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Ghana’s banks not yet in the clear as non-performing loans decline

By David Whitehouse
Posted on Monday, 10 February 2020 14:19

Ghana's central bank building in Accra. Reuters/Francis Kokoroko

Moody’s this month greeted a decline in the level of non-performing loans (NPLs) at Ghana’s banks as credit positive for the banking system.

Nonperforming loans (NPLs) fell to 13.9% in December, versus 17.3% in October.

The central bank says the improvement is due to increased loan recoveries, write-offs and higher credit growth. But the legacy of the NPLs, which peaked at 23.5% in April 2018, is still an obstacle for the banking system and the economy.

“Banks are still trying to find their way around with the new capital requirements and trying to figure out new ways of improving their balance sheets,” says Kojo Dougan, digital corporate and transactional business lead at BlueSPACE Africa Technologies in Accra.

There remain significant NPLs from previous years which constitute a “huge hole”, he says.

  • “The restructuring exercise has yet to fully mature.”
  • “A lot of banks spent time in debt retrieval mode,” so fewer loans were given, meaning fewer NPLs, Dougan says.
  • Some government contractors still have debts to banks from 2016 or earlier, he says. “
  • Those who already used fixed assets as collateral for previous loans have a challenge. There is little collateral to provide.”

Ghana’s banks recapitalised following the introduction of higher capital requirements in 2017, while seven insolvent banks have closed.

The drop in NPLs is credit positive for the banking system and means that lenders can concentrate on extending credit to the economy, Moody’s says.  The ratings service expects credit growth to remain high at close to current levels in the next 12-18 months.

Legal action

Attempts to take executives of the banks that closed to court speaks to the continuing issue of NPLs, Dougan says.

  • Mike Nyinaku, CEO of the failed Beige Bank, is facing prosecution in a case that has been adjourned to March 5.
  • Former managing director of the defunct UT Bank, Prince Kofi Amoabeng, is also facing charges.
  • Minister for Finance Ken Ofori-Atta has hinted that customers of defunct banks will get their deposits back by the end of 2020.

Lending will recover at some point, but it’s not yet clear when, Dougan says. The new capital requirements and are a game changer in that they put the onus on banks to find investors to meet requirements, Dougan says. “So banks will be more pragmatic and prudential in lending” as there needs to be a return on investor funds.

According to Tellimer in January, a slowdown in economic growth and inflation, from increased utility tariffs and transportation costs, “could lead to short term pressure on aggregate demand and limit loan growth prospects.”

  • Weaker growth could also limit asset quality improvements at banks, the research says.
  • Dougan expects that a slowdown in the economy is likely ahead of elections in December.
  • If the current government is re-elected, economic activity will almost rebound from January 2021. But a change of government would mean that the acceleration would be delayed until the second or third quarter of 2021, he says.

Bottom Line: The period of pre-election uncertainty will slow credit growth, meaning that there is still plenty of time for bad news on hidden NPLs to emerge.

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