The Governor of the Bank of Ghana (BoG), Dr. Ernest Addison, has urged commercial banks to address the structural vulnerabilities undermining the stability of the banking sector. Speaking at the 28th National Banking and Ethics Conference organized by the Chartered Institute of Bankers, Ghana, on Thursday, November 21, Dr. Addison stressed the need for a comprehensive approach to resolve the sector’s challenges.
Dr. Addison revealed that the Central Bank is taking proactive steps by integrating business model analysis (BMA) into its regulatory framework. This strategy aims to identify and mitigate risks that could compromise the soundness and sustainability of the banking sector. The Governor explained that vulnerabilities in the banking sector often stem from structural weaknesses rather than sudden external shocks, emphasizing the importance of early identification and intervention to prevent banks from becoming non-viable.
He elaborated on the root causes of banking sector vulnerabilities, noting that unsustainable business models and unviable strategies are often at the heart of bank failures. While external shocks like the COVID-19 pandemic or global financial crises can exacerbate these challenges, the underlying issues are typically long-standing structural problems. According to Dr. Addison, these vulnerabilities, if not addressed promptly, can lead to banks’ activities becoming unsustainable over time.
Dr. Addison stated, “Weaknesses leading to the collapse of banks are not overnight. Unviable and unsustainable business models and strategies are often the root causes of banks’ vulnerabilities and failures. While sudden external shocks such as COVID-19 or the global financial crisis could be greatly impactful and cause the immediate demise of some banks, the root causes are generally more structural. If not identified in time and allowed to fester, these vulnerabilities will make a bank’s activities increasingly unsustainable, to the point where it becomes non-viable.”
To tackle these challenges, the Bank of Ghana is enhancing its supervisory framework by incorporating BMA. Dr. Addison explained that this approach would help supervisors identify vulnerabilities in banks at an early stage, ensuring their safety and soundness. As part of this initiative, the Central Bank has issued an exposure draft of its methodology for assessing the viability of banks’ business models to the industry. The draft is expected to be finalized soon for adoption.
“Going forward, the Bank is incorporating Business Model Analysis (BMA) as a key component of its supervisory frameworks to enable supervisors to identify banks’ vulnerabilities at an early stage and help to ensure their safety and soundness,” Dr. Addison stated. He added, “We have recently issued an exposure draft of our methodology for assessing the viability of banks’ business model to the industry, which we will soon finalise for adoption. Business model analysis has the potential to enhance bank supervision and make it more effective, proactive and forward-looking, and would be our next examination thematic review next year.”
The Governor also underscored the importance of responsible banking practices rooted in strong ethical standards. He urged the banking industry to prioritize integrity and accountability in all operations. He stressed that these values are crucial to maintaining the trust and confidence of stakeholders, as well as ensuring the sector’s long-term sustainability.
The conference also highlighted other pressing issues facing the banking sector. The President of the Chartered Institute of Bankers, Ghana, Benjamin Amenumey, raised concerns about the rising levels of financial fraud within the industry. Referring to the findings of the 2023 Fraud Report by the Bank of Ghana, Mr. Amenumey called for enhanced internal controls and increased emphasis on ethical training to combat this growing challenge.
“Another pressing issue is the rise in financial fraud as highlighted in the 2023 Fraud Report by the Bank of Ghana. This underscores the need for robust internal controls and ethical training,” he said.
Dr. Addison’s remarks at the conference reflect the Bank of Ghana’s commitment to fostering a resilient banking sector capable of withstanding shocks and maintaining stability. The integration of business model analysis into the regulatory framework represents a forward-looking approach to supervision, aimed at addressing the root causes of vulnerabilities before they escalate into crises.
The Governor’s emphasis on structural challenges underscores the need for banks to rethink their business models and strategies to ensure long-term viability. His call for ethical banking practices further highlights the critical role of integrity and accountability in building a robust and trustworthy financial system.
Mr. Amenumey’s remarks on financial fraud bring to the fore the urgent need for banks to strengthen their internal controls and invest in ethical training programs. As financial crimes become increasingly sophisticated, banks must adopt proactive measures to safeguard their operations and protect customers.
The 28th National Banking and Ethics Conference provided a platform for key stakeholders to reflect on the challenges facing the sector and explore solutions to enhance its resilience. The discussions underscored the importance of collaboration between regulators and industry players to address vulnerabilities and promote responsible banking practices.
Dr. Addison’s vision for a more proactive and forward-looking supervisory framework signals a significant shift in the regulatory approach, with a focus on addressing the root causes of sectoral vulnerabilities. By prioritizing the early identification of risks and fostering ethical banking practices, the Bank of Ghana aims to create a stable and sustainable banking sector that can support the country’s economic growth and development.
As the Central Bank finalizes its methodology for assessing banks’ business models, industry players are expected to align their strategies with the new regulatory framework. This alignment will be crucial in ensuring the stability and resilience of the sector, as well as restoring public confidence in the banking system.
The Governor’s remarks serve as a reminder of the critical role of regulators and industry stakeholders in safeguarding the integrity of the financial system. By addressing structural vulnerabilities, strengthening internal controls, and promoting ethical practices, the banking sector can overcome its challenges and contribute to the country’s economic progress.
