Ghana’s banking sector faces a “seismic risk” as its non-performing loan (NPL) ratio has reached 18.5%. Banking and financial consultant Dr. Richmond Atuahene issued this stark warning, highlighting the dangerous position of the country’s financial system.
This alarming NPL ratio, which has climbed from 11% in 2011, significantly surpasses a 10% threshold. Economists Aslı Demirgüç-Kunt and Enrica Detragiache identified this threshold in a 1998 study as a sign of a full-fledged banking crisis. Dr. Atuahene attributes the persistent exposure to serious banking sector risks to delayed payments to businesses and public sector workers, preventing them from servicing their loans.
The current situation fits into a broader pattern of financial strain within Ghana’s economy. Government payment arrears to contractors and suppliers have been a recurring issue, impacting liquidity across various sectors. This directly affects the ability of businesses to repay bank loans, creating a ripple effect that threatens the stability of financial institutions. The Ghana Association of Banks, through CEO John Awuah, has also raised concerns about delays from the Controller and Accountant-General’s Department in transferring public sector loan deductions.
Dr. Atuahene stressed that these payment delays worsen the problem. He questioned why public sector workers’ loans become non-performing when their salaries are paid and deductions are made. He stated, “If the people have been paid and the loans have not been paid, then that’s a different matter.” He urged the government to transfer these deductions promptly to the banks.
The implications of a high NPL ratio are severe for Ghana’s economy. When NPLs accumulate, banks earn less, must set aside more money for potential losses, and have fewer resources to lend. This restricts credit availability for businesses and households, hindering economic growth and job creation. The stability of the entire banking system is at risk if loan distress becomes widespread, affecting not just individual banks but the entire financial infrastructure.
Dr. Atuahene warned that persistent repayment delays undermine banks’ financial health and endanger depositors’ funds. He argues that addressing Ghana’s high NPL ratio requires more than just banks improving their lending practices. The government must also fulfill its payment obligations to contractors, suppliers, and ultimately, the banks. This ensures that money owed can be recovered, preventing further weakening of banks and a contraction in new lending. The Finance Minister, Dr. Cassiel Ato Forson, faces the challenge of resolving these payment issues to safeguard the financial sector.
The stability of Ghana’s financial system depends on timely government payments. Failure to address this issue could lead to a systemic crisis, impacting businesses, ordinary Ghanaians, and the overall economic outlook. Stakeholders will closely monitor government actions to resolve these payment arrears and restore confidence in the banking sector.