a) Financial Intermediation as a Business Activity (5 marks)

Financial intermediation involves institutions (e.g., banks) acting as middlemen between surplus units (lenders/savers) and deficit units (borrowers), channeling funds efficiently. As a business, it generates profit through interest spreads (lending rate > deposit rate), fees, and investments, while managing risks.

In Ghana, banks like GCB operate under Act 930, pooling deposits to lend, earning from net interest margins (e.g., 10-15% pre-DDEP). It includes assessing creditworthiness, monitoring loans, and providing services like payments. Profitability depends on compliance (e.g., Corporate Governance Directive 2018) and resilience, as seen in post-2019 recapitalizations. Intermediation boosts economic efficiency by reducing information asymmetry and transaction costs, aligning with BoG’s sustainable banking for growth.

b) How Transformation Functions Bridge the Gap (15 marks)

Banks reconcile incompatible needs: Lenders prefer low-risk, liquid, short-term savings; borrowers want large, long-term, risky funds.

• Size Transformation (5 marks): Bridges amount mismatches. Lenders deposit small sums (e.g., GH¢100 susu); borrowers need large loans (e.g., GH¢1m for business). Banks aggregate small deposits into large loans. In Ghana, post-2020 digital banking (e.g., mobile money integration per Act 987), this enables SMEs access despite small saver bases. Reduces costs for borrowers (no need to find multiple lenders) and provides diversification for lenders.
• Maturity Transformation (5 marks): Addresses time horizon gaps. Lenders want short-term access (e.g., demand deposits); borrowers seek long-term funds (e.g., 5-year mortgages). Banks borrow short (deposits) and lend long, profiting from upward yield curves. Managed via liquidity buffers per BoG Guidelines; mismatches caused 2017 bank failures (e.g., Capital Bank). In practice, Ghanaian banks use T-bills for liquidity to sustain this, supporting infrastructure projects.
• Risk Transformation (5 marks): Mitigates risk preferences. Lenders avoid high risk; borrowers’ projects are risky. Banks diversify portfolios, screen/monitor loans (per Basel II/III adapted rules), and use capital reserves. E.g., collateral requirements reduce default risk, sharing it across depositors. In Ghana, post-DDEP, enhanced risk management (e.g., Cyber Directive 2020) protects against fintech risks, enabling safe channeling of funds to high-growth sectors like agriculture.

These functions enhance efficiency, but require regulation to prevent crises, as in 2017-2019 cleanup.