The persistent challenge of non-performing loans (NPLs) in Ghana’s banking sector has raised alarms about the industry’s financial health and resilience. Despite efforts to stabilize the economy, a combination of government arrears in energy and non-energy sectors, weak credit risk management, and poor corporate governance has exacerbated the problem, with NPL ratios reaching alarming levels of 20–40% in some banks by the end of 2023.
A recent study by Dr. Richmond Akwasi Atuahene, a corporate governance and banking consultant, coupled with insights from the IMF Country Report 24/030, reveals the deep-rooted issues plaguing the sector, highlighting the urgent need for decisive action to address both macroeconomic and institutional inefficiencies. Without these reforms, Ghana’s banking industry faces a potential crisis that could undermine broader economic recovery efforts.
Systemically, important domestic banks and subsidiaries of reputable international banks reported even higher NPL ratios, ranging from 20% to 40%. This worrying trend is exacerbated by the government’s accumulated arrears in the energy and non-energy sectors. Such arrears have not only constrained liquidity in the banking sector but also eroded profitability and capital adequacy across the board.
The 2024 IMF Country Report 24/030 corroborates these findings, emphasizing the systemic risks posed by unresolved debts in the energy sector and delayed payments to contractors.
This debt overhang has translated into higher NPL ratios over the years, severely straining the financial health of banks. The outstanding energy sector debt, particularly to Independent Power Producers (IPPs) and fuel suppliers, remains a significant burden. Furthermore, government indebtedness to contractors has compounded the problem, creating a vicious cycle that undermines economic recovery and financial stability.
“…building up of non-performing assets (NPLs) disrupts this flow of credit. It hampers credit growth and affects the profitability and solvency of the banks as well. NPLs are the leading indicators to judge the performance of the banking sector. High ratio of non-performing loans to total loans impacts banks’ lending in several ways. A bank plagued with a high stock of NPLs is likely to prioritize internal consolidation and improving assets quality over provision of new credit. A high NPL ratio requires greater loan loss provisions, reducing capital resources available for lending and denting bank profitability.”
The Financial Stability Review (2022) reveals that Ghana’s financial sector assets experienced notable growth in 2022, increasing from GH₵260.43 billion in December 2021 to GH₵312.69 billion by the end of 2022. Dr. Atuahene noted that this growth was primarily driven by the insurance, banking, and pensions sectors, which expanded by 22.3%, 21.7%, and 19.9%, respectively. However, the securities sector recorded a 2.7% year-on-year decline in assets.
Despite the overall increase, the financial system assets to GDP ratio fell from 56.4% in 2021 to 51.2% in 2022, largely due to mark-to-market losses from government bonds under the Domestic Debt Exchange Program (DDEP). The banking sector remained dominant, accounting for 76.5% of the total financial system assets at the end of 2022.
Dr. Atuahene stated that banks in Ghana play a central role in the financial system, serving as key intermediaries in the economy by accepting deposits, providing credit, and recycling funds through loan repayments. However, this critical role has been challenged by systemic issues, such as inadequate internal controls and risk management practices.
These challenges, according to him have contributed to a rise in non-performing loans (NPLs) and exposed the sector to vulnerabilities, as evidenced by high-profile banking failures between 2017 and 2019. While other financial institutions like Savings and Loans companies, Rural Banks, and Insurance firms contribute to the sector, Banks dominate with over 75% of total assets, highlighting their significance in ensuring the stability and health of Ghana’s financial system.
Overview of the Non-performing Loan Ratios in the Ghanaian Banking Sector
Dr. Atuahene highlighted the findings of the IMF Country Report 24/030 (01/2024), which revealed that the government had accumulated substantial arrears in both energy and non-energy sectors over the past decade, contributing to a rise in non-performing loans (NPLs). By December 2023, NPLs were at 20.7%, increasing to 24.1% by June 2024, with several banks, including systemically important ones, reporting NPL ratios between 20–40%.
The stock-taking exercise at the end of 2022 estimated energy sector arrears at $1.6 billion (2.3% of GDP) and non-energy arrears at GHS 35 billion (5.8% of GDP), aligning with program assumptions. These arrears, exacerbated by high fiscal deficits, have strained contractors’ ability to meet bank obligations, further worsening NPL ratios.
“The inability of government to make payments to contractors and other service providers on time, in turn, created NPLs across the banking system. The deceleration in growth also occurred mainly in the non-cocoa/gold sectors which constituted the bulk of the banks’ loan portfolios. This has added to NPLs and also exposed weaknesses in loan underwriting standards. Ghanaian banking sector has been saddled with non-performing loans (NPLs) over the past decade, meaning that they were not able to recover loans they have provided to their customers.
“These had affected the ability of banks to generate income to operate their businesses. It also led to losses which eroded their capital base further. The accumulation of new arrears could compound the NPL problem and weaken banks. High fiscal deficits led to high interest rates and engendered a further deterioration in bank assets, profits, and capital.”
Dr. Atuahene disclosed that Ghana’s fiscal deficits, which peaked at 15.2% in 2020 and gradually declined to 7.7% in 2023, have been a persistent challenge, with expenditure overruns, particularly during election years, exacerbating the issue. These deficits, rising from 6.3% of GDP in 2015 to 7.8% in 2016 and fluctuating in subsequent years, have been a major concern for the government, the Bank of Ghana, private sector stakeholders, and international financial institutions like the IMF and World Bank.
Despite efforts to manage fiscal imbalances, new arrears have emerged, compounding legacy debts in the energy and non-energy sectors. These fiscal strains, he said, have negatively impacted the banking sector, contributing to high non-performing loan (NPL) ratios and undermining price stability, output growth, and overall economic resilience. Post-DDEP 2023, the banking system was characterized by fragility, reduced profitability, and under-capitalization, with poor asset quality eroding regulatory capital levels and impairing the sector’s ability to withstand shocks.
Consequently, Dr. Atuahene noted that in 2023, private sector growth slowed significantly, with annual growth falling to 10.7% from 31.8% in December 2022, and real credit contracting by 10.2%. Credit to the private sector, already low as a share of GDP compared to peer countries, continued its decade-long decline, limiting investment, particularly for small and medium-sized enterprises (SMEs).
“The rise in public debt exacerbated this issue by increasing sovereign risk premiums, raising banks’ funding costs, and leading to higher lending rates. This dynamic contributed to the accumulation of government arrears and higher non-performing loans (NPLs), which reached 16.22% in December 2022, up from 15.2% the previous year. Poor asset quality undermined banks’ solvency, with significant capital impairments further weakening the sector’s resilience.”
Economic pressures, including a 42.8% depreciation of the Ghanaian Cedi in 2022, higher inflation, elevated policy and lending rates, and declining business confidence, compounded the financial challenges. The depreciation, from GHS 6.02 to GHS 8.6 per US dollar, worsened NPLs through revaluation of foreign currency loans and deterioration of domestic loan portfolios, with NPL stock rising from GHS 8.2 billion in 2021 to GHS 10.4 billion in 2022.
“These macroeconomic imbalances, combined with the crowding-out effect of public debt, heightened the probability of borrower defaults and eroded banks’ profitability”.
Ghana’s Banking Crisis
Dr. Atuahene iterated that Ghana’s banking sector is facing a systemic crisis characterized by high non-performing loan (NPL) ratios, which have averaged 15.15%— far exceeding the acceptable 10% threshold. This prolonged instability, he said, stems from a volatile macroeconomic environment, weak regulatory frameworks, and structural deficiencies within the economy.
The past decade has seen Ghana’s economy endure a series of shocks, with inflation surging and the cedi depreciating from GHC3.025 to the US dollar in 2014 to GHC12.15 in 2023. Interest rates soared above 30%, while fiscal deficits widened, fueling economic instability. These conditions eroded asset quality in banks, especially for foreign-owned institutions, heavily exposed to unhedged foreign currency loans.
Borrowers across the board, including individuals, small and medium enterprises (SMEs), and state-owned enterprises (SOEs), struggled to meet debt obligations amid rising costs and limited liquidity. The government’s accumulation of arrears to contractors and service providers further exacerbated the situation, undermining repayment capacity and contributing to NPL growth.
Dr. Atuahene noted that Ghana’s economy remains overly reliant on government-led activities, leaving it vulnerable to fiscal mismanagement. A crowded-out private sector, driven by excessive government borrowing, has stifled credit availability for businesses. Poor performance in key sectors like agriculture and trade has also weakened economic resilience.
Weak regulatory enforcement and insufficient risk analysis allowed banks to amass risky loan portfolios, underestimating the systemic implications. High NPL ratios have restricted banks’ ability to provide new credit, with SMEs— the backbone of the economy— bearing the brunt of reduced lending.
While the 2017–2019 financial sector cleanup sought to address undercapitalization and regulatory gaps, its impact was limited by persistent macroeconomic instability. The cumulative depreciation of the cedi by 51.8% from 2013 to 2018 significantly devalued capital requirements, highlighting the need for ongoing recalibration.
The Great Threats NPLs Poses to Banks and Economy
Dr. Atuahene emphasized that NPLs threaten the stability and profitability of banks, undermining their ability to lend and driving up borrowing costs. This, he said, can lead to a credit crunch, stifling business investments and individual’s access to finance. The broader economic repercussions include slower growth, diminished productivity, and reduced government capacity to allocate resources for development.
The banking consultant noted the adverse effects of NPLs on economic activity are multifaceted. Firstly, they restrict credit availability, which hampers business expansion and new project investments. Secondly, they erode trust in the financial system, potentially triggering capital flight and tightening credit conditions further. Lastly, public confidence in the banking sector diminishes, discouraging savings and investments, which are vital for economic growth. Historically, economies with significant NPL buildups have witnessed banking sector failures due to insolvency, undermining financial stability.
Dr. Atuahene iterated that in Ghana, the banking sector has grappled with high NPL levels over the past decade, exacerbated by macroeconomic instabilities. Factors such as high interest rates, inflation, currency depreciation, and fiscal deficits have contributed to the uptick in NPLs. Additionally, delays in payment by ministries, agencies, and departments, coupled with weak credit risk management, have compounded the problem. Bank-specific shortcomings, including irresponsible lending practices, poor governance, and inadequate credit reference systems, have further strained the sector. Notably, weaknesses in legal and regulatory frameworks, such as inefficiencies in the Borrowers and Lenders Act 2020 (Act 1052), have also played a role.
“A major challenge facing the Ghanaian banking sector is the prevalence of non-performing loans (NPL) over the past decade. This has been identified as a factor that limits the effectiveness of the banking sector in promoting the growth of the country. Growing non-performing assets have been a recurrent problem in the Ghanaian banking sector due to macroeconomic instabilities such as higher interest rates, higher inflation, unemployment, persistent depreciation of the local currency, high fiscal deficits and accumulation and non-payment of arrears to contractors and service providers on time by the ministries, agencies and departments.
“Moreover, bank specific factors including poor credit risk management, irresponsible lending, poor supervision and weak governance, poor underwriting skills, weak credit reference processes and weak understanding of the sectors where the banks were involved in lending, for example in the areas of financing the local buying agencies in the cocoa industry, Non-performing loans (NPLs) erode the profitability and can threaten the solvency of banks, and when a sufficiently large volume of loans is affected, they can potentially threaten financial sector stability.”
Dr. Atuahene averred that the cumulative impact of these factors has led to a fully-fledged banking crisis in Ghana, marked by impaired public confidence and inefficient financial intermediation. Protracted legal disputes and persistent delays in credit-related cases have hindered the resolution of NPLs. The cocoa industry, where financing of local buying agencies has suffered from weak understanding and oversight, exemplifies the sector-specific vulnerabilities that exacerbate the crisis.
The consultant added that globally, financial entities operating in stable, well-regulated markets with sustained economic growth, experience lower NPL rates. In contrast, economic downturns and fluctuating interest rates strain borrowers, increasing default risks. Banks derive income primarily from interest and loan repayments, making the management of NPLs crucial to their profitability.
“High fiscal deficits over the period had led to high interest rates and engendered a further deterioration in bank assets, profits, and capital. The high fiscal deficits of 15.2% in 2020; 12.2% in 2021; 9.3% in 2022 and 7.7% in 2023 posed some challenges and prospects of creating the fiscal space in the near term, are uncertain, as the potential for expenditure overruns were high ahead of the 2016 and 2020 elections. Inability to reduce or contain fiscal deficits have compounded the legacy debt to non-energy and energy sectors that had negatively impacted on the non-performing loan ratios.”
Determinants Of Non-Performing Loans
Non-performing loans (NPLs) have long been a critical concern for financial institutions, impacting their stability and profitability. Dr. Atuahene extensively analyzed the determinants of NPLs, highlighting the interplay between macroeconomic factors, bank-specific elements, and political influences.
Dr. Atuahene asserted that macroeconomic conditions significantly affect borrowers’ ability to service bank debt. Economic cycles influence the cash flow of households and firms, leading to higher default rates during adverse economic shocks. Borrowers face greater challenges in repaying loans when their income streams are disrupted by recessions or other economic downturns.
Moreover, he noted that the relationship between GDP growth and NPLs is inverse. Higher economic growth reduces NPL ratios as borrowers experience improved financial stability, whereas recessions often lead to increased loan defaults. He added that real GDP growth positively correlates with reduced NPL ratios in Euro-area countries
Another determinant Dr. Atuahene highlighted was interest rates. He noted that interest rates are a crucial determinant of NPLs. High interest rates increase borrowers’ debt servicing costs, making repayment challenging and leading to higher NPL volumes. Conversely, lower interest rates can mitigate NPLs but may reduce banks’ earnings. The instability of interest rates also poses significant risks, where fluctuations in rates were linked to NPL growth.
“Exchange rate fluctuations significantly affect NPLs, particularly in economies with high exposure to foreign currency loans. A depreciating local currency can increase the repayment burden for borrowers, raising the likelihood of defaults. The U.S. banking sector and others worldwide have documented strong correlations between exchange rate volatility and NPLs.”
In addition, Dr. Atuahene indicated that political instability and weak governance frameworks are also part of major contributors to NPLs. He highlighted how political pressure often leads to loans being issued on non-meritocratic grounds, particularly in developing economies. Loans granted under political influence are frequently underutilized and poorly repaid, exacerbating the NPL crisis.
Again, factors such as weak judicial systems, bureaucratic inefficiencies, and poor credit policy implementation contribute to the rise in NPLs. These institutional shortcomings undermine the banking sector’s ability to manage credit risks effectively, often leading to systemic failures. Such issues are particularly prevalent in regions with underdeveloped regulatory frameworks.
Bank-Specific and Industry Factors
Dr. Atuahene noted that the build-up of NPLs is often linked to poor risk management practices and regulatory discrepancies. Banks’ behavior and risk assessment mechanisms vary across countries, influenced by differences in financial regulation and supervision. Ineffective risk management can lead to excessive reliance on high-priced interbank borrowings, increasing borrowers’ financial burdens and contributing to NPL growth.
Moral hazard, where borrowers take undue risks believing they are shielded from consequences, also plays a role in increasing NPLs. Coupled with macroeconomic volatility and economic downturns, these factors create a complex environment where borrowers are more likely to default.
“The effect of these determinants on NPLs depends on loans categories. Specifically, consumer loans were most sensitive for changes in lending rates; business loans to the real GDP growth; and mortgage loans were the least sensitive to changes in macroeconomic variables. With respect to bank-specific determinants, their results indicate that these determinants’ effect on the NPLs varies between different categories of loans. Among macroeconomic factors, economic growth, interest rates, inflation, unemployment, and exchange rates have been significant.”
He disclosed that regulatory authorities emphasize the importance of prudential frameworks to stabilize the banking sector. However, these frameworks often focus more on macroeconomic and microeconomic factors than on institutional and governance issues. This gap, he said, can hinder efforts to reduce NPLs effectively.
Sound credit policies are essential to minimizing NPLs. Loans categorized as non-performing— typically those with repayments overdue by more than 90 days— pose a significant challenge for banks. While some loans may transition to “re-performing” status if repayments resume, the likelihood of full repayment remains low. Robust credit policies can help prevent loans from reaching non-performing status in the first place.
Quality Of Assets Within Ghana’s Banking Sector
Dr. Atuahene stated that the Bank of Ghana’s 2020 banking sector development report revealed a marginal decline in asset quality within the banking sector, attributed to pandemic-induced loan repayment challenges and reduced credit growth. The Non-Performing Loan (NPL) ratio rose from 14.7% in December 2019 to 15.7% in December 2020, reflecting increased loan defaults during the economic downturn.
By year-end 2020, the stock of NPLs grew by 9.8% year-on-year to GH¢7.1 billion, reversing a 3.0% contraction seen in 2019. Banks mitigated the impact of the pandemic by offering loan restructuring and repayment moratoriums to customers, which helped to moderate the anticipated deterioration in asset quality.
The pandemic-triggered economic restrictions, including lockdowns and physical distancing measures, exacerbated business disruptions, income losses, and reduced demand, leading to defaults by firms and households. By December 2020, banks had restructured loans totaling GH¢4.5 billion, representing 9.4% of the industry loan book, as a relief measure to struggling borrowers. Regulatory authorities have since implemented enhanced monitoring and guidance measures to track developments in asset quality and ensure stability in the banking sector
“According to Bank of Ghana’s banking sector development report in December 2019, the banking sector non-performing loan ratio improved from 18.2% in December 2018 to 14.7% in December 2019. The decline in the ratio was due to the combination of loan recoveries as well as further write- off. The industry’s asset quality improved significantly during the period under review.
“The stock of the industry’s Non-Performing Loans (NPLs) declined further by 5.2 percent to GH¢6.30 billion in December 2019, following a contraction of 18.9 percent a year earlier. The positive effect of the decline in the stock of NPLs on the NPL ratio was influenced by a strong pick up in gross credit within the review period, with a resultant decline in the NPL ratio to 14.7 percent in December 2019 from 18.2 percent in December 2018.”
The banking sector in Ghana has experienced fluctuations in its Non-Performing Loan (NPL) ratios over the years due to various economic factors and policy interventions. By December 2019, the industry’s NPL ratio adjusted for fully provisioned loss loans decline to 6.7%, down from 10.2% in December 2018. This improvement was attributed to ongoing loan write-offs, intensified loan recoveries, and enhanced risk management practices.
Historically, the sector faced challenges, as seen in 2016, when the NPL ratio increased to 17.3% from 14.7% in 2015, with the stock of NPLs rising from GH¢4.4 billion to GH¢6.2 billion. A slowdown in credit growth and high production costs, particularly from elevated utility tariffs, contributed to this deterioration. However, efforts to settle energy sector debts helped reduce public sector NPL contributions from 3.9% in 2015 to 3.2% in 2016, though private sector NPLs continued to dominate.
In 2017, the NPL ratio climbed further to 22.7%, driven by a slowdown in credit growth and a marginal increase in the year-on-year growth of NPL stock from 39.0% in 2016 to 39.8% in 2017. Indigenous private enterprises remained the largest contributors to NPLs, accounting for 80.6% of total NPLs by year-end 2017, up from 78.9% in 2016. Meanwhile, the public sector’s share of NPLs rose to 5.7%, and the contribution from households and foreign enterprises showed modest declines. Adjusted for fully provisioned losses, the NPL ratio stood at 10.8% in 2017, up from 8.4% in 2016.
Policy Implications
Dr. Atuahene emphasized that achieving macroeconomic stability is essential for addressing Ghana’s persistent non-performing loans (NPLs) and fostering a robust banking sector. He highlighted the need for stable exchange rates, low inflation, manageable fiscal deficits, sustainable public debt, and balanced trade terms as critical factors.
These measures would enhance capital management, improve liquidity, and strengthen banks’ solvency while supporting economic growth and private sector development. Macroeconomic stability depends not only on sound policies but also on structural reforms to optimize market and sector efficiency, ensuring sustainable economic balances that underpin a vibrant and resilient banking industry.
“Prudent macroeconomic policies can result in low and stable inflation, stabilize the local currency which could contribute to lowering the NPLs in the banking sector. Inflation hurts the poor by lowering growth and by redistributing real incomes and wealth to the detriment of those in society, least able to defend their economic interests. The government must ensure that macroeconomic stability is associated with prudent monetary and fiscal policies, such as low and stable levels of inflation, lower fiscal deficit, reasonable public debt levels, exchange rate volatility (nominal or real), and interest rates, among others, all of which could be quantitatively assessed on the financial sector as well as the economy.”
To address Ghana’s persistent non-performing loans (NPLs), Dr. Atuahene noted that the government must tackle fiscal weaknesses by clearing outstanding legacy debts and preventing the accumulation of new arrears. Strategies include fixed monthly payments to contractors, service providers, and Independent Power Producers (IPPs), as recommended by the IMF, alongside the integration of payment systems like GIFMIS to enhance fiscal discipline.
Reducing NPLs require repaying government arrears promptly, resolving problem banks, and addressing systemic vulnerabilities in fiscal and financial management. The Bank of Ghana (BoG) should aim to lower NPL ratios below 10% by 2025, supported by debt restructuring plans and initiatives such as a Non-Performing Assets Recovery Trust (NPART) to clean banks’ balance sheets and restore sector stability.
Simultaneously, robust governance and risk management frameworks are critical for sustainable NPL reduction. Bank boards and executive management must adopt comprehensive strategies to manage NPLs, including periodic reviews, stringent credit assessments, and effective collateral management. Enhanced internal controls, early credit risk detection, and stress testing for large borrowers are necessary to strengthen the resilience of the banking sector.
Ghanaian banks must refine credit risk assessments, update scoring models, and develop adaptable underwriting criteria to minimize risk exposure. Combining prudent fiscal practices, structural reforms, and strong governance is essential to ensuring financial stability and reducing NPLs in Ghana’s banking industry.