Latest data published by the Bank of Ghana has revealed that one of the country’s major financial soundness indicators has been declining for the past three months raising concerns over the health of Ghana’s banking sector.
According to the Summary of Economic and Financial Data published by the Central Bank, the Capital Adequacy Ratio (CAR) which is an important measure of the health and stability of the financial system has been declining for three months running.
The data shows that CAR declined from 15.5% in April 2024 to 14.7% in May and further dropped marginally to 14.3% in June this year.
This downward trajectory has raised alarm over the capacity of the financial sector to remain solvent over time should the trend persist. A continuous downward trend of CAR will mean that the banks will have less funds reserved for unexpected losses increasing the risk for depositors and investors. It will further result in a financial sector that cannot handle shocks or economic downturns hence risk failure.
Moreover, a declining CAR could further induce reduced lending and decreased confidence among customers and investors.
Commenting on the development, a financial analyst Courage Boti who spoke to The High Street Journal noted that even though the situation calls for further observation in the coming months, it is not alarming at this point.
“At 14.3%, the industry in general is still above the Bank of Ghana regulatory requirement of 13% even now 10% at forbearance following the current crises. So it is just above the usual threshold and you can see specifics of an institution at ADB that has negative CAR as their 2nd Quarter financials will show. That alone will even weigh the industry average. And I know NIB is in a similar situation. So it’s all part of what is weighing down this number. As to whether they are very endemic and cause everybody to be concerned, I am not sure that is the position here,” he explained.
He continued, “This a mix of factors that is playing a role in the decline. It is alarming? I’m not too sure at this point. So I am not overly alarmed at this point but I must say that I have not looked at the data of all the banks. But I think it’s really a trend we must observe in the coming days. If it continues to the point where it falls below the regulatory threshold significantly, then we can say there is a cause for concern. At this point, I think, it is a trend worth observing for a few more months ahead.”
