Bridging facilities are short-term loans designed to “bridge” a funding gap until permanent financing or asset sales provide repayment. In Ghanaian banking, they are common in property and corporate deals but regulated tightly under BoG’s guidelines to manage risks, especially post-2019 cleanup where mismatched funding contributed to failures. Below, I address each part with practical insights.

(a) What is a Bridging Facility? (2 marks)
A bridging facility is a temporary, short-term loan provided by a bank to cover immediate funding needs, pending receipt of longer-term finance, asset disposal proceeds, or other inflows. It is typically secured, high-value, and carries higher interest rates due to its interim nature. In Ghana, examples include financing property purchases until mortgage approval or corporate acquisitions until equity raises, aligning with BoG’s emphasis on matched funding under the Liquidity Risk Management Guidelines.

(b) Distinguish between a Closed Bridge Facility and an Open Bridge Facility (4 marks)

• Closed Bridge Facility: This is a bridging loan where the repayment source is pre-identified, committed, and certain, such as a signed sale agreement or approved long-term loan. It has a fixed maturity tied to the expected inflow, lower risk, and often lower rates. For instance, in Ghana, a bank like Access Bank might provide a closed bridge for a property developer with a binding buyer contract, ensuring quick repayment.
• Open Bridge Facility: This lacks a guaranteed repayment source; repayment depends on uncertain events like market sales or future financing without commitments. It is riskier, with higher rates and stricter monitoring. In practice, an open bridge might fund a business expansion pending uncommitted investor funds, exposing lenders to market volatility, as seen in volatile real estate markets in Accra.

The key distinction lies in repayment certainty: closed bridges are “closed” with assured exits, while open ones remain “open” to contingencies.

(c) Discuss four (4) key risks associated with Closed Bridge Facilities (8 marks)
Despite relative certainty, closed bridges carry risks:

1. Timing Risk (2 marks): Delays in the committed repayment source, e.g., legal hurdles in property transfers under Ghana’s Land Act, 2020 (Act 1036), could extend the bridge, increasing interest costs and liquidity strain. BoG’s CRD requires buffers, but delays in court approvals have affected banks like Stanbic in real estate deals.
2. Counterparty Risk (2 marks): The committed party (e.g., buyer or long-term lender) may default or renege, turning a closed bridge open. In Ghana’s post-DDEP environment, fiscal uncertainties have led to withdrawn commitments, amplifying defaults.
3. Valuation Risk (2 marks): Over-reliance on asset values; if collateral (e.g., property) depreciates due to market downturns, recovery suffers. The 2022-2024 economic slowdown in Ghana highlighted this, with property values dropping 10-15% in some areas.
4. Operational Risk (2 marks): Administrative errors in documentation or monitoring, per BoG’s Operational Risk Framework (aligned with Basel II), could invalidate securities. Examples include imperfect liens, as in past bank failures where poor perfection led to losses.

Mitigation involves rigorous due diligence and contingencies.

(d) Discuss risks associated with Open Bridge Facilities (6 marks)
Open bridges, lacking assured repayment, pose amplified risks:

• Market/Repayment Uncertainty (2 marks): Dependent on volatile events like asset sales; in Ghana’s real estate boom-bust cycles (e.g., Kasoa developments), unsold properties can lead to prolonged exposures and NPLs, contravening BoG’s prudent lending rules.
• Interest Rate and Liquidity Risk (2 marks): Higher rates due to uncertainty can strain borrowers, while banks face liquidity mismatches if bridges extend, violating BoG’s Liquidity Coverage Ratio requirements under CRD. Post-cleanup, banks like Ecobank limit open bridges to avoid illiquidity.
• Credit and Rollover Risk (2 marks): Borrower default risk is elevated without alternatives; attempts to rollover into term loans increase overall exposure. Governance issues, as in UT Bank’s collapse, often stemmed from unchecked open bridges tied to speculative ventures.

Overall, open bridges demand higher equity cushions and monitoring to align with risk appetites.