Bank of Ghana writes off GH¢3.1bn in loans because of new accounting rule


The Bank of Ghana (BoG) wrote off three times more of its loans in 2018 than it did in 2017.

The action, according to the bank’s 2018 annual
report, was largely due to a change in the method used to report the bank’s
financial statements.

Last year, when BoG started reporting its financial
statements in accordance with the International Financial Reporting Standards
Nine (IFRS 9), the bank’s bad loans, technically called impairment losses, rose
from 13 per cent of the gross loans and advances in 2017 to 39 per cent.

The increased impairment led to the central bank
reporting a net loss of GH¢793.09 million in 2018.

The loss for the year under review was almost half of
that of GH¢1.64 billion posted in 2017.

An analysis of the bank’s 2018 report showed that but
for the impairment, which was GH¢3.1 billion, BoG could have posted a net
profit in excess of GH¢1 billion in that fiscal year.

The impairment was on a gross loan book of GH¢7.88
billion, which was advanced to financial institutions and other quasi-government
institutions, according to the annual report.

Robust standards

Issued by the International Accounting Standards Board
(IASB) in July 2014, the IFRS 9 is a set of financial reporting standards that
hinge on the classification and measurement of financial instruments,
impairment of financial assets and hedging of accounting.

It took effect globally on January 1, 2018, forcing
all relevant institutions to adopt it in the reporting of their financial

A banking consultant with more than three decades of
experience, Dr Richmond Atuahene, said in an interview that the increased
impairment by BoG showed the impact that the IFRS 9 would have on the finances
of institutions.

“The impairment of BoG’s loans is not so much about
loans given to institutions that were unable to pay or that have gone bad but
it is more of the change in the reporting standards,” he said.

“This new system is more robust; it requires that you
recognise the loan as you book it,” he said, noting that, such a standard had
negative implications on the profits and capitals of reporting institutions.

Implications on shareholders

The impact of the IFRS 9 on the profit and loss
account of BoG gives a glimpse of what the new reporting standards holds in
store for banks and their shareholders.

Two Chief Finance Officer (CFOs) of two universal
banks in the country told the Graphic Business on condition of anonymity that
the increased impairment requirements under the IFRS 9 had implications on the
pricing of loans, the profit and the capital of banks.

“Generally, it means that you will be impairing more
of your loans under strenuous circumstances.

“The major assumption under that is you do not wait
for an adverse event to happen before you can impair it,” one of the CFOs said.

It explained that while the old regime of financial
reporting required banks to have “objective evidence” that the customer was
having difficulty repaying the loan before impairment, IFRS 9 “says you do not
need to wait, you have to make an assumption and provision for it.”

The other CFO said the increased requirement for more
impairment charge meant that the shareholders’ funds of banks would be reduced.

The shareholders’ funds, according to BoG rules,
comprise paid up capital and reserve funds.

The reserve account holds funds from the profit and
loss account and the income surplus of the bank.

“So, when my provision goes up, my paid up capital
will be the same but the amount that I will transfer to the reserve fund will

“The difference that will go into retained earnings,
which I can use to pay dividend will reduce,” the CFO said.

It said banks that were religious with BoG rules on
provisional requirement would not register significant impairment losses,
following the adoption of the IFRS 9 on January 1, last year.

Beneficiaries of BoG loans

Meanwhile, BoG’s 2018 annual report showed that of the
GH¢7.88 billion that was in the central bank’s loan book, GH¢5.38 billion was
advanced to financial institutions and the remaining GH¢2.51 billion was loaned
to what the bank referred to as other quasi-governmental institutions.

A source at BoG explained that the financial
institutions referred to banks while the other quasi-governmental institutions
referred to the Ghana Cocoa Board (COCOBOD).

Source: Graphic Online

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