Private sector still crowded out of bank credit

…despite recapitalization

Dr. Ernest Addison, BoG Governor

Data made available by the Bank of Ghana indicates that despite the expectation that the recently concluded recapitalization of Ghana’s banking industry would instigate a rebound in bank credit growth to private enterprises, the private sector, comprising private enterprise and households are still being deprived of direly needed loan financing because of the public sector’s large appetite for domestic debt. Indeed, contrary to the central bank’s expectations in this regard, the share of outstanding bank credit held by the public sector has actually increased over the 12 months up to April 2019, although in absolute terms outstanding private sector bank debt has increased – but not nearly by as much as public sector debt has climbed.

By April 2019, the private sector held 52.6 percent of the total outstanding banking industry loan portfolio of GHc74,253.38 million, this amounting to GHc39,079.08 million. On the other hand, total debt outstanding owed to banks by the public sector totaled GHc35,174.30 million, or 47.4 percent of the total. Public sector debt comprised GHc25,840.64 owed by government through its issuances of treasury bills, notes and bonds as well as Tema Oil Refinery bonds; and GHc9,333.66 million owed by state owned enterprises.

Instructively, a year previously, as at April 2018, the public sector owed GHc19,817.09 million in all, this amounting to just 37.8 percent of the GHc52,449.83 million total loan portfolio of the banking industry. At that time, the private sector held 62.2 percent of the total banking industry loan portfolio, amounting to GHc32,632.74 million.

To be sure though, in absolute terms, credit held by the private sector has grown over the one year period, by 19.8 percent. However this has been eclipsed by a 39.1 percent increase in outstanding bank debt held by SOEs and more impactfully, by a 97.2 percent increase in the outstanding debt held by government through its cedi-denominated domestic debt issuances.

This shows that most of the increase in both deposits and capital – the latter having risen dramatically due to recapitalization – has gone into increased credit to the public sector rather than the private sector which both the BoG and government itself had been hoping for, in order to drive faster economic growth, targeted at 7.6 percent for 2019.

The private sector has been complaining vehemently that it is not getting its fair share of bank credit and the data from the BoG supports their assertion in that it is the private sector that accounts for the overwhelming largest proportion of the deposits that fund most of banks lending in the first place. Indeed, by April 2019, the private sector was the source of 88.8 percent of the total cedi deposits held by Ghana’s banking industry at that time, of GHc71,342.42 million. The private sector’s cedi deposits by that time amounted to GHc63,374.94 million compared with just GHc7,967.48 million provided by the public sector comprising GHc4,359.79 million in deposits from government’s institutions and agencies and GHc3,607.69 million from its SOEs.

This means the public sector, as at April this year, was supplying just 11.2 percent of the banking industry’s cedi deposits but taking 47.4 percent of its total outstanding loans portfolio; while conversely the private sector was providing 88.8 percent of the industry’s deposits but held only 52.6 percent of its credit.

Banks have been retreating from private sector loans towards risk free public debt issuances over the past two years as they have had to struggle with rising non-performing loans ratio (the industry average peaked at 23 percent by mid 2018) while being presented with the opportunity to make between 14 percent and 21 percent (depending on the tenor) on risk free government domestic debt issuances. Between the beginning of this year and July 15, government has issued GHc24.8 billion in domestic debt securities although most of this has been used to meet current debt maturities as they arise.