme states that it is to protect small depositors from events that are insurable under the Act, and to support the development of a safe, sound and stable financial marketplace.

Actually, the general objective of the Act ought to have had a non-plan of action weight to the citizen as a fundamental point, albeit one may contend that a store security and a free from any potential harm budgetary market are on the whole focusing on the assurance of the citizen. It is obviously the little investors focus by Ghana Deposit Protection Act, 2016, Act 931 and free from any danger commercial center don't focus on the citizen however are both for government advantage.

However, for the deposits of depositors to be properly protected in a free market, banks and specialised deposit-taking institutions should be allowed to decide whether they want to join this GDPC or do otherwise. In some jurisdictions, the option of joining a Deposit Protection Corporation is given to the financial institutions.  But because of the forces at the marketplace, their membership , has become compulsory because depositors are informed which of the financial institutions are member of DPC and which ones are not and therefore Financial Institutions are left with no choice than to become members of DPC and boldly advertise their membership.

The function of the commercial banks in Ghana regarding deposits mobilization has not yielded maximum results. Banks deposit mobilization has tended to concentrate more in the urban areas. This covers the rich with regular incomes and a few large reputable companies who have the ability to save. Needless to say, most of the rural folks and small scale businessmen have limited access to the commercial banks. In many instances these people resort to “susu” collectors and rotational savers for their saving services. As far as these services may achieve their purpose of mobilizing deposits, they face threats of frauds and subsequent mistrust of operators. The benefits of extending bank services to these areas would be enormous either extending bank branches where profitable or bank personnel making periodic visits and training of local group leaders capable of using bank expertise to mobilize deposits.

In Ghana there are limited sources of funds to investors and looking at the dominance of the commercial banks operating in 277 areas and commanding 70% of the banking business there is the need for bank reforms that devise more effective ways of mobilizing deposits from these small scale enterprises and subsistent farmers and widens their scope to meet the entire population with bank products and services. The more banking services are extended to the rural savers, the more deposits will increase and “all other things being equal” supply of loanable funds will increase proportionately.

In Ghana, Commercial Banks are faced with many challenges in their desire to mobilise more deposits. As observed in the previous chapters, more than 60% of the population live in the rural areas in isolated villages. It therefore become cost ineffective to have bank branches that can conveniently provide door step financial services to the rural inhabitants hence, their concentration in the urban and the southern part of the country

The Banking sector in Ghana has not fully regained the confidence that many customers lost; thus making deposit attraction difficult. This could be due to partly the attitude of bank staff towards customers and the government action of controlling the operations of the banks. In the early 1980s most depositors had their deposits frozen because of the government’s decision to withdraw fifty cedi notes from the money in circulation

Another problem militating against deposit mobilisation in Ghana is the unfavourable macroeconomic environment with high inflation and reserve requirement and their associated low returns on deposits. In a period of high inflation, hedging is inevitably a prudent measure depositors pursue in order to enjoy future appreciation of value. Thus, more deposits are redirected into the purchase of real estate properties. The high reserve requirement of 44% compose of both secondary and primary reserves in addition to high tax and a 10% development levy reduced the volume of loanable funds which subsequently reduce returns on investment and deposits.

Commercial banks should now target the rural majority. Where the usual way of extending bank branches has not been helpful, there could be formation of Self Help Groups (SHGs) made of members with similar occupations. Bank personnel can then be deployed periodically to train them simple book keeping, account maintenance and depositing and other related business advice.

The legal system in Ghana is weak and subject to manipulation from both the government and the opinion leaders. Investors/depositors are not protected in such a situation to invest their money. Good accounting methods, auditing and other checks and balances would ensure smooth interpretations of the law. Enforcing regulations to guide and protect depositors would provide a safe environment for depositors to increase their savings.