Effect of Banking Sector Clean Up on the Safety of Depositors’ Funds

Abstract

The financial sub-sector which includes the banking industry is the “engine” that accelerates development and growth in global economies, including Ghana. Throughout the years, a number of laws have been enacted through Ghana’s Parliament to bolster activities and performance of the financial sub-sector of the Ghanaian economy. The financial sub-sector forms an integral part of the Services sector. However, there has been a steady decline in growth rate of the Services sector in recent years. The objective of this research was to examine the implications of the banking sub-sector reforms for key stakeholders such as depositors, and the relative effect on their funds. The quantitative approach to scientific inquiry formed the basis for the conduct of this research. A cross-sectional design was adapted and used in the study. This allowed the researcher to gather relevant research data over a specific period of time. Data required for the research were obtained essentially from secondary sources including text books, journals, research papers, newspaper publications; electronic databases of the Bank of Ghana, Google Search Engine, Index Mundi; and financial websites such as Tradingeconomics.com, among others. Descriptive statistics and regression models were used to describe the research variables; and to evaluate their behaviour over the stated time frame in the Ghanaian banking sub-sector. The research findings revealed a negative relationship between banks and specialised deposit-taking institutions that are in distress and failing(independent variable) and the safety of depositors’ funds (dependent variable).The findings revealed the independent variable accounts for only about 23% of the variation in the dependent variable. The results suggested about 77% of the outcome is explained by external random factors such as measures put in place by the Bank of Ghana to mitigate risks associated with depositors’ funds. The findings lend credence to the financial ingenuity of the Bank of Ghana aimed at stabilising the banking system; and enhancing its contribution to national socio-economic development and growth. The study recommended the need for the Bank of Ghana to maintain separate departments responsible for ensuring market-stability and market-integrity of all financial institutions under its supervision; and establish an insurance reserve to expedite mitigation of liquidity and solvency challenges. Corporate benchmarks of financial institutions must be preceded by due diligence and appropriate analysis. Management’s emphasis should be on effective operational risk management, not on investment strategy. Struggling banks with little or no evidence of survival must be liquidated early to avoid further financial tsunami; and to ensure financially healthy and competitive banks are maintained in the economy.