Ghana’s banking sector is facing a concerning rise in non-performing loans, reaching a peak of 20% of all loans, a level not seen in half a decade, according to data from the Bank of Ghana.
This increase represents a 0.9 percentage point rise from the previous ratio of 19.1% in July 2023. The data highlights a challenging situation where 1 out of every 5 loans issued is either not being repaid or is significantly overdue in terms of interest or principal payments as of August 2023.
This surge in non-performing loans is a clear indicator that many borrowers are not refinancing their obligations, which poses a serious threat to the health and efficiency of the banking sector. The trend has been steadily climbing since October 2022 when it stood at 14%, marking a remarkable 6 percentage point increase to its current level.
The ratio of non-performing loans in a bank is calculated by dividing the total value of non-performing loans by the overall value of the loan portfolio. The average ratio between January and August 2023 has been approximately 17.9%, surpassing averages for the same period in 2020, 2021, and 2022.
According to international standards, loans are classified as non-performing when borrowers are more than 90 days late in repaying both the principal amount and interest, or when there is little expectation of receiving full payments in the future.
The situation has been exacerbated by Ghana’s recent debt restructuring, where the government acknowledged its inability to repay its loans and sought to reduce its debt burden to secure a $3 billion loan from the International Monetary Fund (IMF). Banks took significant losses as part of this debt restructuring, which had a substantial impact on their financial performance in 2022.
In the current economic climate, it is crucial for banks to address the rising ratio of non-performing loans to mitigate the impact of debt restructuring and minimize losses. The persistently high level of non-performing loans poses challenges not only to the banking sector but also to the overall stability of Ghana’s economy, making effective management and resolution of these loans a priority for policymakers and financial institutions.
Source: Norvanreports
