Addressing the non-performing loan problem in Ghana

The Bank of Ghana has recently issued a directive instructing 32 banks to provide feasible plans to tackle the growing issue of non-performing loans (NPLs) within the country's banking sector. Sulemana Mohammed, CEO of Doobia, shed light on the pressing matter during an interview on CNBC Africa. The NPLs ratio for Ghana reached 21.6 per cent in October, which is nearly five times higher than the global benchmark of below five per cent. This significant disparity has raised concerns and highlighted the urgent need for proactive measures to address the problem. Understanding the root causes of the high NPLs is crucial in formulating effective solutions. One of the key factors contributing to the elevated NPL levels is the exposure of banks to the energy sector. The Ghanaian government has taken steps to alleviate this issue by issuing an energy bond of 4.7 billion under a 10 billion program. Additionally, President Akufo-Addo has urged expedited action to issue the remaining bonds by the end of March next year, aiming to reduce NPLs significantly. The energy sector is not the only area of concern, as banks also have exposures to various sectors of the economy. Enhancing risk management systems within banks is crucial to mitigate NPL risks and improve overall financial stability. Implementing robust recovery processes and restructuring non-performing loans are essential steps for banks to enhance their financial health and address NPL concerns. However, the challenges extend beyond the public sector debts to private sector debts, reflecting wider economic challenges within the country. The ripple effects of the energy crisis in Ghana have had adverse impacts on companies' production processes and cash flows, leading to difficulties in servicing debts. As the economy gradually normalizes, banks must adapt by restructuring debts, reducing interest rates, and extending payment periods to facilitate debt repayment for struggling companies. Addressing the weak risk management systems within the banking sector is imperative to effectively manage NPLs and safeguard financial stability. While the industry's NPL ratio remains alarmingly high, variations among individual banks highlight the importance of tailored risk management strategies to mitigate NPL risks effectively. Tightening risk management practices and implementing proactive measures are essential to address the high NPL levels and enhance the resilience of Ghana's banking sector.