Credit quality without credit growth: The banking sector, illusion of stability?

By Prof. Samuel Lartey

www.pefghana.org

 Ghana’s banking sector is once again under close scrutiny as headline indicators suggest a gradual improvement in asset quality. Non-performing loan ratios have declined, provisions have increased, and banks appear more resilient than during the turbulent years that culminated in the 2017–2019 banking sector clean-up.

Yet, this apparent stability conceals a deeper structural reality. The improvement in credit quality has occurred alongside weak credit growth, aggressive loan write-offs, and heightened risk aversion by banks.

Between January and October 2025, domestic banks wrote off approximately GH¢1.39 billion in bad loans, representing an increase of about 56.7 percent compared with the previous year. Over the same period, the stock of new credit to the private sector expanded only marginally in nominal terms and declined in real terms when adjusted for inflation.

This combination matters. When credit creation slows down and banks deliberately avoid high-risk lending, non-performing loans will almost inevitably decline. The key question, therefore, is whether Ghana’s improving loan quality reflects a stronger economy or simply a more cautious banking system.

Historical Context and Lessons Learned

Ghana’s experience with non-performing loans has been cyclical and costly. In the early 2000s, weak supervision and poor risk management led to a build up of bad assets across several banks. More recently, the 2017–2019 banking sector clean-up resulted in the closure or consolidation of nine banks and imposed a fiscal cost estimated at over GH¢21 billion. That episode fundamentally reshaped bank behaviour.

Since then, regulatory oversight has tightened, capital requirements have increased, and boards and management teams have become more sensitive to balance sheet risk. These reforms have improved discipline, but they have also encouraged conservatism, particularly in lending to small and medium enterprises and sectors exposed to exchange rate volatility, commodity price swings, and delayed government payments.

Trends in Credit Quality and Write Offs

Recent data from the banking industry pointed to a measurable decline in reported non-performing loans. Gross NPL ratios fell from about 22.7 percent in October 2024 to roughly 19.5 per cent in October 2025.

When adjusted for fully provisioned loans, the ratio declined from 9.4 percent to 6.8 per cent over the same period. These figures suggest progress, but they must be read alongside the scale of loan write-offs and subdued lending activity.

Banks have increasingly chosen to clean up their balance sheets by recognising losses upfront. While this strengthens bank balance sheets, it does not automatically translate into renewed lending appetite.

Selected Indicators of Asset Quality and Credit Conditions

Indicator	October 2024	October 2025	Financial Implication
Gross NPL Ratio	22.7%	19.5%	Lower reported credit risk but influenced by reduced lending
NPL Ratio adjusted for provisions	9.4%	6.8%	Improved balance sheet optics
Bad debt write offs	GH¢0.89 billion	GH¢1.39 billion	Direct hit to bank profitability
Estimated government related write offs	GH¢3.22 billion	Not reported	Fiscal pressure and crowding out effect

The table shows that the decline in non-performing loan ratios between October 2024 and October 2025 coincided with a sharp increase in loan write-offs and subdued credit expansion, indicating that the apparent improvement in asset quality reflects deliberate balance sheet clean-up and heightened risk aversion by banks rather than a broad-based strengthening of economic activity or borrower repayment capacity.

Source: Bank of Ghana, Banking Sector Reports and Monetary Time Series; Ghana Banking Sector Developments, October 2024 and October 2025; authors’ analysis based on published supervisory and financial stability data. 

Sluggish Credit Growth and Risk Aversion

Of equal importance to declining NPL ratios is the sluggish growth in overall credit to the economy. Real sector credit growth has remained weak, particularly to SMEs, which account for nearly 70 percent of employment and about 40 percent of GDP. Banks have tightened underwriting standards, increased collateral requirements, shortened loan tenors, and concentrated lending in low-risk segments such as government securities and large corporates with predictable cash flows.

This risk minimisation strategy is rational from an institutional perspective. Following painful lessons from past crises, banks are determined not to exacerbate balance sheet weakness. However, the macroeconomic effect is a contraction in credit availability to productive sectors. When fewer loans are granted, especially to higher-risk but growth-enabling enterprises, the probability of new non-performing loans naturally declines. In this sense, improving loan quality is a byproduct of reduced risk-taking rather than evidence of improved borrower strength.

The Illusion of Stability

A genuinely resilient and buoyant economy is typically characterised by expanding credit, rising investment, improved business cash flows, and stronger debt servicing capacity. Ghana’s current environment tells a different story. High inflation in 2023 and 2024 eroded real incomes, currency depreciation increased the cost of servicing foreign-currency loans, and energy and input costs squeezed margins across many sectors. These conditions are not consistent with a broad-based improvement in repayment capacity.

The danger lies in misinterpreting declining NPL ratios as a signal that underlying risks have dissipated. If policymakers and market participants become complacent, structural constraints such as government payment arrears, weak SME competitiveness, and limited long-term financing options may remain unaddressed. Over time, these unresolved issues can recreate the very conditions that lead to future asset quality deterioration.

Impact on Individuals, SMEs, and Corporates

For households, tighter credit conditions translate into higher borrowing costs and reduced access to loans for housing, education, and micro enterprise development. For SMEs, limited access to bank financing constrains expansion, technology adoption, and job creation. Even viable firms with sound business models struggle to meet stricter collateral and documentation requirements.

Large corporates face a mixed outcome. While stronger bank balance sheets and lower NPL ratios improve investor sentiment, weak domestic credit growth can delay expansion plans and reduce supply chain activity. In the public sector, unresolved obligations to contractors and suppliers continue to strain liquidity across the private sector, indirectly feeding credit stress.

Macroeconomic and Fiscal Implications

At the macro level, sustained risk aversion in the banking system has tangible economic costs. Credit contraction dampens investment and production, increasing the risk of unemployment and limiting income growth. Reduced productive capacity can worsen inflationary pressures over time, while subdued investor confidence may discourage foreign direct investment. The fiscal impact is also significant, as government related write offs and contingent liabilities reduce the state’s ability to fund infrastructure and social services.

Conclusion

Ghana’s declining non-performing loan ratios represent an important but incomplete signal. They reflect prudence, conservatism, and deliberate risk minimisation by banks shaped by hard lessons from previous crises. They do not, on their own, confirm a resilient economy or a broad improvement in repayment capacity.

For sustainable progress, improvements in asset quality must eventually be driven by stronger economic fundamentals. These include consistent macroeconomic stability, timely settlement of government obligations, improved SME productivity, and the development of long-term financing instruments. Until such conditions are firmly established, the current improvement in credit quality should be treated not as a cause for complacency, but as a reminder that stability built on credit contraction has clear limits.

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