The Bank of Ghana has advised Regulated Financial Institutions (RFIs) that engage in cross-border lending, investments, trade finance, or foreign currency exposures to have adequate policies and procedures for identifying, assessing, measuring, evaluating, monitoring, reporting and controlling or mitigating country risk and transfer risk on a timely basis.
This is to avert the potential default or deterioration in credit quality of foreign counterparties arising from country-specific macroeconomic, fiscal, political or financial sector conditions.
The advice is captured in the Credit Risk Management Directive for all Banks, Savings and Loans, Finance Houses and Financial Holding Firms.
The BoG also urged RFIs not to introduce or implement such products, market entries, or delivery channels unless the required regulatory approvals have been obtained, where applicable.
Credit Risk Management Process
On Credit Risk Management Process, it said an RFI shall establish and enforce strict policies to avoid association with individuals involved in fraudulent activities or other serious financial crimes or misconduct.
Similarly, an RFI shall employ robust due diligence measures, including obtaining references from known parties, accessing credit reference bureaus, and becoming familiar with individuals responsible for managing a company, including checks on their integrity, experience, and financial condition.
Credit Appraisal and Approval
The Central Bank pointed out that an RFI shall establish sound, well-defined credit-granting criteria for approving credit in a safe and sound manner. “The criteria shall specify eligible borrowers, the types, amounts, and tenors of credit the RFI is willing to provide, and the terms and conditions under which credits may be granted”.
Again, an RFI shall undertake a comprehensive credit risk assessment that is proportionate to the nature, type and size of the exposure.
Similarly, it shall apply experienced credit judgement using a scalable and flexible approach to its credit risk assessment of a borrower, particularly where borrower information is limited, adding, FRIs shall diversify their loan portfolios across sectors, geographical locations, borrower types and credit risk mitigants within the constraints of local market structures.
Exposures to individuals
For exposures to individuals, the BoG said an RFI’s credit assessment shall, at a minimum and where relevant, consider the purpose and structure of the exposure and sources of repayment, including reasonable verification of income or cash flows using formal or alternative documentation; the borrower’s or counterparty’s current risk profile (including the nature and aggregate indebtedness) and its sensitivity to economic and market developments; among others.
From 1st July 2027, the Bank of Ghana will begin the implementation of the Credit Risk Management Directive for all Banks, Savings and Loans, Finance Houses and Financial Holding Firms.
The broad objective of the directive is to enhance the resilience of Regulated Financial Institutions (RFIs) by ensuring that they establish and fully implement adequate and effective credit risk management systems that commensurate with their risk-taking activities and capital strength.