People and institutions saved more money with banks in the first six months of the year than they did in 2020, but not much of bank funds were used to support businesses as loans.

A Bank of Ghana (BoG) report has shown that while deposits with banks rose by almost a quarter to GH¢110.4 billion in the first half, loans to businesses and individuals grew by less than six per cent, as more bank funds went into the purchase of risk-free government paper within the period.

The banking sector report released on August 24 indicated that savings in banks rose by 22.5 per cent in the first half of June – higher than the 19.1 per cent growth recorded in the same period last year.

The report indicated that the strong growth in deposits in the first half of 2021 relative to last year was largely driven by liquidity flows within the domestic economy emanating from the COVID-19 fiscal stimulus. Part also came from payments to contractors, specialised deposit-taking institutions (SDIs) depositors and clients of fund managers licensed by the Securities and Exchange Commission (SEC), according to the report.

“Increased savings by individuals and firms resulting from the pandemic-induced slowdown in consumer and investment spending in some sectors also contributed to the observed growth in total deposits,” it added.

Among other things, the BoG said the strong growth in deposits caused banks to reduce their borrowings by more than half, thereby cutting cost.

Less lending

The central bank added that although the banking sector was broadly profitable and resilient, banks had reduced lending in the wake of the COVID-19-induced risks and a growing appetite for debt by the government.

It said while deposits rose by 22.5 per cent to GH¢110.4 billion by June this year, net loans and advances grew by 5.5 per cent to GH¢41.1 billion. In the corresponding period last year, deposits grew by 19.1 per cent while net advances rose by 14.7 per cent.

Implications

Touching on the implications of the development, the BoG said deposits remained the main source of funding for banks, with its share increasing to 67.7 per cent from 64.8 per cent over the two corresponding periods.

On the other, it said banks’ borrowings increased by five per cent in June 2021, compared with 10.9 per cent growth in the previous year, due to the higher increase in deposits, coupled with higher loan repayments and the liquidity release from the reduction in the reserve requirement of banks.

It said these developments had added to banks’ pool of funds vis-à-vis the slowdown in credit growth.

“The slowdown in borrowings was mostly reflected at the short-end of the domestic market, even as the short-term domestic borrowings contracted by 25.6 per cent relative to a growth of 7.6 per cent in the previous year. Short-term foreign borrowings, however, rebounded to 12.2 per cent growth, against a contraction of 11.2 per cent. At the long end of the market, both long-term domestic borrowing and long-term foreign borrowing recorded slower growth during the review period,” it said.