In 2023, Ghana’s banking sector witnessed a significant shift in the performance of bad debt, marked by a substantial reduction in write-offs compared to the previous year.

According to data released by the Bank of Ghana, banks in the country wrote off GH¢4.33 billion as bad debt in 2023. Though the amount written off was huge, it represents a staggering 79.2% decrease from the GH¢20.8 billion recorded in 2022.

This drastic reduction in bad debt is a positive signal for the industry, reflecting improved risk management practices and a more stable economic environment. The bad debt, comprising loan losses, depreciation, and other categories, was significantly lower in 2023, indicating a healthier financial outlook for banks.

The Bank of Ghana attributed this decline in bad debt to lower impairments on financial assets reported by banks during the period. Total provisions and impairments contracted by 79.2% in December 2023, a stark contrast to the sharp increase witnessed in December 2022 due to significant impairments on restructured bonds.

However, despite the reduction in bad debt, asset quality risks remained elevated in December 2023, highlighting the lingering impact of macroeconomic challenges faced by the banking sector in 2022. The industry’s non-performing loan (NPL) ratio increased to 20.7% in December 2023, up from 16.6% in December 2022. Similarly, the NPL ratio adjusted for fully provisioned loan loss category rose from 6.6% to 8.4% during the same period.

The stock of non-performing loans also saw a substantial increase, rising by 37.4% to GH¢15.8 billion in December 2023. This suggests that while the absolute value of bad debt may have decreased, the proportion of non-performing loans relative to total loans remains a concern for the banking sector.

Stock of Non-Performing Loans Rises

Another notable trend in 2023 was the moderation in credit growth, attributed to both a general risk aversion by banks and a softening in credit demand following macroeconomic challenges.

Growth in gross loans and advances slowed to 10.9% in December 2023, down from 29.1% in December 2022. Similarly, growth in net loans and advances, adjusted for provisions and interest in suspense, moderated to 9.4%, compared to 26.8% in the previous year.

Furthermore, addressing the underlying factors contributing to the increase in non-performing loans will be crucial for restoring confidence in the banking sector and fostering sustainable growth. This may involve measures such as enhancing credit assessment processes, promoting financial literacy among borrowers, and implementing effective debt recovery strategies.

Several factors contribute to the prevalence of non-performing loans (NPLs) in the banking sector. Economic downturns or recessions can lead to higher unemployment rates, decreased consumer spending, and reduced business activity, all of which can impact borrowers’ ability to repay loans.

Banks may extend credit to borrowers without conducting thorough risk assessments, leading to loans being granted to individuals or businesses with insufficient capacity to repay.

Inadequate legal and regulatory frameworks for loan recovery can make it challenging for banks to enforce loan contracts and recover funds from defaulting borrowers.

Inadequate monitoring of borrowers’ creditworthiness throughout the loan term can result in delayed identification of early warning signs of default, allowing potential problems to escalate.

Moreover, weak corporate governance, inadequate internal controls, or management deficiencies can increase the likelihood of mismanagement of loans and higher NPL levels.

Overall, the evolution of bad debt and asset quality in Ghana’s banking sector in 2023 reflects a mixed picture of improvement and ongoing challenges. While the reduction in write-offs is a positive development, the persistence of elevated asset quality risks underscores the need for continued vigilance and prudent risk management by banks and regulatory authorities alike.