The banking sector scare: The persistent cycle of non-performing loans

By Prof. Samuel Lartey

www.pefghana.org

Ghana’s financial landscape has long been characterised by a recurring challenge: non-performing loans, bad debts, and business closures. While these issues are by no means new to banks, corporate institutions, or entrepreneurs, they continue to shape the dynamics of credit, investment, and economic growth in the country.

The latest figures from the banking industry reveal both progress and ongoing risks. Between January and October 2025, domestic banks wrote off GH¢1.39 billion in bad debt, a sharp 56.7% increase from previous periods, highlighting persistent vulnerabilities in the financial ecosystem. Yet asset quality appears to be improving, offering a nuanced picture of the challenges and opportunities ahead.

Persistent Cycle of Non-Performing Loans

Ghana’s banking sector has long grappled with the persistent cycle of non-performing loans (NPLs), a problem that has periodically disrupted credit flow and economic growth. Historically, the sector experienced significant NPL surges during periods of economic instability, such as the financial crises of the early 2000s and the banking sector clean-up of 2017, when several banks were closed or restructured due to insolvency.

These cycles have had wide-ranging impacts: credit availability tightens, SMEs and entrepreneurs struggle to access loans, public sector entities face increased fiscal pressure, and overall investor confidence is undermined. The 2024–2025 period continues this trend, with banks writing off GH¢1.39 billion in bad debt while NPL ratios remain elevated, albeit improving.

Breaking this cycle requires a multi-pronged approach: stricter loan underwriting standards, enhanced risk management frameworks, regular asset quality reviews, timely recovery of delinquent loans, and incentives to restructure viable businesses rather than liquidate them. Additionally, digital credit assessment tools and public-private collaboration can strengthen transparency and accountability, helping prevent future loan defaults while sustaining credit flow to productive sectors of the economy.

The Banking Sector’s Struggle with Bad Debt

*Estimated based on reported growth. Source: Bank of Ghana’s reports covering 2024 and 2025

Banks’ provisions for bad debts include loan losses, depreciation, and other allowances. The banking sector showed an improvement in asset quality in 2025, with the non-performing loan ratio declining to 19.5 per cent from 22.7 per cent in October 2024, and to 6.8 per cent from 9.4 per cent when adjusted for fully provisioned loans.

At the same time, banks recorded a sharp rise in bad debt write-offs, totalling GH¢1.39 billion, representing an increase of 56.7 percent from the previous year. This shows that while overall loan quality is improving, financial institutions are actively addressing problem loans to offset potential loan losses, safeguard their balance sheets, and cushion themselves against macroeconomic challenges such as inflation, foreign exchange volatility, and business closures.

Impact on Individual Clients

For individual clients, especially small account holders and loan borrowers, the persistence of non-performing loans translates into higher borrowing costs and restricted access to credit. Banks tighten lending criteria to protect themselves from further losses, making it more difficult for ordinary Ghanaians to obtain loans for education, housing, or personal business ventures.

Entrepreneurs and SMEs

Small and medium enterprises (SMEs) are the backbone of Ghana’s economy, contributing nearly 70% of employment and 40% of GDP. Yet, repeated cycles of business closures and bank write-offs stifle entrepreneurship. With non-performing loans rising, banks are often reluctant to extend credit to high-risk SMEs, particularly in sectors like retail, hospitality, and agriculture.

Corporate Institutions and Public Sector Implications

Large businesses and government agencies are not immune. The report notes that the government itself wrote off GH¢3.22 billion in October 2024, reflecting challenges in public sector loan recovery. These write-offs affect fiscal balances, reduce the government’s capacity to fund essential services, and can contribute to higher public debt.

Moreover, corporate institutions face reputational risks and reduced investor confidence when non-performing loans dominate their balance sheets. This can deter foreign direct investment (FDI) and slow corporate expansion plans.

Macro-Economic Implications

The repeated cycle of bad debts and business failures has broader consequences for the Ghanaian economy:

1. Credit Contraction: As banks write off bad loans, they become more cautious in lending, reducing the availability of credit to productive sectors.
2. Employment Risks: SMEs and large businesses affected by credit constraints may reduce staff, increasing unemployment.
3. Inflationary Pressure: Reduced investment and production can limit supply, driving up prices.
4. Investor Confidence: Persistent NPLs and business closures may deter both local and international investors.

The banking sector’s total NPL ratio improved to 19.5% in October 2025 from 22.7% in October 2024, reflecting a cleanup of minor problem loans. However, the increase in doubtful and loss loans signals continuing vulnerability, requiring vigilance from regulators, banks, and policymakers.

Conclusion
Ghana’s financial sector is at a crossroads. While the decline in NPL ratios signals progress in managing risk, the continued rise in bad debt write-offs reminds us that systemic challenges remain. For individuals, entrepreneurs, businesses, and the public sector alike, these trends underscore the importance of prudent lending, effective risk management, and proactive government intervention. Without addressing the structural causes of loan defaults and business closures, the cycle of losses will continue, limiting economic growth and the realisation of Ghana’s full financial potential.