BoG affirms commitment to strengthening credit market amid rising NPLs

The Second Deputy Governor of the Bank of Ghana, Elsie Awadzi, has emphasised the central bank's dedication to building a more robust credit market during a recent stakeholders' forum on collateral enforcement. 

Her remarks come at a crucial time as the banking sector grapples with increasing non-performing loans (NPLs) and debt recovery challenges.

"In the end, we are all on one side. Our collective goal is to promote a stable and efficient credit system," Awadzi stated, highlighting the importance of collaboration between the central bank and stakeholders. 

She stressed that while credit is fundamental for economic growth, its effectiveness depends on prudent lending practices and borrowers meeting their obligations.

Regulatory reforms 

Over the past two decades, the Bank of Ghana has implemented significant regulatory reforms to modernise the credit market. 

These include the Credit Reporting Act of 2007 and the Borrowers and Lenders Act of 2008, later updated in 2020. 

The revised Act was designed to streamline collateral registration and enforcement, aiming to expedite loan recovery and reduce borrowing costs.

Despite these reforms, the banking sector faces mounting challenges. Data reveals a concerning trend in NPLs, with the ratio rising from 18 percent in September 2023 to 22.8 per cent by September 2024. 

Banks have been forced to write off significant bad loans over the past year, significantly impacting their balance sheets.

"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," Mrs explained. 

The rising NPLs have made financial institutions increasingly cautious about lending, potentially hampering economic growth.

Legislative improvements 

Chief Justice, Gertrude Torkornoo, also speaking at the forum, addressed the legal challenges in debt recovery. 

While acknowledging legislative improvements, including the establishment of the collateral registry, she highlighted persistent obstacles in the judicial process. 

The Chief Justice pointed to complex litigation procedures and historical legal doctrines that often favor borrowers, leading to prolonged recovery efforts.

Recent data from the collateral registry shows that between 2010 and end-2023, 4,640 Memorandum of No Objections certificates were issued to support loan recovery. 

However, many cases still end up in court, extending the recovery timeline.

The situation has been further complicated by past financial market liberalisation that led to a proliferation of microfinance businesses offering high-interest quick loans, resulting in increased defaults.

The Bank of Ghana has recently initiated a survey to evaluate banks' challenges in implementing the Borrowers and Lenders Act provisions, demonstrating its commitment to addressing these ongoing issues in the credit market.