For decades, the relationship between Ghanaian banks and the government was a cozy one. Banks lent money to the state through bonds and bills, and in return, they enjoyed steady, “risk-free” interest income. However, in 2022 and 2023, that relationship turned toxic. The Domestic Debt Exchange Programme (DDEP) did not just bite, it nearly swallowed the industry whole. Yet, as the industry moves through 2026, central bank data reveals a startling trend: banks are returning to the same government instruments that almost broke them.
The “Bite” That Nearly Broke the System
Before the DDEP, banks were heavily exposed to government debt. When the government realized it could no longer pay its bills, it forced a restructuring that was catastrophic for the banking sector. In 2022, the industry recorded its most severe decline in history, with return on equity plummeting as billions of cedis in impairment losses were booked. These losses were so massive that they threatened the survival of several institutions by eroding capital buffers. For the first time in years, the safety of the banking system was questioned, and the resulting panic nearly triggered a “run on banks,” where depositors rush to withdraw money simultaneously. Only emergency regulatory forbearance and liquidity support from the Bank of Ghana kept the doors open and the system from collapsing.
Stubborn Loyalty: Why Banks Won’t Let Go
Despite the scars of the debt exchange, the Bank of Ghana Governor on Wednesday highlighted a concerning reality: banks are still piling into sovereign debt. According to the Governor, financial intermediation remains modest, with loans accounting for less than one-fifth of total assets across the industry. This means that for every 5 cedis a bank holds, less than 1 cedi is actually going out as a loan to a business or an individual. Instead, asset concentration in sovereign and central bank instruments remains elevated.
This “stubborn” loyalty is driven by a profit trap. Approximately 68 percent of industry profitability continues to be driven by net interest income. Banks have become heavily dependent on this income stream, increasing their sensitivity to interest rate cycles and sovereign exposure dynamics. While there is nothing inherently problematic about interest income, this high level of dependence means banks are essentially acting as “interest addicts,” choosing the perceived ease of government paper over the traditional work of lending to the public.
The Private Sector: The Real Victim
This investment strategy comes at a high price for the rest of the country through what is known as the “crowding-out effect.” When banks use the majority of their funds to buy Treasury Bills and Bank of Ghana instruments, the private sector is effectively denied the capital it needs for expansion. A manufacturing company looking to build a new factory or a startup looking to hire more staff finds it nearly impossible to get a loan. This age old persists despite the painful effect of DDEP and the current drop in the rates of government instruments. This results in economic stagnation, where the “real economy” that creates jobs remains starved of the credit it needs to function.
The Governor’s Warning: Diversify or Decline
The central bank is now sounding a clear alarm that relying on government interest is a strategy built on shaky ground. As the economy stabilizes and the rate environment normalizes, interest margins will compress. The Governor warned that earnings resilience will increasingly depend on diversification. Banks must move away from being balance-sheet intensive and instead focus on transactional banking, trade services, payments, and other fee-based income streams. These activities are less dependent on holding massive amounts of debt and are more focused on providing actual financial services to the public.
Conclusion
The 2022 DDEP was a painful lesson in the dangers of over-reliance on the state. While banks have successfully rebuilt their capital, their stubborn refusal to shift focus toward the private sector remains a significant hurdle to Ghana’s full economic recovery. Until banks stop acting as government piggy banks and start fulfilling their role as financial intermediaries, the private sector will continue to struggle for the credit it needs to grow.
