Bank Fixed Deposits: Time to rethink how banks raise funds

By Dela Herman AGBO

Bank fixed deposits have long been a popular savings and investment instrument in Ghana. For decades, individuals, institutions, and businesses have relied on fixed deposits (FDs) as a perceived “safe” way to earn predictable returns. However, recent market developments, financial sector clean-ups, and rising investor losses have exposed fundamental weaknesses in how fixed deposits are marketed and understood.

This article argues that Ghanaian banks should stop advertising fixed deposits directly to the investing public as investment substitutes and instead raise funds through properly structured bonds and money market instruments, while restricting fixed deposits primarily to core banking clients. This approach aligns better with global best practices, enhances transparency, and protects investors.

What Is a Bank Fixed Deposit?

A bank fixed deposit is a time-bound deposit where a customer places funds with a bank for a specified period typically 30, 91, 180, or 365 days at a fixed interest rate. The depositor cannot withdraw the funds before maturity without incurring penalties.

In Ghana, fixed deposits are widely marketed as low-risk investments, short-term wealth accumulation tools and alternatives to treasury bills and mutual funds. However, a fixed deposit is not an investment security; it is a bank liability, and the depositor becomes an unsecured creditor of the issuing bank.

The Core Problem in Ghana’s Fixed Deposit Market

Aggressive Rate-Based Advertising

Banks in Ghana aggressively advertise fixed deposit rates often without adequate disclosure of the bank’s financial health, liquidity risk, credit risk, and maturity mismatch risk. This has led many investors to make rate-driven decisions, not risk-informed investment decisions. Above all, the marketers of these fixed deposit products are not licensed by the Securities and Exchange Commission of Ghana to advise or sell investment products.

Blurring the line between Banking and Investment Products

Fixed deposits are being marketed in ways similar to money market funds, government securities and corporate bonds

Yet unlike these instruments, fixed deposits are not tradable, no secondary market, lack full disclosure standards and are not priced daily on a mark-to-market basis.

Why Banks Should Issue Bonds or Money Market Products Instead

 Transparency and Disclosure

Bonds and money market instruments require offering documents, risk disclosures, clear tenor and use of funds and regulatory approval from SEC. This protects investors and improves market discipline across board.

Proper Matching of Funds

Banks often use short-term fixed deposits to fund long-term loans, infrastructure financing and corporate facilities

This creates liquidity and rollover risk. Corporate Bonds allow banks to match asset and liability maturities properly to avoid default or rollover risk.

Market Discipline and Pricing Efficiency

When banks issue bonds investors price risk properly, weak institutions pay higher yields and strong institutions benefit from lower funding costs. Fixed deposits hide these realities behind headline rates and just sell rates to investors.

 

How Fixed Deposits Work in the USA and Other Developed Markets

United States

In the U.S., fixed deposits are known as Certificates of Deposit (CDs).

Key features are follows:

• Offered mainly to retail banking customers
• Covered by FDIC insurance up to USD 250,000 per depositor per bank
• Rates are modest and reflect low risk
• CDs are not marketed as investment products
• Institutional investors access banks via:
  • Commercial paper
  • Bank bonds
  • Money market funds

Europe and Other Developed Markets

• Fixed deposits are conservative savings tools
• Strict consumer protection rules apply
• Banks raise large-scale funding through:
  • Covered bonds
  • Medium-term notes (MTNs)
  • Interbank markets

The key distinction is clear – deposits are for clients; investments are for the capital markets.

Key Risks of Fixed Deposits Often Not Disclosed in Ghana

• Credit Risk – If a bank fails, depositors may lose funds beyond insured limits.
• Liquidity Risk – Early withdrawal penalties may not protect depositors in systemic stress.
• Reinvestment Risk – Rates may fall at maturity, affecting income planning.
• Inflation Risk – Fixed deposit returns may not preserve real value.
• Concentration Risk – Investors placing large sums in one bank face single-issuer exposure.

Why Direct Advertising to Investors Is Problematic

• Investors are influenced by headline rates, not balance sheet strength
• Risk disclosures are minimal or absent
• Depositors mistakenly believe fixed deposits are risk-free
• Banks shift funding risk to uninformed investors

This practice undermines investor protection and distorts capital allocation, unfortunately, it is an acceptable practice in Ghana to influence the investing public’s investment decision with beautiful songs and rates.

The Way Forward: Recommendations for Ghana

1. Restrict Fixed Deposits to Core Banking Clients

Fixed deposits should primarily serve retail customers, SMEs, operating accounts and relationship clients. Not mass-market investment solicitation for new funds across the nation.

2. Encourage Banks to Raise Funds Through Capital Markets

Banks should issue bonds and notes for long-term funding, use commercial paper for short-term needs and partner with licensed fund managers like EcoCapital Investment Management Limited for money market products

3. Strengthen Disclosure Requirements

Regulators should require risk warnings in fixed deposit advertising, clear distinction between deposits and investments and disclosure of deposit insurance limits.

4. Improve Investor Education

Investors must understand fixed deposits are bank credit exposure, higher rates mean higher risk, and diversification matters in all our investment decisions.

5. Role of Regulators

The Bank of Ghana, SEC, and NPRA should collaborate to harmonize product definitions, prevent regulatory arbitrage, and protect retail and institutional investors

Fixed deposits are useful banking products but they should not be mistaken for investment securities. Ghana’s financial system will be stronger, safer, and more transparent if banks raise investment capital through bonds and market-based instruments, while fixed deposits remain what they were always meant to be: conservative savings tools for banking clients.

A shift in this direction will deepen Ghana’s capital markets, protect investors, and support sustainable economic growth.

Dela is the Chief Executive Officer of EcoCapital Investment Management Ltd.

 

 

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