Ghana’s Central Bank Engages Lenders to Tackle Rising Bad Loan Ratios

Ghana’s central bank is addressing an alarming rise in bad loans, exemplified by one lender’s 81% non-performing loan ratio. The industry average stands at 21.8%, a significant increase since December 2022. Governor Johnson Asiama noted that many issues stem from government debt restructuring rather than the banks’ actions. Ongoing discussions aim to lower these ratios and stabilize the financial sector, amidst challenges like currency depreciation and high inflation rates.

Ghana’s central bank has initiated discussions with local lenders to address the surge in bad loans, with one bank reporting an alarming 81% non-performing loan ratio. This figure stands in stark contrast to the industry average of 21.8% at the end of 2024, which has increased from 14.8% in December 2022, following Ghana’s default on substantial external debts, according to Bank of Ghana data.

During a recent conference, Governor Johnson Asiama highlighted the critical issue of non-performing loans, emphasizing that while banks play a role, much of the burden arises from the government’s domestic debt exchange program. Asiama pointed out that the restructuring was not directly due to any actions taken by the banks themselves.

As lessons are learned from the crisis, the central bank is proactively engaging various local lenders, primarily focusing on domestic banks, especially state-owned institutions. These banks have been significant sources of financing for the government, which has struggled with debt management, ultimately seeking a $3 billion bailout from the International Monetary Fund in 2022 due to unsustainable debt payments.

The economic landscape of West Africa is further complicated by currency devaluation, with the cedi depreciating nearly 18% against the dollar in the past year. This has resulted in persistent inflation levels at approximately 23%, prompting the central bank to maintain a high policy interest rate of 27%, which restricts credit accessibility for businesses and households.

Despite current challenges, the financial sector indicates potential for recovery. A recent Fitch Ratings report noted that while solvency pressures exist, they have not led to significant liquidity issues. Governor Asiama stated that if non-performing loan ratios can be reduced and fiscal stability is achieved, lending rates are likely to decrease swiftly.

In conclusion, Ghana’s central bank is prioritizing dialogue with local lenders to mitigate the adverse effects of high non-performing loans, which have surged amid a challenging economic backdrop. The focus on stabilizing the fiscal environment underscores the importance of these measures for restoring confidence in the financial system and promoting lending. Achieving lower non-performing loan ratios could pave the way for reduced lending rates, facilitating growth and recovery in the economy.

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