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UNIVERSITY OF GHANA

COLLEGE OF HUMANITIES



CAPITAL ADEQUACY OF BANKS IN GHANA: DOES LIQUIDITY

TRANSFORMATION MATTER?

BY

ALHASSAN ABUBAKARI SADDIQ

(10550735)







THIS THESIS IS SUBMITTED TO THE UNIVERSITY OF GHANA, LEGON IN

PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF MPHIL

FINANCE DEGREE



JULY, 2017

University of Ghana http://ugspace.ug.edu.gh

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i



DECLARATION

I do hereby declare that this thesis is the outcome of my own study and has not been submitted

by any person or group of persons for any academic award in the University of Ghana or any

other tertiary institution in or outside Ghana. I duly acknowledge all references used in this

study.

I solely bear responsibility for any shortcomings.

















.…………………………... …………………………….

ALHASSAN ABUBAKARI SADDIQ DATE

(10550735)











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4.5 Liquidity Creation / Transformation Measures

To meet the first objective of the study, two of the liquidity creation measures developed by

Berger and Bouwman (2009) are employed to estimate the amount of liquidity the banks

transformed during the study period. In line with Berger and Bouwman (2009), this study

groups banks’ activities into liquid, semi-liquid and illiquid and assigns weights of 0.5 to illiquid

assets and liquid liabilities, 0 to semi liquid assets and liabilities and -0.5 to liquid assets and

illiquid liabilities and sums them to construct the four measures indicated in chapter three. The

study however, applies only the ‘cat fat’ and ‘cat nonfat’ measures to estimate liquidity

transformed by the observed banks with and without off balance sheet items respectively. This is

because, what is important in liquidity transformation as far as assets are concerned is the cost,

ease, and time banks require to obtain liquid funds from their assets (e.g. loans), Berger and

Bouwman (2009). According to them, banks’ ability to securitize loans is closer to liquidity

transformation than time. For instance, it may be relatively easier to securitize a 20-year

residential mortgage though it is a long-term loan. Using the two measures, total liquidity

transformed or created by the banks is estimated as:

Liquidity created (GHȼ) = Σ [0.5*(Illiquid assets + Liquid liabilities) + 0*(Semi liquid

assets + Semi liquid liabilities) – 0.5*(Liquid assets + Illiquid liabilities)] ... ... ... ... ... (1)

Classification of Bank Activities into Liquid, Semi liquid and Illiquid

On the bases of cost, ease, and the time it takes customers to retrieve their funds from banks,

Berger and Bouwman (2009) grouped liabilities of banks into illiquid, semi liquid and liquid. In

the same vein they categorized bank assets into illiquid, semi liquid and liquid based on the cost,

ease, and time it takes banks to secure funds to honour the demands of customers.



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Classification of Bank Liabilities

Berger and Bouwman (2009) categorized funds such as current and savings account balances as

liquid liabilities since bank customers do not have to incur any cost in having quick access to

them. Also, time deposit account balances and similar funds which customers have to undergo

minor difficulties or incur minor costs to obtain were classified by Berger and Bouwman as semi

liquid liabilities. They further classified long duration liabilities including subordinated term debt

(one of the components of tier 2 capital) which are difficult to access easily as illiquid. Bank

equity is also counted among the illiquid liabilities, though in the capital markets it is considered

liquid because it can be traded with ease. Bank liquidity is what is considered here not capital

market liquidity.

Classification of Bank Assets

As regards bank assets, Berger and Bouwman (2009) considered bank marketable securities,

cash, and similar assets which can be used to solve liquidity problems devoid of major costs, as

liquid. Assets that are relatively easier to sell or securitize and self-liquidating items such as

short-term loans maturing within a year are considered semi liquid. Long term loans are illiquid.

Also considered illiquid assets are commercial loans, banks’ investments in unconsolidated

subsidiaries, and similar assets since they cannot be easily converted into cash without attracting

losses. Table 4.1 presents the various classes of bank assets and liabilities.











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APPENDIX XIV





































































YEAR

LIQUIDITY

TRANSFORMED

(NO OBS) GHȼ

LIQUIDITY

TRANSFORMED

WITH OBS GHȼ

2006 1,851,695,822.00 1,379,600,926.00

2007 1,777,112,762.00 1,944,985,829.50

2008 2,275,161,631.50 2,353,798,378.00

2009 2,432,158,637.50 2,701,593,950.50

2010 2,929,061,818.50 3,287,866,909.50

2011 4,228,443,537.00 5,135,194,782.00

2012 5,897,109,549.50 7,173,499,284.00

2013 7,861,752,998.00 9,336,933,804.00

2014 10,419,761,063.00 12,404,617,925.00

2015 11,863,295,662.50 13,515,326,722.00

TOTAL 54,264,242,016.50 65,104,650,860.50

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APPENDIX XV





















LIQUIDITY



DEPOSIT

TRANSFORMED

TO

RATIO







YEAR



WITHOUT OBS



WITH OBS



LOANS /

DEPOSIT

RATIO

2006 0.68 0.51 1.13

2007 0.43 0.47 0.75

2008 0.41 0.43 0.82

2009 0.33 0.37 0.67

2010 0.31 0.34 0.52

2011 0.32 0.39 0.56

2012 0.35 0.42 0.65

2013 0.38 0.45 0.71

2014 0.37 0.44 0.74

2015 0.34 0.39 0.70

GRAND

RATIO

0.38 0.45 0.68

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