- 25 Marks
Question
A bank had to write off the following bad debts for the years 1990 – 1996 inclusive.
| Year | Amount of bad debts (GHe’000) |
|---|---|
| 1990 | 360 |
| 1991 | 390 |
| 1992 | 440 |
| 1993 | 500 |
| 1994 | 560 |
| 1995 | 600 |
| 1996 | 650 |
(a) Find the trend using the method of moving average. (10 marks)
(b) Using the data above, plot a histogram showing the trend line calculated in (a) above. (5 marks)
(c) Accurate bank sales and profit forecasting requires careful analysis of a bank’s specific and broader influences. Discuss some of the micro and macro economic factors a bank must analyse in its sales and profit forecasting. (5 marks)
(d) Forecasting the success of new product in the banking industry is notoriously difficult. Describe some of the macroeconomic and microeconomic factors that a bank might consider in forecasting sales for new products. (5 marks)
Answer
a) Using a 3-year moving average (suitable for 7 data points to smooth trend):
- 1991 (1990-1992): (360 + 390 + 440)/3 = 1190/3 ≈ 396.67
- 1992 (1991-1993): (390 + 440 + 500)/3 = 1330/3 ≈ 443.33
- 1993 (1992-1994): (440 + 500 + 560)/3 = 1500/3 = 500
- 1994 (1993-1995): (500 + 560 + 600)/3 = 1660/3 ≈ 553.33
- 1995 (1994-1996): (560 + 600 + 650)/3 = 1810/3 ≈ 603.33
The trend shows increasing bad debts over time. To arrive: Sum consecutive three values and divide by 3, centering on the middle year.
In Ghanaian context, rising bad debts post-1990s mirrored economic challenges, informing provisioning under BoG directives.
b) The histogram would have bars for each year’s bad debts (e.g., 1990: height 360, etc.). Overlay the trend line connecting the moving averages at centered years (e.g., line from 396.67 at 1991, to 443.33 at 1992, etc.).
Since text-based, describe: Bars increase steadily; trend line is smooth upward, highlighting the overall rise without seasonal fluctuations.
This visualization aids risk management, as in BoG’s stress testing requirements.
c) Microeconomic factors (bank-specific):
- Internal efficiency: Cost structures, staff productivity; e.g., high operational costs reduce profits.
- Product portfolio: Demand for loans/deposits; poor lending practices increase NPLs.
- Competitive positioning: Market share vs. competitors like Ecobank Ghana.
Macroeconomic factors (broader):
- Inflation and interest rates: High rates (e.g., Ghana’s 2023 inflation) affect borrowing/savings.
- GDP growth: Economic downturns like post-COVID increase defaults.
- Regulatory changes: BoG recapitalization post-cleanup impacts profitability.
- Exchange rates: Volatility affects forex revenues in import-dependent Ghana.
Analysis ensures compliance with BoG’s sustainable banking principles for accurate forecasting.
d) Macroeconomic factors:
- Economic growth: High GDP boosts demand for new products like mobile banking.
- Inflation/interest rates: Affect consumer affordability; e.g., high rates deter adoption.
- Government policies: Fintech regulations under Act 987 influence digital product sales.
- Global events: Like DDEP impacting liquidity and trust.
Microeconomic factors:
- Competition: Rival banks’ offerings; e.g., MTN MoMo vs. bank apps.
- Pricing strategy: Competitive fees attract sales.
- Internal capabilities: Marketing budget, technology infrastructure.
- Customer preferences: Demand for convenience in Ghana’s digital shift.
Banks like Stanbic use these for forecasting, mitigating risks from events like the 2017 cleanup.
- Uploader: Samuel Duah