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Banking Regulation Tightens: Reserves and Liquidity Requirements

The Gambian government has strengthened the financial sector by introducing stricter reserve requirements and liquidity standards for banking institutions through the Banking Act (2009).

Reserve Requirements: A Growing Share

Under Section 19(1) of the BA 2009, banks are required to maintain a statutory reserve account. This reserve cannot be reduced or impaired without approval from the Central Bank.

  • Minimum transfer to this reserve is 25% of net profits after taxes in the first four years, decreasing to 15% thereafter

Liquidity Requirements: A Key Ratio

Regulated banking institutions must maintain a minimum liquid asset ratio of 30%. This ratio ensures that banks have sufficient readily encashable assets to meet their liabilities.

  • Failure to attain this ratio exposes institutions to fines based on the deficiency in liquid assets

Liquid Asset Ratio Formula

The liquid asset ratio is calculated using the following formula:

  • Eligible Liquid Assets / Liabilities in The Gambia
    • Numerator: includes six freely transferable asset types, such as notes/coins, Central Bank current account balances, and treasury bills
    • Denominator: represents liabilities to the public in The Gambia

Central Bank’s Authority

The Central Bank has the authority to raise or lower the prescribed liquid asset ratio as circumstances require.

  • Decreases take effect immediately, while increases can only be raised by 5% of the denominator in any single month after reasonable notice

Implications for Banks

Banks must ensure that they maintain a sufficient balance sheet liquidity to honor all commitments and meet maturing liabilities as they fall due. Failure to comply with these requirements may result in fines and reputational damage.

In conclusion, the Banking Act (2009) has introduced stricter reserve requirements and liquidity standards to strengthen the stability of the financial sector in The Gambia. Banks must adapt to these new regulations to ensure their continued growth and prosperity.