Managing non-performing loans in Ghana's banking sector: Balancing prudential discipline with realistic transition pathways

Abstract

Non-performing loans (NPLs) remain a central and persistent vulnerability within Ghana's banking sector, with significant implications for financial stability, bank performance, and the sector's ability to support economic growth. Although the 2017-2018 banking sector clean-up led by the Bank of Ghana restored confidence and strengthened capital positions in the short term, empirical evidence indicates that it did not deliver a sustained reduction in underlying credit risk. A paired sample t-test shows that average NPL levels in the post-clean-up period are significantly higher than in the pre-reform period (p < 0.001), while recent bank-level data confirms that NPL ratios remain elevated across much of the industry, with several institutions still far above prudential thresholds based on their end of year financials for 2025. Moreover, the Bank of Ghana's latest financial stability stress testing results indicate that under baseline conditions characterized by a favourable macroeconomic environment and the successful implementation of the NPL reduction strategy, the industry NPL ratio is projected to decline to 16.3 percent by end-December 2026. In attempt to 'cure-at-once' this lasting and financial/banking sector endemic, the Bank of Ghana has introduced a strengthened regulatory framework, including a 10 percent NPL ceiling by December 2026, enhanced supervisory oversight, and stricter enforcement mechanisms. These measures represent a critical and commendable step toward restoring asset quality and reinforcing financial discipline. However, the persistence of high NPLs, driven by structural and macroeconomic factors suggests that regulatory tightening alone may be necessary but not sufficient to achieve a lasting solution. Within this context, the current timeline for achieving the 10 percent NPL target may be overly ambitious and could incentivize short-term adjustments, including aggressive loan write-offs and unwarranted credit growth in an attempt to dilute the base, which may not address the root causes of the problem. This may have adverse implication for efficient credit allocation given the sectoral composition of NPLs. Practically, this could place banks in a significant dilemma. On one hand, they may seek to expand lending in order to dilute the NPL ratio and bring it closer to regulatory expectations. On the other hand, they may opt to strategically restructure their loan portfolios by tightening credit exposure to critical sectors that have historically exhibited a higher propensity for loan defaults and, consequently, a greater contribution to non-performing loans. This brief therefore advocates a calibrated transition pathway that aligns prudential objectives with prevailing industry conditions and the banking sector's capacity for sustainable adjustment. Such an approach would support the continued reduction of NPLs while preserving financial stability, credit intermediation, and the banking sector's contribution to economic recovery. Moreover, this should be complemented with a differentiated, risk-based supervisory framework that accounts for varying conditions across banks. Beyond regulatory adjustments, the brief emphasizes the importance of addressing structural constraints within the financial ecosystem, particularly by strengthening legal and institutional frameworks for debt recovery and improving the efficiency of the judicial process. Further, elevated NPLs should not be viewed solely as a weakness but also as an opportunity to catalyse financial innovation and market development. Instruments such as securitization, factoring, and the establishment of a secondary market for distressed assets can provide pathways for risk transfer, enhance liquidity, and create balance sheet relief for banks. Through coordinated policy action and regulatory clarity, these mechanisms can transform the NPL challenge into an avenue for deepening Ghana's financial architecture. Ultimately, achieving a sustainable reduction in NPLs will require a balanced strategy that combines strong regulatory discipline with realistic timelines, structural reforms, and macroeconomic stability. Such an approach will not only strengthen the resilience of the banking sector but also ensure that it continues to play its critical role in supporting Ghana's long-term economic transformation.