GTA-AP6 Okpalaobieri.pdf - Global Trade Alert

It is considered by many economists to be the worst financial crisis since the Great Depression of the1930s. It contributed to the failure of key businesses, declines in consumer wealth estimated in thehundreds of billions of US dollars, substantial financial commitments incurred by governments, and asignificant decline in economic activity. Many causes have been suggested, with varying weightassigned by experts. Both market‐based and regulatory solutions have been implemented or areunder consideration, while significant risks remain for the world economy over the 2010–11 period.Possible research questions under considerationThis paper seeks to address the following questions:1 How the financial crisis has affected the banking sector’s performance in the two leading WestAfrican English‐speaking countries?2 How the measures (from outright bailouts to structural reforms) taken in each of these twocountries mitigated or worsened the impact of the financial crisis?3 How effective have the measures been?The private financial sector in Ghana is described as booming and over the last five years, the CentralBank of Ghana’s prime rate has moved in lock‐step with the inflation rate, but cautiously to preventthe crowding out of the private sector. While Nigeria is described as the largest economy, a fastdeveloping country and one of the largest financial services sector in sub‐Saharan Africa with thepotential to become a regional financial services centre (Becker et al, 2008 ‐ Nigeria Financial Servicecluster; Analysis and Recommendations. The microeconomics of competitiveness, firms, cluster andeconomic development). Ghana has 1.2 million bank account holders out of a population of 23million (a ratio of about 5%), compared to Nigeria’s 23 million bank account holders among apopulation of 140 million (more than 16%). With 27 banks, Ghana has three more than Nigeria —where further consolidation is expected (source; the Ghanaian journal & Oxford Analytica). Yet theperformances of the banking sector in these two countries have not been investigated in the light ofthe global financial crisis to assess the effectiveness of their coping mechanisms. This paper intendstherefore to fill this gap.Stylised FactsThe financial crisis and response from governments and central banks worldwideThe global financial crisis had major impacts on developed and developing countries alike. Thedeveloped and richer developing countries began to address the consequences of the crisis andannounced various fiscal stimuli. The G‐20 countries announced fiscal stimuli worth around 1.5% ofGDP, or some US$2 trillion, to cushion the consequences of the global financial crisis.Questions regarding bank solvency, declines in credit availability, and damaged investor confidencehad an impact on global stock markets, where securities suffered large losses during late 2008 andearly 2009. Economies worldwide slowed during this period as credit tightened and internationaltrade declined. Critics argued that credit rating agencies and investors failed to accurately price therisk involved with mortgage‐related financial products, and that governments did not adjust theirregulatory practices to address 21st‐century financial markets.Governments and central banks responded with unprecedented fiscal stimulus, monetary policyexpansion and institutional bailouts. The responses included were direct (Treasury) or indirect(Central Banks) or both measures were taken by countries worldwide; however, the actions can besummarised under several categories as follows:• Interest rate cuts and liquidity injections by central banks• Capital injections into banks/companies by governments (eg UK and USA)• Lending guarantees by governments to restore liquidity, and