Ghana’s banking sector, despite numerous measures, continues to be haunted by persistently rising high non-performing loans (NPLs), which threaten its sustainability, profitability, and ability to lend to the private sector to propel growth.
The banking sector, over the last decade, has been experiencing fluctuating NPLs at high levels, affecting lending rates.
A research paper by the banking and financial consultant, Dr. Richmond Atuahene, copied to The High Street Journal, reveals that Ghana’s banking sector NPLs averaged 17% between 2014 to 2024.
These high NPLs were accumulated through non-payment of contractors’ debts, non-payment of energy debt, the 2017-2018 banking crisis, the 2022 domestic debt exchange, economic downturns, high fiscal deficits, lax lending practices, and regulatory bottlenecks.
The Trend
Between 2014 and 2017, Ghana’s non-performing loan (NPL) ratio rose sharply from 11% to a peak of 22.7%, largely due to weak credit risk management, poor loan recovery practices, and high exposure to distressed sectors such as energy and construction. This period also reflected the impact of weak macroeconomic fundamentals and a fragile regulatory environment.
From 2018 to 2021, the NPL ratio saw a gradual decline, supported by the Bank of Ghana’s banking sector clean-up exercise, which included recapitalization, license revocations, and improved supervision. These measures strengthened banks’ risk profiles and loan recovery efforts.
However, from 2022 to 2024, the NPL ratio began rising again, reaching 21.8% in 2024. This recent surge is likely tied to post-COVID-19 recovery challenges, the domestic debt exchange programme (DDEP) which weakened banks’ balance sheets, high inflation, and an overall sluggish economic environment that impacted borrowers’ ability to repay loans.
Given the implications of the situation on Ghana’s economic recovery and growth, the banking and finance consultant has offered a comprehensive and actionable roadmap to address the crisis. Here are some of them;
Address Fiscal Weaknesses and Create a Stable Macroeconomic Environment
The government must tackle underlying fiscal weaknesses—such as high inflation, unstable exchange rates, high policy rates, rising public debt, and fiscal deficits—that have made the banking sector vulnerable. Creating a stable macroeconomic environment is essential to reducing NPLs and safeguarding financial system stability.
Repay Legacy Debts and Resolve Problem Banks
The government should repay all outstanding arrears, particularly legacy debts owed to contractors, IPPs, and service providers. Fixed monthly payment plans must be adopted. Also, integrating statutory fund arrears into the GIFMIS system can improve financial tracking and reduce NPLs.
Ring-Fence and Restructure Government Arrears
Through the Ministry of Finance, the government should ring-fence legacy debts and establish a structured repayment plan. This will help improve banks’ solvency and capital adequacy. Additionally, recapitalization efforts must be backed by improved governance and risk management to be effective.
Prioritize Arrears Repayment to Support Financial Sector Recapitalization
Repaying government arrears, especially in the energy and non-energy sectors, should be prioritized to reduce banks’ NPLs. Without addressing these debts, any recapitalization programs under GFSF would be ineffective.
Conduct Independent Asset Quality Reviews (AQR)
The Bank of Ghana should commission rigorous, internationally-aligned AQRs by reputable firms to assess the actual condition of banks’ assets. This will provide an up-to-date and credible basis for regulatory and policy decisions.
Strengthen Bank Governance Structures
Banks must improve governance by requiring boards and executive management to develop, monitor, and implement comprehensive NPL strategies. This includes defining targets, monitoring progress, approving NPL-related policies, and ensuring strong internal controls and staff understanding.
Implement Comprehensive Risk Management Frameworks
Banks should adopt best-practice risk management frameworks to guide credit decisions, assess potential losses, and enhance operational efficiency. This includes better credit risk assessments, collateral management, monitoring systems, and debt collection processes.
Improve Internal Risk Systems and Early Warning Mechanisms
Banks should enhance their ability to assess and forecast credit risk, implement early response systems for distressed borrowers, and conduct regular stress testing. These actions will help prevent defaults and reduce NPL accumulation over time.
Enhance Supervisory Oversight of High-NPL Institutions
Banks and SDIs with high or growing NPLs should be subjected to tighter oversight, including more frequent regulatory reporting, intensified supervision, and stricter monitoring of their capital and profitability.
Utilize Capital Buffers to Absorb Losses
The Bank of Ghana should allow banks to use available capital buffers to absorb the impact of rising NPLs. As Ghana transitions to Basel III and IV, a gradual approach to capital compliance may be necessary to maintain financial stability.
Strengthen Credit Risk Assessment and Underwriting Standards
Banks must implement stronger credit risk assessment practices before granting loans. This includes updating credit scoring models and establishing stricter underwriting criteria such as loan-to-value and leverage ratios, along with geographic, sector, and product-level exposure limits.
The Bottomline
The Atuahene’s recommendations align with IMF prescriptions and global best practices, offering a rare blend of realism and optimism.
If implemented, Ghana could finally escape its decade-long NPL trap and build a resilient financial sector.
