Fixed Deposits, Treasury Bills, and the Mispricing of Risk in Ghana’s Financial System

By Dela Herman Agbo, Chief Executive Officer, EcoCapital Investment Management Ltd

What Is a Fixed Deposit?

A fixed deposit (FD) is a financial
instrument offered by banks that allows an investor to place funds for a specified period such as 30, 90, 180,
or 365 days at an agreed interest rate.
The investor earns a predetermined return and receives the principal plus
interest at maturity.

Fixed
deposits are widely used by Individuals, Corporates, Churches and foundations,
Pension funds and institutional investors. They are valued for their simplicity, predictability, and relative
safety.

Benefits of Fixed Deposits

Fixed deposits offer
several advantages:

1. Predictable
   Returns – Investors know exactly how much they will
   earn at maturity.
2. Capital
   Preservation – Fixed deposits are considered
   low-risk instruments when placed with regulated banks.
3. Short-Term
   Investment Planning – They are ideal for managing idle
   funds or meeting short-term liabilities.
4. Ease of
   Administration – No trading, valuation
   complexity, or market timing is required.

However, these benefits
do not eliminate credit and
institutional risk, which differentiates fixed deposits from government
securities.

Fixed Deposits vs. Money Market Instruments

Although often used
interchangeably in practice, fixed
deposits and money market instruments are fundamentally different.

Feature	Fixed Deposit	Money Market Instrument
Issuer	Commercial banks	Government, financial institutions and other businesses
Risk	Low, but not risk-free	Virtually risk-free (T-bills) but the other institutions have some amount of risk
Benchmark	Should reference T-bill rate	Treasury bill is the base
Liquidity	Limited until maturity	Highly liquid (T-bills)  Limited until maturity
Examples	Bank FD	Treasury bills, commercial paper

Treasury bills, issued by the Government of Ghana, are
universally accepted as the risk-free
benchmark rate because they are backed by the sovereign. This makes
Treasury bills the base rate of
the financial system.

Why Fixed Deposit Rates Should Not Be Lower Than Treasury Bill Rates

In any efficient
financial market, no rational investor
should accept a lower return for higher risk. Yet, in Ghana, banks
routinely offer fixed deposit rates
that are significantly below Treasury bill rates.

This practice is
economically illogical for three key reasons:

1. Treasury Bills Are Risk-Free

a.     
Fixed deposits carry bank credit risk,
liquidity risk, and systemic risk.

2. Risk Must Be Rewarded

a.     
A bank deposit should attract a risk premium, not a discount.

3. Rate Suppression Distorts Capital Allocation

a.     
Cheap deposits enable banks to invest
heavily in government securities instead of lending to the real economy.

The Pension Fund Distortion: A Ghanaian Example

In Ghana, National Pensions Regulatory Authority (NPRA)
guidelines mandate that approximately 35% of pension fund assets be invested in bank money market instruments.

However, in practice:

• Banks are not issuing true money market instruments
• Instead, they are offering fixed deposits
• These fixed deposits are priced far below prevailing Treasury bill rates

The consequence is
troubling:

• Banks mobilize long-term pension funds at artificially
  low rates
• They then reinvest these funds into
  Treasury bills and government
  securities
• This results in risk-free arbitrage profits for
  banks
• Meanwhile, SMEs, manufacturers, agribusinesses, and infrastructure projects
  struggle to access financing

In effect, pension
funds meant to support national development are being used to subsidize bank balance sheets, not to
grow the economy.

Why Banks Must Offer Rates above Treasury Bill Yields

If banks are required through
regulation, market discipline, or institutional investor pressure to offer fixed deposit and money market rates above
Treasury bill rates, the structure of incentives would change
fundamentally.

1. End of Easy Arbitrage

a.     
Banks can no longer profit simply by
recycling deposits into government securities.

2. Forced Reorientation Toward Productive Lending

a.     
To remain profitable, banks must
finance:

2. SMEs
3. Manufacturing
4. Agribusiness
5. Infrastructure
6. Trade
   and export businesses
2. Revival of Financial Intermediation

a.     
Banks return to their core function:
mobilizing savings and allocating capital efficiently.

4. Job Creation and Economic Growth

a.     
Credit to productive sectors translates
directly into employment and income generation.

Policy Implications and the Way Forward

To correct the current
imbalance, the following actions are necessary:

• Clear
  distinction between fixed deposits and money market instruments
• Enforcement
  of risk-based pricing relative to Treasury bills
• Stricter
  NPRA oversight on how pension funds are placed
  with banks
• Encouragement
  of genuine bank-issued money market instruments
• Incentives
  for SME and project financing

Fixed deposits remain a
valuable savings and investment instrument. However, when fixed deposit rates
are priced below the Treasury bill rate,
the financial system becomes distorted.

In Ghana, this
distortion has allowed banks to earn risk-free
profits on pension funds, while the productive sectors of the economy
are aggressively searching for capital to expand, innovate, and create jobs.

Treasury bills are the base rate of the economy. Any
investment instrument that carries higher risk must be priced above the risk
free asset. When banks are compelled to do so, they will naturally shift away
from passive government lending and toward financing the real economy where
sustainable growth truly comes from in the economy.