Ghana’s banking sector is showing signs of recovery, but significant risks continue to linger beneath the surface.

According to the International Monetary Fund, non-performing loans and sovereign exposures remain elevated despite improvements in capital and profitability. This revelation comes from the IMF’s Technical Assistance Report on the Bank of Ghana following a recent mission to the country.

Over the past year, the sector has demonstrated resilience after enduring the shocks associated with the 2022 Domestic Debt Exchange Programme. Banks suffered substantial losses on their holdings of domestic government bonds, which significantly weakened their capital base.

However, recent data shows a rebound in capital adequacy ratios, which have risen to about 18 percent of risk weighted assets as of August 2025. This level is approaching the stability recorded before the debt restructuring exercise.

Non-Performing Loans Remain Elevated

Despite the encouraging recovery in capital buffers, the IMF report highlights a major concern in the form of persistently high non-performing loans. The private sector NPL ratio currently stands at 20.8 percent, a figure that signals ongoing stress within the credit environment. This elevated level suggests that a substantial portion of loans issued by banks is either in default or at risk of default.

High NPLs continue to constrain banks’ ability to extend new credit. Financial institutions remain cautious in their lending practices, tightening credit conditions to mitigate further risks. This cautious approach, while prudent, limits the flow of financing to businesses and households, thereby slowing economic momentum.

The situation also underscores structural weaknesses in credit risk management and recovery mechanisms. Without effective strategies to reduce bad loans, banks may struggle to sustain their recovery trajectory.

Sovereign Exposure Raises Concerns

Another key issue flagged by the IMF is the high level of exposure to domestic sovereign debt. Ghanaian banks continue to hold significant amounts of government securities, which exposes them to fiscal risks. While these instruments often offer attractive yields, they also tie the health of the banking sector closely to the government’s fiscal position.

The IMF notes that the recovery in profitability has been partly driven by increased investments in high yielding Bank of Ghana bills. While this strategy has boosted earnings in the short term, it may crowd out lending to the private sector and increase systemic risk if fiscal conditions deteriorate.

The heavy concentration in sovereign assets highlights the need for diversification in banks’ portfolios. A more balanced asset mix would reduce vulnerabilities and support long term financial stability.

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Credit Growth Expected to Rebound

Amid these challenges, there are signs that credit to the private sector may begin to recover. The IMF report indicates that lending has been constrained by high interest rates and elevated credit risks. However, this trend is expected to reverse as macroeconomic conditions improve.

Declining inflation and interest rates are anticipated to create a more conducive environment for lending. Additionally, the gradual recovery from the Domestic Debt Exchange Programme is expected to restore confidence within the financial system. Authorities also expect that a shift away from excessive sovereign exposure will encourage banks to reengage with private sector lending.

Efforts by the Bank of Ghana to reduce non-performing loans are also likely to play a critical role in unlocking credit growth. As banks clean up their balance sheets, they will be better positioned to support economic activity through increased lending.

Strengthening Macroprudential Policies

To address these vulnerabilities, Ghanaian authorities have sought technical assistance from the IMF to strengthen macroprudential policy frameworks. The mission conducted a comprehensive review of the central bank’s institutional setup and policy tools designed to safeguard financial stability.

The assessment included a detailed evaluation of existing macroprudential instruments and provided guidance on the implementation of additional tools such as the Countercyclical Capital Buffer and buffers for Domestic Systemically Important Banks. These measures are intended to build resilience within the banking sector and mitigate risks associated with economic cycles.

Capacity building initiatives, including seminars and workshops, were also conducted to support the effective operationalization of these frameworks. Strengthening macroprudential oversight is expected to enhance the banking sector’s ability to withstand future shocks.

Outlook Remains Cautiously Optimistic

While Ghana’s banking sector is on a path to recovery, the IMF’s findings highlight the need for continued vigilance. Elevated non-performing loans and significant sovereign exposure remain key risks that could undermine stability if not addressed.

The anticipated rebound in private sector credit offers a positive outlook, but this will depend on sustained improvements in macroeconomic conditions and effective policy interventions. The Bank of Ghana’s efforts to enhance regulatory frameworks and reduce systemic vulnerabilities will be crucial in shaping the sector’s future.

Ultimately, the balance between recovery and risk management will determine the strength and sustainability of Ghana’s financial system. Ensuring that banks maintain adequate capital, manage credit risks effectively, and diversify their asset portfolios will be essential in navigating the challenges ahead.