Ghana’s banking sector is masking a dangerous reality beneath its seemingly impressive growth numbers, with nearly a quarter of loans given to customers classified as non-performing.

The sector’s NPL ratio has surged to an alarming 22.7% as of October 2024, up significantly from 18.3% a year ago, signalling a rapidly deteriorating loan book quality that could threaten the sector’s stability. 

While the banking industry touts a 42.4% growth in total assets to GH¢367.2 billion and reports improved capital adequacy ratios of 11.1%, these headline figures obscure the mounting stress in loan portfolios. 

The rising tide of bad loans suggests that banks’ aggressive lending push - with private sector credit growth jumping to 28.8% from last year’s contraction of 7.5%,  may be setting the stage for a new wave of asset quality problems.

The Monetary Policy Committee of the Bank of Ghana in its November report noted that Credit risk remains elevated in the banking sector.

The report highlighted that notwithstanding the elevated non-performing loans (NPL) profile, the banking sector remains sound, well-capitalised and liquid.

In the outlook, the committee said performance would be contingent on a rebound in profits, continuous adherence to recapitalisation plans and enforcement of strict credit underwriting standards. 

This surge in NPLs comes despite banks having already weathered a domestic debt exchange program, raising questions about whether institutions have truly recovered from recent financial sector reforms or are simply papering over deeper structural weaknesses.

For an industry still emerging from a recent cleanup exercise that cost billions, the escalating bad loan situation presents an uncomfortable echo of past crises. 

Experts have argued that the contrast between rapid asset growth and deteriorating loan quality suggests banks may be pursuing expansion at the expense of prudent risk management, a strategy that has historically ended poorly for Ghana’s financial sector.

Threat to banks

Banks in the country had a difficult 2022 due to the Domestic Debt Exchange Programme, with 16 banks recording significant losses in the year under review.

The banks, however, rebounded in 2023, with results from 20 out of the 23 banks indicating a return to profitability.

Although four banks still recorded losses in 2023, the losses recorded were an improvement of the 2022 losses.

In an earlier interview with the Graphic Business, Banking Consultant Dr Richmond Atuahene said the high NPLs were a major threat to the profitability and solvency of banks.

He said although the banking industry had been battling with rising NPLs for decades now, the level at which it is rising now threatens the financial stability agenda of the country.

He, therefore, advised the government, the Bank of Ghana and the banks to put in place measures to immediately address the rising NPLs in the country.
Ghana has historically recorded high levels of NPLs in the banking sector, with NPLs reaching a record high of 24 per cent in 2023.

According to Demirguc-Kunt and Detragiache (1997), any banking industry whose NPLs exceed 10% is in crisis.

Dr Atuahene said the country’s banking sector was, therefore, in a full-fledged crisis as a result of general repayment challenges on the part of borrowers.

He said the repayment challenges were a reflection of the weak macro-economic imbalances in the form of higher inflation, higher lending rates, persistent depreciation of the local currency, higher energy costs and a harsh business environment.

Vulnerabilities 

To reverse the NPLs trend in the country, Dr Atuahene urged the government to address the persistent fiscal weaknesses that have created vulnerabilities in the banking sector.

He said the government’s dominance in economic activity, against the backdrop of weaknesses in fiscal management, further increased vulnerabilities in the banking sector.

He pointed out that the government’s accumulation of payment arrears to contractors and other service providers, which has undermined their capacity to service their bank loans and created NPLs across the industry, had prevailed in the past decade.

He said the accumulation of new government arrears could compound the NPL problem and weaken banks. 

“In addition, while government domestic arrears have been a recurring source of vulnerability, banks continued to rely on implicit government guarantees when lending to government service providers,” he stated.

He urged the government to settle its indebtedness to contractors to enable them to pay back their loans to the banks, adding that this would help the banks recover some of the NPLs on their books.

Risk management framework

The banking expert also advised banks to implement a well-designed risk management framework that has been considered a must for a best-practising bank.

He said universal banks should be immediately required to strengthen their internal controls and risk management practices, including strengthening their credit risk assessment, legal perfection of collateral, monitoring and collection systems, as well as debt collection.

To decide whether to approve a loan application, banks should evaluate the riskiness of the loan, decide on an appropriate risk premium on the loan, devise measures to prevent, as well as deal with possible loss events and assess their ability to absorb losses when NPLs occur.

“Putting such a framework into practice would be expected to increase operational efficiency. If the risk management framework does not work, a plan for the reduction of NPLs is necessary,” he said.