The Impact of Legacy Debt on Ghana’s Banking Sector
Ghana’s banking sector is facing significant challenges due to high non-performing loan (NPL) ratios. According to a new policy paper study by banking consultant Dr. Richmond Atuahene, the sector’s NPL ratio stands at 23.6 percent, far above the 10 percent threshold considered acceptable in global banking.
The Cause of High NPL Ratios
The study attributes the high NPL ratios to persistent arrears, coupled with macroeconomic instability. The data from the Bank of Ghana (BoG) shows that the NPL ratio has been consistently high over the past decade, with an average of over 17 percent. The sector’s NPL problem stems from a mix of government arrears, weak economic conditions, and poor credit risk practices.
The Effect of Legacy Debt on the Banking Sector
The legacy debt owed to contractors, service providers, and independent power producers (IPPs) is estimated to be around GH¢35 billion (5.8 percent of gross domestic product) for non-energy sector debt and US$1.6 billion (2.8 percent of GDP) for energy sector arrears. If the government were to ring-fence and repay this debt, the domestic banking sector could strengthen its capital base and cut high NPL ratios.
The Role of the Ministry of Finance
The study urges the Ministry of Finance (MoF) to ring-fence the debt and agree on fixed monthly repayments to clear the backlog. Without this, any recapitalization would be "meaningless". The MoF must take urgent action to address the legacy debt issue and restore the health of the banking sector.
Sector Data and NPL Ratios
Sector data shows that agriculture has the highest NPL ratio at 62.1 percent, followed by transportation at 53.9 percent. Mining, on the other hand, has improved to below 10 percent. The BoG’s plan to cut NPLs includes stricter loan restructuring rules, faster collateral recovery, stronger credit risk governance, and tighter lending controls for repeat defaulters.
Recommendations
The report recommends independent asset quality reviews by international firms, stronger governance in banks, improved internal controls, and tighter credit assessment standards. These measures are essential to restore asset quality and safeguard stability in the banking sector.
Conclusion
In conclusion, the legacy debt owed to contractors, service providers, and IPPs is a significant challenge facing Ghana’s banking sector. The government must take urgent action to address this issue and restore the health of the banking sector. By ring-fencing and repaying the legacy debt, the sector can strengthen its capital base and cut high NPL ratios. The implementation of the recommended measures will also help to restore asset quality and safeguard stability in the banking sector.
