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BANKS HOLD BACK CREDIT

By Elorm DESEWU

Universal Banks in the country are currently trading controversially with regard to giving out credit facilities to their customers.

According to bank chieftains, most banks have held up the granting of credit facilities to customers for the fear of likely rising loan default rate.

This is due to the fact that, as interest in the country continue to rise, borrowers find it harder to pay back the loan facilities acquired from banks.

Additionally, the central bank’s monetary policy is being tightened which means less liquidity in the country which translates into less cash flow as well as constraints in the obligation to service loans.

Indeed, banks are also trying to learn lessons of the global credit crunch which subprime mortgage lending. The subprime mortgage crisis which is an ongoing financial crisis was triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe.

When US house prices begun to decline in 2006 and 2007, mortgage delinquencies soared and securities backed with subprime mortgages widely held by financial firms, lost most of their value. The result has been a large decline in the capital of many banks and USA government sponsored enterprises, tightening credit around the world.

Also government deficit requires higher public-sector borrowing. This means that government will issue more government securities, that is treasury bills, notes and bonds, at a higher yields.

According to the Monetary Policy Committee report, credit to the private sector and public institutions by deposit money banks over the year 2008 increased by GH¢1,820.3 million representing 43.9% compared with GH¢1,626.7 million representing 64.6% for 2007. The private sector accounted for GH¢1,5896.2 million representing 87.1% of the credit flow, bringing the private sector credit outstanding to GH¢4,884.3 million.

However credit to the private sector recorded a real annual growth of 25.4 in 2008, some easing from 41.8% for 2007.

Although the central bank in 2006 abolished the secondary reserve requirement for banks to make more money available for on-lending to the private sector, the situation has changed now. Banks are now mostly investing in government securities which are safer as they want to protect shareholders value as well as depositors.

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