The Bank of Ghana has recently given the green light to GIRSAL’s Agricultural Credit Risk Guarantee (CRG) to be accepted as collateral for lending to agribusinesses. This decision, which was communicated through a letter from the central bank to GIRSAL on December 7th, 2022, was made possible due to GIRSAL’s success in de-risking agricultural financing for financial institutions. GIRSAL’s CRG scheme was granted a zero-risk weighting by the Bank of Ghana for financial exposures secured by GIRSAL in 2021, which greatly benefited Partner Financial Institutions (PFIs) in assessing their Capital Adequacy Ratio (CAR).
The increased demand for collateral by financial institutions is driven by regulatory changes that prioritize secured transactions in the wake of the 2007/08 global financial crisis. However, determining what qualifies as acceptable collateral remains a challenge in the risk management practices of many financial institutions.
The approval of GIRSAL’s CRG as acceptable collateral for financial institutions has several benefits. Firstly, it boosts GIRSAL’s credibility as a credit guarantee provider and makes the CRG scheme more appealing for financial institutions to rely on, resulting in more lending to the agricultural sector. Additionally, it enhances financial institutions’ profitability by giving them the option to meet their collateral requirements from agribusinesses, improving their portfolio quality and strengthening their position in their loan assets quality on their balance sheet and capital adequacy ratio (CAR) computation.
Financial institutions that have signed on with GIRSAL and are using the CRG are required to apply to the Bank of Ghana to use GIRSAL Credit Guarantees as collateral for the computation of a single obligor limit, as per section 62(9) of ACT 930.
The term “single obligor” refers to the maximum amount a bank can lend to a single borrower or individual in relation to the total shareholders’ fund of the bank. The shareholders’ fund represents the amount of equity in a business that belongs to the shareholders and would be available for distribution if the company were to liquidate.