How lower loan defaults can heal banks, economy
Ghana’s banks stand at an inflection point. Following a period of fiscal stress, domestic debt restructuring, and continued macro-financial volatility, the country’s banking sector today exhibits two seemingly contradictory features: large stockpiles of liquid assets alongside elevated credit distress.
I consider three points as paramount among reasons why preventing defaults and curing problem loans reduce credit distress.
First, defaults tie up capital and liquidity. When loans sour, banks must increase loan-loss provisions and set aside capital; those provisions are a direct drain on earnings and regulatory buffers.
Higher non-performing loans (NPLs) therefore reduce usable capital and the effective liquidity that banks can deploy for new lending.
Second, defaults cause risk premiums and interest rates to rise.
As asset quality deteriorates, banks respond by raising lending spreads to compensate for expected losses and to restore capital buffers, as banks price not only expected inflation and policy rates but also credit risk and the cost of provisioning.
Indeed, several cross-country and bank-level studies, including a 2024 Kenyan study by Koskei and Samoei, document a positive linkage between rising NPLs and higher lending rates.
Third, credit contraction throttles growth.
The classic bank-mediated credit channel means that when banks cut back lending or lend only at prohibitively high rates, firms, especially SMEs that depend on bank credit, scale back investment and hiring.
The result of that is usually slower job creation and weaker GDP performance.
Interestingly, in Ghana, while the Central Bank’s Financial Stability Review shows that broad liquid assets to total assets in the banking sector rose to 65.7 per cent, an indicator that banks currently hold sizeable liquid buffers, the same reviews and data series record elevated NPLs.
Ghana’s NPL ratio climbed sharply in 2023–2024, peaking at about 26.7 per cent in March 2024 and reported at 21.8 per cent by December 2024 according to monthly bank of Ghana compilations.
One might wonder then how we reconcile high liquidity with high NPLs.
The answer is that liquidity statistics capture gross liquid holdings, not how much of the balance sheet is truly deployable for new lending after regulatory constraints, provisioning needs, and internal risk limits are applied.
A bank with a large bucket of liquid assets but facing high provisioning requirements and weak capital adequacy will be risk-averse and reluctant to convert those liquid assets into new loans, especially long-term business credit.
While much of the policy debate focuses on bank-level and systemic interventions, the real turning point in Ghana’s credit story lies closer to home.
And that is because the actions of borrowers can determine whether liquidity becomes a tool for prosperity or a dead weight on the system.
I propose three key remedial steps households and businesses must take.
One of the steps is proactive restructuring.
Instead of waiting until arrears spiral into defaults, households and firms can and should initiate engagements with their banks early to renegotiate terms.
Aligning repayment schedules with real cash flow, much like the Domestic Debt Exchange Programme did for government obligations, can preserve viable business projects and household creditworthiness.
Another is facilitating recovery.
It helps when borrowers protect their own collateral value, as businesses that maintain proper documentation, register assets, and avoid over-encumbrance make resolution smoother if difficulties arise.
Also, households that insure or properly maintain pledged assets protect both themselves and their lender, as it helps banks restore lending cycles more quickly.
Furthermore, households and firms must adopt liquidity and capital discipline, as well as take legal and cultural responsibility.
At all times, borrowers must make default a last resort, not a norm.
Every repayment is a signal of one’s creditworthiness.
Borrowers must view loans as contracts to be honoured, not gambles to be walked away from.
A responsible credit culture lowers risk premiums across the economy, bringing down interest rates.
In conclusion, borrower behaviour in Ghana needs to improve.
If households and businesses commit to reducing defaults, they will unlock direct benefits, including lower borrowing costs, continued access to finance, stronger household balance sheets, and thriving businesses.
The writer is an economist,
PMR, National Investment Bank, Ghana
E-mails: oscarekonai@
gmail.com/oscar.onai@nib.com.gh
