In case you had not noticed, there is currently a liquidity crisis in Ghana’s financial system. Many banks, specialized deposit-taking institutions, fund managers and investment banks are unable to meet the heightened withdrawals by customers who are worried about the security of their deposits. The withdrawals have been spurred on by the takeover of five lenders by the country’s central bank in August.

The pace of withdrawals are no laughing matter. Banks do not keep every single deposit in a vault waiting to hand them out to customers who come asking. Deposits are invested in medium to long-term assets and banks rely on statutory reserves and short-term borrowing from the Bank of Ghana (BoG) and other banks to meet the cash requirements of customers. In the case where a significant number of customers try to withdraw at the same time, the bank can run short of cash and be unable to meet withdrawal requirements. This usually has the effect of spooking customers and making even more people attempt to withdraw their money. This situation is known as a bank run.

The implications of a bank run can be enormous for a country. The Great Depression saw the collapse of several banks in the USA as one bank run sparked another. In order to avoid repeating such a situation during the financial crisis of 2008, the US government bailed out several banks and financial institutions and its central bank purchased many troubled assets to try to keep the solvency of these institutions.

It is important to keep customers calm for the following reasons.

1. A rush to withdraw cash from banks will cause them to sell assets below their market value for cash. This has the effect of reducing the value of assets across the whole financial market and reducing the net worth of investments held by the public as well as making many companies insolvent i.e. the value of their assets will be less than the value of their liabilities. This would mean the collapse of these businesses.
2.  An economic downturn is likely to follow a failure of the financial system. There will be a lack of credit to businesses and capital for new ventures. This could reduce the rate of GDP growth.
3.  Job losses will be sure to follow the collapse of a number of financial institutions.
4.  A loss of confidence in the financial sector would be a setback to the progress that has been made in financial inclusion, cashless transactions and anti-money laundering regulations.

However, there is very good reason for people not to worry about their monies going down the drain. The Ghana Deposit Protection Act, 2016 (Act 931) insures bank deposits up to GH¢6,250.00 and deposits in specialized deposit-taking institutions up to GH¢1,250.00. The Act requires that in the case where a bank becomes insolvent or has its license revoked, customers will be given modalities as to how their deposits up to the maximum limits will be repaid. The modalities must be made known within 6 days after which customers are paid within 30 days. In the case where a customer’s deposits exceed the maximum insured by the Act, the depositor will collect the difference from the entity that liquidates the assets of the bank.

But it does not need to get to the situation where banks become insolvent. People are still reeling from the job losses that followed the consolidation of 5 banks. The last thing we need is banks collapsing not because of poor management but a bank run caused by a lack of confidence.