Amid fresh concerns over high rate of bad loans in Ghana’s banking sector, Banking and financial consultant Dr Richmond Atuahene has warned that the persistently high non-performing loan (NPL) ratio places the country’s financial sector in a dangerous position.
The banking and finance expert draws this conclusion from a research that identifies loan distress above certain thresholds as a sign of a systemic banking crisis.
Dr Atuahene said Ghana’s NPL ratio stood at 11% in 2011 and had since risen to 18.5%, arguing that the country had remained exposed to serious banking sector risks because businesses and public sector workers were not receiving the payments needed to service their loans.
His warning comes amid concerns raised by John Awuah, Chief Executive Officer of the Ghana Association of Banks, over delays by the Controller and Accountant-General’s Department in transferring loan repayments deducted from public sector workers’ salaries.
What ‘Seismic Risk’ Means for Ghana
In a 1998 study, The Determinants of Banking Crises in Developing and Developed Countries, economists Aslı Demirgüç-Kunt and Enrica Detragiache classified a banking sector episode as a full-fledged crisis if at least one of four conditions was met. One was when non-performing assets exceeded 10% of total banking assets.
Although the study does not describe the 10% threshold as “seismic risk”, its findings provide a basis for understanding Dr Atuahene’s warning.
In simple terms, non-performing loans are loans on which borrowers have stopped making payments as required. When these loans accumulate, banks earn less from lending, set aside more money to cover potential losses, and have fewer resources available to extend credit to businesses and households.
The danger becomes systemic when loan distress is widespread enough to threaten the stability of the banking system, rather than remaining a problem for individual banks.
Government Payment Delays Worsen the Problem
Dr Atuahene argued that delayed payments to private sector contractors and suppliers also contribute to the problem because businesses that have completed work or supplied goods cannot repay their bank loans without receiving the money owed to them.
He questioned why public sector workers’ loans should become non-performing when their salaries have already been paid, and the corresponding loan deductions have been made.
“If the people have been paid and the loans have not been paid, then that’s a different matter,” he said, stressing that the government should transfer the deductions to the banks.
A Threat to Banks and Depositors
Dr Atuahene warned that persistent repayment delays undermine banks’ financial health and put depositors’ funds at risk.
Addressing Ghana’s high NPL ratio, for him, requires more than urging banks to improve lending practices. He maintains that the government must also meet its payment obligations so that contractors, suppliers and lenders can recover money owed to them.
He stresses that when borrowers cannot repay because government payments are delayed, the resulting losses can weaken banks, restrict new lending and ultimately affect businesses and ordinary Ghanaians.
