Rescue Savings & Loans Companies

– And others grappling with liquidity challenges – Dr Obeng-Okon

Story: Isaac AIDOO, Accra

ECONOMIST and Adjunct Lecturer at the Ghana Institute of Management and Public Administration (GIMPA), Dr Raziel Obeng-Okon, has appealed to government to implement a comprehensive package aimed at rescuing savings and loans companies, finance houses, and other financial institutions grappling with liquidity challenges.

He warns that without decisive intervention, the ongoing struggles within the financial services sector could trigger a severe economic crisis.

Speaking on the current state of Ghana’s financial sector, Dr. Obeng-Okon emphasized that while banks have recovered well from recent financial turbulence, particularly following the domestic debt exchange program (DDEP) and the sector’s restructuring, many lower-tier financial institutions remain vulnerable.

“Savings and loans companies, microfinance institutions, and finance houses are still facing liquidity and recapitalization challenges,” he stated.

He cautioned that if these challenges persist without intervention, it could lead to significant disruptions in the sector, causing further losses for depositors and destabilizing the broader economy.

In his remarks, Dr. Obeng-Okon underscored the need to restore trust and confidence across the entire spectrum of financial institutions. He noted that while some strides have been made in stabilizing the sector, many customers still have their funds locked up in distressed institutions, with no clear recovery plan from regulators.

“We cannot pretend all is well when depositors still have their funds or investments locked up with no clear directives from the regulator to halt a looming disaster,” he stressed.

Support for the Ghana Gold Coin (GGC)

Dr. Obeng-Okon also expressed his support for the recently launched Ghana Gold Coin (GGC) by the Bank of Ghana (BoG), describing it as a promising investment product.

He noted that the GGC could serve as a hedge against forex risks, given that its pricing is pegged to the US dollar. Additionally, he highlighted the potential benefits of the GGC for portfolio diversification, as it offers residents a new avenue for investment in gold, a commodity known for its resilience and long-term value.

“The Ghana Gold Coin is a welcome addition to the financial landscape, providing an opportunity for Ghanaians to invest in a product tied to an international commodity like gold, which has historically proven to be a stable store of value,” Dr. Obeng-Okon remarked.

He further explained that the manufacturing of the GGC from refined gold would contribute to value addition in Ghana’s economy, enhancing the benefits of the country’s natural resources.

Liquidity Challenges and the State of the Financial Sector

Despite the positive reception of the Ghana Gold Coin, Dr. Obeng-Okon warned that it does not address the underlying liquidity issues still facing many financial institutions.

“Currently, an impression has been created that Ghana has excess liquidity within the banking system, leading to the issuance of the GGC to mop up excess cedi liquidity. However, this is far from the truth,” he clarified, noting that the liquidity challenges in the sector persist as a consequence of the financial sector cleanup and the DDEP.

While banks have largely rebounded in terms of profitability and liquidity, Dr. Obeng-Okon pointed out that other institutions within the sector, such as savings and loans companies, are still struggling.

These entities play a crucial role in providing financial services to individuals and small businesses, and their continued instability threatens the broader financial ecosystem.

A Call for Government Action

In his conclusion, Dr. Obeng-Okon reiterated the need for urgent government action to support struggling financial institutions. He argued that a government-led rescue package, similar to those implemented for the banking sector, would help to resolve the liquidity, profitability, and recapitalization challenges facing savings and loans companies, finance houses, and microfinance institutions.

“A package to address these problems is essential for preventing a potential financial crisis,” Dr. Obeng-Okon stressed. He emphasized that failure to act would only exacerbate the situation, creating further risks for depositors, small businesses, and the economy at large. According to him, restoring confidence in the entire financial services sector, particularly among lower-tier institutions, is critical for maintaining the stability and growth of the economy.

Related Issues and Past Government Interventions

The call for government intervention echoes concerns raised during the financial sector cleanup initiated in 2017, which led to the collapse of several banks, savings and loans companies, and microfinance institutions due to insolvency and mismanagement.

The restructuring process, while necessary to stabilize the sector, left many customers with locked-up funds and investments, leading to widespread frustration and loss of confidence in non-bank financial institutions.

The ongoing challenges within the financial services sector have also been exacerbated by the global economic climate and domestic fiscal pressures.

 The government has previously introduced initiatives aimed at restoring stability, such as the DDEP, which restructured Ghana’s debt portfolio and sought to improve fiscal sustainability.

However, Dr. Obeng-Okon’s call highlights the need for targeted measures to address the specific vulnerabilities of smaller financial institutions, which have not recovered as well as the banks.

In light of these challenges, the success of new financial products like the Ghana Gold Coin, while promising, will depend on the overall health and trustworthiness of the sector.

As Dr. Obeng-Okon notes, confidence in the financial system is crucial for ensuring that new initiatives like the GGC can thrive and contribute meaningfully to economic development.

Conclusion

Dr. Obeng-Okon’s call for a government package to address the liquidity struggles of savings and loans companies and other vulnerable financial institutions serves as a timely reminder of the critical role these institutions play in Ghana’s financial landscape. As the country continues its recovery efforts, attention must be given to ensuring that all segments of the financial sector are supported to avoid a potential crisis that could further weaken public confidence and impede economic growth.