Bank of Ghana promotes financial innovation

The Second Deputy Governor of the Bank of Ghana has emphasized that to enable customers and banks derive the maximum benefits from innovations, banks should invest in technologies that increase access and lower the cost of use of banks services. According to him, increase in the banking population is expected to lower the overall cost of innovations and increase banks’ income as well as reduce the cost of use of banks’ service. Speaking on the theme “The Benefits of Financial Innovation: The Emergence of New Standards,” at the Re-Launch of First Atlantic Bank, Mr. Millison Narh, the Deputy Governor of BoG, stressed that financial innovations have brought in its wake opportunities and challenges which financial institutions should exploit to serve the unbanked population. Banks are enjoined to develop new products and services using appropriate technology to increase the number of banking population and reduce their cost of operations. He observed that the traditional lines of banking businesses are shrinking and diminishing, and banks that do not innovate may face dwindling number of customers and rising operational cost. Similarly, competition from other banks and non-bank financial institutions is getting keener and it is necessary that banks’ management constantly review their operations and innovate to survive in this changing world. He said financial innovation involves creating and popularizing new financial instruments, technologies, institutions, markets, processes, and business models. It also encompasses the new application of existing ideas in different market contexts. Examples of innovative financial instruments in Ghana are ATMs, debit and credit cards, e-banking, mobile banking, agency banking, and venture capital financing. Financial innovation has many benefits, as they facilitate; easy payments for goods and services, cash withdrawals, and undertaking account services; quick short-term financing to customers; and Long–term financing that is required for creating long-term assets, example through venture capital funds. They also help deepen liquidity in existing markets by reducing excessive reliance on a narrow base of depositors for funding; and raise the quantity and quality of investments, and increase the efficiency and growth of an economy. “When innovation fails, the entire financial system pays the price and the lessons of the global financial crisis are still fresh in our minds. It is therefore necessary for bank management to design the necessary control system to measure, mitigate, monitor and manage all inherent risks associated with the innovated products and services,” he said. Mr. Narh indicated that Ghana is in a favourable situation to avoid the factors responsible for the financial crisis because; first, both the Bank of Ghana and capital markets regulators have fostered a robust financial sector; second, innovative products on our markets are not complex; and third, realizing the significant opportunities for productive and prudent financial innovation, the BOG has and continues to learn from the experiences of others However, mindful of the lessons of the recent global financial crisis, the Bank of Ghana emphasizes the need for new and strengthened standards as it seek to realize the benefits of financial innovation. The Bank of Ghana therefore, guided increasingly by the following standards; that the traditional standards of maintaining adequate capital; avoiding excessive reliance on short-term funding; maintaining proper credit administration standards, following sound risk management and effective corporate governance remain as critical as ever. He said since complexity was an element that contributed to the crisis, the Bank of Ghana encourages simple innovations. Hence, products that are relatively straightforward and that offer clear value-added are preferred. The Bank of Ghana requires financial institutions to fully understand its innovations and to make sure that prospective investors or customers do so too. The Bank of Ghana also ensures that it understands all new products and their implications. In designing and approving new products, the Bank of Ghana ensures that the interests of developers are aligned with the interests of customers. As we are aware, financial institutions in the advanced economies that were seriously affected in the financial crisis had retained excessive toxic assets. It is important that directors and management understand the risks their institutions are exposed to. Hence, it is critical that governance be reformed, and that boards include members with risk management experience to play a useful role in monitoring and controlling the level of risk taken by their institutions. It is inevitable that in every financial market, some financial firms will experience difficulties. A key policy lesson from the crisis is that an effective resolution scheme must be designed, so that governments can promptly and effectively resolve institutions that become highly troubled. Such regimes should minimize potential market disruptions as well as dampen moral hazard. The Bank of Ghana is making efforts in this area with the assistance of the IMF.