Corporate governance and climate resilience: BoG’s vision for the financial future
In recent years, the Bank of Ghana (BoG) has taken significant steps to strengthen corporate governance within the country’s banking sector. With a series of reforms aimed at fostering stability, transparency, and long-term resilience, BoG’s regulatory oversight has been essential in addressing past governance lapses that culminated in financial instability.
Now, with the introduction of a Climate-Related Financial Risk Directive, BoG is guiding banks to adapt their governance and risk frameworks to address climate risks, ensuring that Ghana’s financial sector remains resilient amid global environmental challenges.
The directive requires commercial banks to align their policies with these new standards by December 31, 2025, with Specialised Deposit-Taking Institutions (SDIs) and Non-Bank Financial Institutions (NBFIs) following by December 31, 2026. Implementation takes effect on January 1, 2026, for banks and January 1, 2027, for SDIs and NBFIs.
Through a closer examination of BoG’s corporate governance prescriptions, the central bank’s role in overseeing governance practices, and the financial implications of these reforms, we can appreciate the profound impact this directive will have on the banking sector and broader economy in Ghana.
Bank of Ghana’s Corporate Governance Framework: An Evolution of Standards
Corporate governance has long been a priority for BoG. Following the banking crisis of 2017-2018, which saw the collapse or merger of nine banks due to governance failures, the central bank introduced stringent corporate governance guidelines in 2019.
These regulations sought to prevent poor practices, such as insider lending, inadequate risk management, and a lack of board oversight, which had previously contributed to widespread financial instability.
A Review of BoG’s Governance Framework:
- Board Oversight and Independence:
The BoG mandates that all regulated financial institutions maintain independent boards with clear oversight responsibilities. This independence mitigates conflicts of interest and promotes responsible risk-taking. As a result, banks have been required to appoint directors who bring specialized knowledge and maintain ethical accountability.
- Risk Management Policies:
Under BoG’s directives, banks must have dedicated risk management frameworks capable of identifying, monitoring, and managing financial risks. The new Climate-Related Financial Risk Directive extends this requirement, urging banks to evaluate how climate risks could impact asset values, credit risks, and operational stability.
- Enhanced Transparency and Disclosure Requirements:
Transparency is fundamental to governance. BoG requires banks to disclose financial data, risk factors, and, with the new directive, environmental impacts. Such disclosures will enable stakeholders to assess banks’ resilience to climate risks, fostering accountability.
- Internal Controls and Audit Functions:
Strong internal controls help prevent fraudulent activities, while robust audit functions ensure compliance. The BoG’s oversight involves regular examinations to verify adherence to these controls, with non-compliant banks facing sanctions, fines, or even license revocations.
Monitoring Corporate Governance Practices: The Role of BoG
The Bank of Ghana’s active role in monitoring corporate governance is essential for building and maintaining trust in the banking sector. Through frequent audits, examinations, and enforcement of regulatory frameworks, BoG has ensured that banks adhere to prescribed governance standards.
A pivotal example was in 2018, when the BoG revoked the licenses of insolvent banks, citing poor corporate governance and exposing a severe lack of internal controls and risk management practices.
In the wake of these failures, BoG has introduced several reforms to enhance governance, including the establishment of the Corporate Governance Directive in 2019. This directive set specific requirements for board composition, tenure, and accountability standards, ensuring boards were well-equipped to oversee operations effectively.
These reforms marked a turning point for Ghana’s banking sector, with banks required to submit quarterly governance reports detailing their compliance status, which BoG reviews meticulously.
To reinforce these practices, the BoG imposes penalties for non-compliance, a move that has prompted banks to prioritize governance. The ongoing monitoring of governance frameworks has seen notable improvements, with Ghana’s banking sector recording a reduction in non-performing loans from 22.6% in 2018 to around 15% by 2023.
However, as climate-related risks increase, BoG’s recent directive highlights the need for even stronger governance to safeguard the sector’s future.
Financial Implications for the Banking Sector and Economy
The financial stability of the banking sector is critical to Ghana’s economic health. By prioritizing governance reforms, BoG has made significant strides in restoring trust in the sector, which directly impacts economic growth, as a healthy banking system is better positioned to support the private sector and facilitate credit access.
- Capital Injection and Compliance Costs:
Compliance with BoG’s directive requires banks to invest in new governance structures, risk management systems, and board training programs. Banks may incur costs related to hiring climate risk experts, adopting technology for scenario analysis, and creating transparent reporting systems.
However, these costs are necessary to avoid future financial losses associated with climate risks. Globally, the cost of compliance often represents 10-20% of operational expenses, and Ghanaian banks could face similar financial burdens in the short term.
- Reduction of Non-Performing Loans (NPLs):
Better governance has already reduced NPL ratios, as evidenced by the drop from 22.6% in 2018 to 15% by 2023. With climate-focused governance structures in place, banks can avoid risky loans in vulnerable sectors, preserving asset quality. Given that a 1% decrease in NPLs can significantly bolster financial stability, BoG’s directive is expected to further strengthen banks’ risk management practices.
- Attracting Investment:
Strong governance, combined with climate risk mitigation, makes Ghanaian banks more appealing to international investors. As global investors increasingly focus on Environmental, Social, and Governance (ESG) criteria, adherence to BoG’s directive can make Ghanaian banks attractive to foreign capital. This could foster additional investment in the sector, supporting broader economic growth.
- Fostering Long-term Economic Stability:
A stable banking sector boosts economic growth by providing steady financing to businesses and households. By enhancing governance and requiring climate risk integration, BoG’s directive will contribute to long-term stability.
For instance, improved risk management could reduce Ghana’s vulnerability to climate-related financial shocks, estimated to cost over $250 million annually. By addressing these vulnerabilities, BoG is safeguarding both the financial sector and the broader economy.
A Sustainable and Resilient Banking Sector
With the Climate-Related Financial Risk Directive, BoG is setting Ghana’s banking sector on a sustainable trajectory. Compliance with this directive is not merely a regulatory obligation but a necessary step toward climate resilience. Banks must now view climate-related risks as integral to their operations and embrace sustainable practices that can shield them from future disruptions.
BoG’s prescriptive approach, emphasizing stringent governance frameworks, is expected to foster a stronger, more resilient banking sector. By encouraging proactive measures, such as climate scenario analyses and improved risk management practices, the central bank is aligning Ghana’s financial sector with global sustainability goals.
Furthermore, by promoting transparency and accountability, BoG is strengthening public trust, enabling the banking sector to play a leading role in financing Ghana’s sustainable development.
Conclusion
The Bank of Ghana’s approach to corporate governance and climate risk represents a transformative shift in the country’s financial landscape. By integrating global best practices with local imperatives, BoG is paving the way for a banking sector that not only aligns with environmental sustainability but also supports Ghana’s broader economic aspirations.
Through stringent governance requirements, active monitoring, and climate-risk integration, BoG is reshaping the banking sector to be resilient and adaptive. While the initial costs of compliance may be substantial, the long-term benefits, such as reduced financial vulnerability, increased investor confidence, and enhanced stability will have a lasting positive impact on Ghana’s economy.
As Ghana moves toward its 2026 and 2027 compliance deadlines, banks must rise to the challenge, adopting a proactive stance on governance and climate risk. This commitment to corporate governance will serve as the foundation for a sustainable financial future, allowing Ghana’s banking sector to thrive in an increasingly climate-conscious world.