BoG commits to robust credit market amid debt recovery challenges

Bank of Ghana Second Deputy Governor Elsie Awadzi has affirmed the central bank’s commitment to a stronger credit market.

Speaking during a stakeholders’ forum on collateral enforcement, the Second Deputy Governor noted that a robust credit market is essential for providing cost-effective loans to businesses, particularly small- and medium-sized enterprises (SMEs) and households.

“In the end, we are all on one side. Our collective goal is to promote a stable and efficient credit system. The Bank of Ghana, as a regulator, remains committed to working with all stakeholder groups to make this mission a reality,” she stated.

Amid growing concerns over rising non-performing loans and the challenges faced by financial institutions in recovering debts, Ms. Awadzi stressed the importance of a collaborative approach to ensure stability for the banking sector and broader economy.

She acknowledged that while credit is crucial for economic growth, it can only be effective when loans are granted prudently and borrowers meet their repayment obligations.

The Bank of Ghana over the past two decades has implemented regulatory reforms aimed at modernising the credit market. These include the Credit Reporting Act of 2007 and Borrowers and Lenders Act of 2008, which introduced frameworks for credit information sharing and streamlined the collateral enforcement process.

The Deputy Governor elaborated on the significance of the Borrowers and Lenders Act of 2020, which replaced the previous 2008 legislation. The updated Act aimed to address inefficiencies in the credit market by enhancing mechanisms for collateral registration and enforcement. This change was expected to expedite loan recovery processes, reduce borrowing costs and minimise the need for court proceedings. However, despite these reforms, challenges remain.

“Since enactment of the new Act in 2020 and following several stakeholder sensitisation programmes, we have seen a significant increase in the number of Memorandum of No Objections obtained by banks and specialised depository institutions,” Ms. Awadzi explained.

Data from the collateral registry indicate that from 2010 to end-2023, a total of 4,640 such certificates were issued to facilitate loan recovery efforts. However, anecdotal evidence suggests that many of these cases still end up in court, delaying the recovery process.

She highlighted a concerning rise in the banking sector’s non-performing loan (NPL) ratio. The ratio increased from 18 percent in September 2023 to 22.8 percent by September 2024. The escalation in NPLs has led banks to write off bad loans totalling GH¢163.5million over the past year, impacting their balance sheets significantly.

“This situation is unsustainable for the banking industry. The costs of non-payment are ultimately borne by depositors whose funds are used to provide these loans,” she said.

The growing burden of bad loans has made financial institutions more hesitant to lend – especially to genuine businesses, which could stifle economic growth. The Bank of Ghana recently conducted a survey to assess current challenges faced by banks in utilising provisions of the Borrowers and Lenders Act.

Chief Justice Gertrude Torkornoo, who also spoke at the forum, shared her perspectives on the legal challenges associated with debt recovery.

She acknowledged the efforts made through enacting various laws – including the Borrowers and Lenders Act of 2008, its 2020 amendment and establishment of the collateral registry. Despite these interventions, she pointed out that the judicial process continues to face hurdles in resolving debt-recovery cases efficiently.

Justice Torkornoo referenced past financial crises and challenges faced by receivers during the financial sector clean-up in 2018.

The Chief Justice highlighted complexities of litigation processes which often involve sophisticated rules and jurisdictional challenges, making it difficult for creditors to recover debts swiftly.

“Despite critical interventions such as establishing the collateral registry and legislative amendments, we continue to experience significant difficulty in debt recovery,” Torkornoo stated.

She cited historical legal doctrines that favoured borrowers, complicating debt enforcement efforts and leading to prolonged litigation.

The Chief Justice also reflected on past financial market liberalisations that led to a surge in microfinance businesses offering quick loans with high interest rates.

This development has resulted in increased loan defaults, as borrowers struggled to repay and financial institutions found it challenging to enforce loan agreements.