The Vice President of Ghana, who is also a Presidential aspirant of the New Patriotic Party (NPP), has stoked the conversation on credit-based economy, with many analysts giving varied opinions on the subject and its relevance in propelling the economy. One of such experts is Banking Consultant and Finance Analyst, Dr. Richmond Atuahene.
Ghana is currently, largely, cash based and shifting from a predominantly cash-based economy to a more credit-driven one will be a great feat for the economy. This transition is not only crucial for fostering economic growth but also for integrating the country more fully into the global financial system. With a credit-based economy, individuals and businesses can leverage financial resources that were previously inaccessible, opening new opportunities for investment, entrepreneurship, and consumption.
According to Dr. Atuahene, a credit-based economy relies heavily on credit or borrowed money to facilitate consumption, investment, and overall economic growth. Developed economies like the United States, Germany, Australia, and Switzerland are notable examples, where well-developed credit markets offer a wide array of financial products and services. These economies have a stable macroeconomic environment with low inflation, stable exchange rates, and manageable public debt, allowing individuals and businesses to access credit more easily. The presence of robust credit infrastructure, including credit bureaus, scoring models, and regulatory frameworks, further supports widespread credit accessibility.
In these economies, unique identification systems like the US Social Security Number or the UK’s National Insurance Number, along with sophisticated property addressing systems, are crucial for the effective functioning of credit markets. These systems enable financial institutions to easily track borrowers, reducing default risk and allowing for lower interest rates on loans. The importance of property address systems is often underestimated, but without them, these developed economies would struggle to maintain the efficiency of their financial sectors, as banks rely on these systems to monitor and trace debtors.
“Credit rating agencies (CRAs) play a key role in financial markets in developed economies by helping to reduce the informative asymmetry between lenders and borrower in the credit market. Credit rating agencies (CRAs) are used to assess the risk of a borrower’s default, and its associated financial loss, in the sale of financial products. Their primary function is to benchmark the likelihood of a debtor’s default by providing a credit rating; they are not to be confused with what are normally described as credit reference agencies, which do a similar job but for individuals.”
The State of The Credit Economy In Ghana
Dr. Atuahene explained that before an economy can be considered a credit-based economy or can consider transiting to a credit-based economy, conditions such as a stable economy, stable currency, trust and confidence, transparent credit information, and an effective legal framework must be met.
The Banking Consultant noted that in Ghana, the state of the credit economy has been hampered by certain challenges, both in terms of access to credit and the impact of inflation. “Access to credit in Ghana is hindered by limited financial infrastructure, high collateral requirements, the presence of the informal economy, limited credit history, and high-interest rates”.
He stated that the lack of developed banking services and credit reporting systems makes it difficult for lenders to assess borrowers’ creditworthiness. Additionally, the need for significant collateral poses a barrier for individuals and small businesses with limited assets.
“In Ghana, credit performance has historically been a mixed bag due to several factors, including the high level of poverty, limited financial literacy, and challenges in the regulatory and legal frameworks. Ghana’s credit environment had faced general economic deterioration of macro-economic instabilities of high inflation, persistent depreciation of local currency, higher policy rates and lending rates as well high fiscal deficits.”
In addition, Dr. Atuahene disclosed that the country had experienced unsustainable debt environment over the 2019- 2023 which resulted in both domestic and external debt restructuring with its attendant negative consequences. One outcome of the DDEP has been the crowding out of the private sector. Banks’ and SDIs internal controls and credit risk management practices have not kept pace with the industry’s growth and changing risks.
Meanwhile, as of December 2023, non-performing loans (NPLs) in the banking sector were alarmingly high, with an average of 20.6%, and certain banks, including major domestic and international ones, reporting NPL ratios as high as 30%. By June 2024, the NPL asset ratio had further increased to 24.1%, largely due to significant government arrears in both the energy and non-energy sectors.
Difficult Macroeconomic Environment Increases Vulnerabilities In The Credit Market In Ghana
Dr. Atuahene stated that government’s dominant role in economic activity, compounded by weak fiscal management, has exacerbated vulnerabilities in the credit market, particularly within the banking sector. State-owned enterprises (SOEs), ministries, departments, and agencies (MDAs), as well as many small and medium enterprises (SMEs), depend heavily on government contracts.
The government’s accumulation of payment arrears to contractors and service providers has severely impacted their ability to repay bank loans, contributing to rising non-performing loans (NPLs) across the industry.
According to the IMF Country Report 24/030 (01/2024), government arrears amounted to US$1.6 billion (2.3% of GDP) in the energy sector and GHC 35 billion (5.8% of GDP) in the non-energy sector, leading to higher NPL ratios over the past decade.
“The past five years, the country has experienced harsh and difficult macroeconomic environment for both banks and SDIs as a result of a general deterioration of economic conditions, which have resulted in the rising in non-performing assets in the financial sector. Macro-economic instabilities have affected the ability of financial institutions ability to absorb and manage the risks and behavior of creditors. Stable macro-economic conditions influence the effectiveness of markets, the ability of the financial system to intermediate resources, and economic growth.”
The Expert asserted that persistent macroeconomic instability has severely disrupted Ghana’s financial markets and weakened the ability of financial institutions to manage risks. Over the past five years, high fiscal deficits, government arrears, and market volatility have exacerbated the non-performing loans (NPL) situation. Inflation soared, interest rates rose to around 30%, and the local currency depreciated, leading to deteriorating asset prices and deposit runs.
The Ghanaian economy faced a food and energy crisis, expansionary fiscal policies, and became classified as hyperinflationary by 2023, with three-year cumulative inflation reaching 133%. This situation forced financial institutions to apply IAS 29, adjusting reported balances to reflect the loss of purchasing power. The high inflation, currency depreciation, and rising interest rates undermined the effectiveness of financial sector reforms, while large budget deficits pushed credit away from the private sector toward the government.
“With inflation currently at 21.4% and still pose to increase further, the Bank of Ghana has reduced its rate to 27% per annum which has made borrowing more expensive and has resulted in reduced credit demand.” Inflation-driven volatility in interest rates discourages borrowing, while inflated asset prices make it difficult for borrowers to meet collateral requirements.
Moreover, currency depreciation in Ghana has also complicated the dynamics of the credit economy. While depreciation is often used in emerging markets to boost export competitiveness, it has led to increased foreign currency debt obligations for firms, lowering their profits, borrowing capacity, investment, and output.
Ghana’s Unsustainable Debt Environment
Dr. Atuahene highlighted that Ghana has been operating in an unsustainable debt environment, which has negatively impacted the financial institutions. The country’s economic and financial crisis over the past three years has been the most severe in modern history, marked by significant output and employment losses. Ghana’s debt surged from GH₵35.1 billion (48.4% of GDP) in 2012 to GH₵122.6 billion (73.3% of GDP) by 2016, and further escalated to GH₵546 billion (88.1% of GDP) in 2022. Despite a domestic debt exchange program in September 2023, debt levels continued to rise to GH₵610 billion, reflecting ongoing economic challenges.
“The situation in Ghana is a testament to the catastrophic effect that excessive borrowing has exerted on an economy and the disastrous consequences on the social fabric as well as high poverty levels. One of the core issues in this contemporary Ghana’s tragedy has been public debt. When the crisis started in 2022 with a debt-to-GDP ratio of around 100%, it was interpreted by most economists and policymakers as a public debt crisis. The result of these efforts will be a slowdown of the increase in debt and a boost to growth and therefore a decrease in the debt-to-GDP ratio.”
Ghana has faced one of its most severe economic crises in recent history, worsened by external shocks such as the Covid-19 pandemic and the Russia-Ukraine war. The country experienced weak economic growth, high unemployment, soaring inflation, currency depreciation, loss of access to external capital markets, dwindling international reserves, and a looming public debt crisis.
By November 2022, Ghana’s public debt was declared unsustainable, with a public and publicly guaranteed (PPG) debt-to-GDP ratio of 100.34%. To restore debt sustainability, the government aims to reduce this ratio to 55% by 2028, seeking a $3 billion IMF credit facility that required debt restructuring. Rapidly growing foreign debt and its associated interest payments, along with the suspension of foreign debt payments in December 2022, led to a collapse in both private and public investment, with total investment to GDP declining by 5 percentage points.
“Ghana registered the largest fiscal deficits in the past decade, which reached its peak in 2020 with an unprecedented deficit of 15.2% of GDP and 12.3% in 2021 thus sharply increasing the country’s debt stock and debt service costs, thereby creating enormous budgetary difficulties. The government of Ghana naturally aimed at achieving fiscal consolidation in the original 2022 budget. In December, 2022 the government defaulted on the external debt and also began the domestic debt restructuring which has just been completed.”
Impact of Weak Legal and Regulatory Framework on Credit Market Performance in the Banking Sector
Dr. Atuahene contends that significant weaknesses in Ghana’s legal and regulatory framework for the credit market have contributed to the rising non-performing loan (NPL) ratios in the banking sector over the past decade. These challenges are amplified by difficulties in enforcing creditor rights, despite the introduction of the Borrowers and Lenders Act 2020 (Act 1052) and the Credit Reporting Regulations (2020) LI 2394.
Banks face prolonged delays in foreclosing on collateral due to complex and time-consuming procedures, leading to low debt recovery rates. The legal, regulatory, and judicial systems, including frequent adjournments in credit-related cases and inefficiencies in the Borrowers and Lenders Act, have all contributed to this increase in NPLs.
The establishment of the Collateral Registry under Act 1052 was intended to improve credit delivery by providing platforms for registering security interests in both movable and immovable assets, conducting asset searches, and enabling the realization of security interest without a court order. Although, the Collateral Registry has facilitated asset registration and searches, it has not sufficiently addressed the challenges related to the quick disposal and realization of collateral, especially in cases involving legal mortgages.
Furthermore, the enactment of the Credit Reporting Act 2008 (Act 726) and the Credit Reporting Regulations (2020) was aimed at reducing information asymmetry in the credit market. However, these measures have not effectively reduced the default probabilities of borrowers or improved access to credit for small and medium-sized enterprises (SMEs).
Transitioning Ghana to a Credit-Based Economy, A Difficult Path But…
Dr. Atuahene indicated that with government’s dominance in the economic activity, it could make the path to credit-based economy very challenging and difficult because the fiscal deficits always widens, inflation accelerates, interest rates rises to around 30 percent, investors become skittish and begin to exit the debt market, and the exchange rate begins to depreciate, thereby creating conditions for asset price deterioration, but if critical steps are adopted and implemented then credit-based economy could be achieved.
“The informal sector further complicates credit evaluation, while the absence of comprehensive credit reporting systems hampers lenders’ ability to assess creditworthiness. Even when credit is accessible, high-interest rates make it unaffordable for many. Inflation compounds these challenges by reducing purchasing power, leading to tighter credit conditions.”
Moreover, Dr. Atuahene iterated that transitioning Ghana to a credit-based economy requires significant institutional reforms, particularly the digitalization of property addressing and street naming systems. This would enable banks and Specialized Deposit-taking Institutions (SDIs) to track borrowers more effectively, reducing risk premiums on loans. Digitalization also facilitates the acceptance of the National Identification Authority (NIA) card, enhancing trust in financial transactions, which is essential for a healthy credit culture.
Achieving macroeconomic stability is another critical component. A stable economic environment, characterized by low inflation, stable exchange rates, and manageable public debt, creates favorable conditions for credit expansion and growth. The Government of Ghana and the Bank of Ghana must prioritize sound macroeconomic policies that stabilize the exchange rate and lower inflation, ultimately improving asset quality in the banking sector.
Additionally, improving financial infrastructure and enforcement mechanisms is vital for a credit-based economy. This includes ensuring compliance with international financial reporting standards, strengthening credit reporting systems, and expediting judicial processes for foreclosures and collateral disposal. Legislative and institutional reforms to enhance creditor rights and insolvency frameworks are also necessary.