High lending rate regime over the past decade: ‘Analysis of Multi-faceted Causes’, strategic recommendation for policy directions

By Dr Richmond Akwasi ATUAHENE 

1.0 Introduction

Providers of credit attributed the high interest rate to high cost of administration of overdue loans and defaulters which eventually push up lending cost without corresponding increase in loans turnover. Defaulters of loan reduce financial institutions’ resource base for further lending, thus weakening staff morale and affecting the borrower’s confidence. The consequence is that financial institutions must set the risk premium sufficiently high to compensate for the risk leading to differentials in the required return and the expected return on a loan. Over the past decade (2016–2025), Ghana‘s lending rates have been among the highest in Sub-Saharan Africa, driven by a complex interplay of macroeconomic instability, high operational costs, and structural risks within the banking sector. Ghana’s lending rates over the past decade have remained high and volatile, driven by a combination of high inflation, heavy government borrowing, government legacy debt, elevated non-performing loans (NPLs), and significant currency depreciation.

Monetary policy rate (MPR) involves the central bank’s activities to regulate money supply (M2), interest rates, and credit availability. Monetary policy is founded on the link between a nation’s interest rate, the interest rate at which money may be borrowed, and the total amount of money in circulation It uses various tools to control the exchange rate, unemployment, inflation, and economic growth. For example, some of Ghana’s often-employed monetary policy tools include open market operations, repurchase agreements, foreign exchange processes, cash reserve requirements, and the MPR, sometimes known as the prime rate. The Monetary Policy Rate (MPR) and the Ghana Reference Rate (GRR) have been adjusted upwards to combat inflation, with banks factoring in high operational costs and risk premiums, keeping borrowing costs steep. High bank lending rates in Ghana over the past decade (2016–2025) have primarily been driven by persistent macroeconomic imbalances, specifically high inflation and aggressive monetary policy responses. High bank lending rates in Ghana over the past decade (roughly 2016–2025) have been driven by a combination of persistent macroeconomic imbalances, high operational costs, and significant credit risks within the banking sector. Average lending rates in Ghana showed a slight downward trend toward the end of 2024, falling from approximately 33.75 percent in December 2023 to 30.25 percent by December 2024, partly reflecting improved liquidity management and broader disinflation.

The average lending rate has frequently exceeded 28-30%, heavily influenced by inflation, government excessive borrowing, and currency instability. Also, Kenya’s average lending rate of 14.80 percent, Tanzania’s 12.19 percent -14.5 percent, and Rwanda’s 15.89-15.97 percent are all better than the case of Ghana’s lending rate of 19.7 percent per annum as at end of February 2026 with Nigeria recording the highest of Nigeria’s 27.5 percent per annum.

• Multi-Faceted Causes of High Lending Rates

1. Persistent High Inflation and Monetary Tightening: Tight Monetary Policy:

Perhaps one of the major networks through which Monetary Policy Rate affects economic activities such as consumption and investment is the relationship between the MPR and Lending Rate. This is the rate the Bank of Ghana sets to benchmark commercial banks’ lending rate hence determines the borrowing cost. Studies have established that rises in the MPR increases lending rates while a decline in the MPR depresses the lending rate (Duah-Tsibu et al, 2025). Policy rate is another regulatory requirement that affects determinant of the lending rate in Ghana. Policy rate is that rate that a universal bank pays to borrow funds from the central bank (Bank of Ghana) and these areas a marginal cost of funds to the bank.

The policy rate is the benchmark interest rate which the Central Bank lends to commercial banks. Ghana’s policy rate currently stands at 14 percent, the highest amongst the eight countries. Mauritius has the lowest rate of 4.50 percent, followed by Botswana (3.5 percent), Rwanda (7.25 percent), South Africa (6.75 percent), Tanzania (5.75 percent), and Kenya (8.75 percent) respectively. However, Nigeria has the highest rate (26.5 percent). High inflation forced the Bank of Ghana (BoG) to maintain a tight monetary policy, raising the MPR to combat rising costs, which directly increased the cost of funds for banks. The Bank of Ghana has historically maintained a tight policy stance owing to inflationary risks but has in recent times lowered the rate especially from 2023-2026 (a reduction by 1600 basis points from 30 percent to 14 percent). Unfortunately, the recent reduction in the policy rate has not yielded a corresponding reduction in the banks’ lending rates. For tight monetary policy, Bank of Ghana aggressively raised its Monetary Policy Rate (MPR) to combat inflation, which peaked at 30 percent in July 2023.

High inflation, peaking at over 54 percent in 2022, prompted the Bank of Ghana (BoG) to aggressively raise the Monetary Policy Rate (MPR)—reaching 30 percent in 2023—to curb price surges. MPR has dropped from the high of 30 percent in 2023 to 14 percent in March 2026 with corresponding inflation rate 3.3 percent Commercial banks pegged their lending rates to this high MPR, driving up the cost of credit but low MPR of 3.3 percent it is expected that lending rates will drop considerably. In Ghana, the Monetary Policy Rate (MPR) set by the Bank of Ghana has a strong positive short-run impact on commercial bank lending rates, though long-run, structural inefficiencies often create asymmetric responses where lending rates rise faster than they fall. Commercial banks in Ghana tend to adjust lending rates upward faster when the MPR increases than they do downward when the policy rate is cut, often leading to slow reductions in borrowing costs. Beyond the MPR, bank lending rates in Ghana are heavily influenced by inflation, exchange rate fluctuations, and high non-performing loans (NPLs).

1. Government Heavy Borrowing and Crowding Out:

Another contributing factor of high lending rate in Ghana is heavy borrowing by government from the domestic market to finance its budget deficit and high expenditure that the government made during election years to win power also contributes significantly to high rate of lending in the country.  Heavy government borrowing in Ghana, particularly through domestic debt instruments, significantly crowds out the private sector by absorbing available credit and driving up interest rates. Banks often prefer lending to the government over the private sector, resulting in high lending rates, limited credit access, and reduced economic growth for private enterprises. High government borrowing (Treasury Bill yields) creates “crowding out,” where banks prefer lending to the government over riskier private borrowers unless interest rates are high. High public debt and government borrowing to finance budget deficits create a “crowding-out” effect. High public debt and significant budget deficits had led the government to borrow heavily from the domestic market. This increased demand for funds “crowded out” the private sector, as banks preferred to invest in lower-risk government treasury bills rather than lending them to businesses, sustaining high interest rates. The Domestic Debt Exchange Programme (DDEP), initiated in late 2022 and implemented through 2023, fundamentally altered Ghana’s debt landscape, resulting in a heavily increased reliance on short-term domestic borrowing to fill fiscal gaps. While intended to restore sustainability, the DDEP created a “crowding out” effect, where the government became the primary borrower in the money market, leaving limited credit for the private sector. To stabilize the economy and meet fiscal needs after restricting long-term bond issuance, the government accelerated borrowing from the money market, particularly via T-bills, throughout 2023 and 2024.

Ghana has experienced both credit crunch” and crowding out: The intense focus on short-term money market instruments contributed to a “credit crunch” for the private sector, as banks and financial institutions preferred lending to the government over private business thus contributed to the high lending rates DDEP was a necessary step for debt sustainability under the IMF program, its immediate aftermath did force the government to rely heavily on the domestic money market for liquidity between 2023 and 2025, maintaining high interest rates and pressure on local financial markets. High costs increase interest rate spreads, hindering small and large businesses from accessing affordable credit, which suppresses economic growth. Banks, acting rationally to minimize risk, prioritize holding government bonds and T-bills, leaving less capital for lending to the real sector of the economy (e.g., manufacturing, agriculture). High domestic borrowing leads to high interest rates, making it difficult for private businesses to borrow for investment. Disciplined fiscal management to control inflation and exchange rate stability is fundamental to reducing operational risks.

iii. High Non-Performing Loans (NPLs) had contributed significantly to the higher lending rates in the country.

The relationship between NPL and Lending Rate is intricate and multidimensional, influencing banking profitability and bank behavior concerning lending. Studies suggest that the higher the level of NPLs, the higher the lending rates as in Ghana since commercial banks must adjust to hedge against possible defaults. High Non-Performing Loans (NPLs) remain a critical factor keeping lending rates elevated in Ghana, as banks maintain high interest margins to cover the risk of default. High Non-Performing Loans (NPLs) in Ghana, hovering averaging 18.07 percent over the past decade, have necessitated high lending rates as banks price in risk and attempt to recover losses from defaulters. Banks charge higher interest rates to cover potential defaults, meaning borrowers pay for the risk of non-performing ones. High NPL ratios erode capital and decrease profitability, causing banks to become cautious and reduce the volume of credit extended, which drives up the cost of available funds. High NPL ratios, which reached 22.70 percent in 2017 and remained elevated (e.g., 18.90 percent in December, 2025), significantly reduce banks’ willingness to lend. Banks price loans at a premium to cover the perceived risk of default.

Asset quality has been a major constraint, with NPLs hovering high (e.g., 22.70 percent in December 2017 and around 18.90 percent in late 2025), driven by economic slowdowns and government arrears to contractors. Banks hiked interest rates to cover potential losses and risk premiums from these defaults. The high risk forces banks to adopt strict lending conditions, often excluding Small and Medium Enterprises (SMEs) from accessing affordable credit. NPL ratios in the banking sector remained critical at over 18 percent in late 2025, frequently cited as one of the highest in the West African sub-region. The high NPLs are largely driven by a weak macroeconomic environment, including high inflation, currency depreciation and government arrears to energy and non-energy sector over the past decade. Non-performing loan is also another variable which affects lending rate, this variable is measured as the ratio of the total loan or non-performing loans to total loans. An increase in the provision for loan losses implies a higher cost of bad debt write-offs. Given the risk-averse behavior, banks face higher credit risk and are likely to pass the risk premium to the borrowers, leading to higher borrowing rate.

iv.Currency Depreciation and Macroeconomic Instability: Constant depreciation of the Ghanaian cedi against major currencies, particularly in 2015-2016 and 2022, increased valuation risks and working capital needs for businesses, compelling banks to increase lending rates to manage exchange-rate volatility risks. Rapid depreciation of the Ghana cedi increases the cost of imports and weakens the overall macroeconomic stability, forcing higher interest rates to encourage savings and protect the currency. Currency depreciation increases the domestic value of foreign currency debt, directly weakening the balance sheets of households and firms with unhedged FX debt, which raises default risk.  Currency depreciation often acts as a catalyst for macroeconomic instability, creating a feedback loop that increases risk premiums for borrowers and results in higher borrowing rates. This occurs primarily through the deterioration of borrower balance sheets, increased inflation, and heightened uncertainty in financial market

Bankers, perceiving higher risks from borrower insolvency and potential macroeconomic instability, demand higher interest rate spreads, leading to higher borrowing rates.  As a currency loses value, lenders perceive a higher risk of borrower default, especially for those with unhedged foreign currency liabilities. To compensate for this increased credit risk, lenders demand a higher risk premium, which is directly passed on to borrowers

1. High Operational Costs and Inefficiencies:

High operational costs and inefficiencies in Ghana’s banking sector directly exacerbate high lending rates, as banks pass on elevated administrative expenses, overheads, and high-risk premiums to borrowers.  These inefficiencies, combined with high non-performing loans (NPLs), compel lenders to hike rates, stifling private sector credit access. Banks in Ghana often pass on administrative overheads and inefficiencies directly to customers by increasing lending rates, rather than reducing operating costs. Rising NPLs, driven by poor credit risk management, compel banks to increase lending rates to offset losses. Based on recent banking sector performance reports, the average operating cost-to-income ratio (a proxy for operating expenses to income) for the Ghanaian banking industry has fluctuated but hovered around 45 percent to 55 percent in recent years (2021-2025).

In early 2025, industry operating costs moved up moderately, with cost-to-income ratios in some cases remaining flat around 47.2 percent, despite rising interest income Banks in Ghana face high overhead costs, including high impairment losses/provisioning, personnel costs, rent, utilities, and taxes. These operating expenses are passed on to borrowers to maintain profitability. The expenses and obligations of banks are a function of variables including impairment losses/provision of loan loss, personnel expenses, rent, utilities, taxation, national fiscal stabilization levy, amongst others. The combination of these cost drivers significantly depletes the bank’s topline items i.e. Interest int income and revenue. One of the reasons that have been advanced by banks for charging high lending rate is high operating expenses.  Operating Expenses to Interest Income Ratios of the most Ghanaian banks have been undoubtedly high in historical and current periods. The sector’s cost-to-income ratio has hovered around 60 percent for the past few years, as operational costs remain relatively high, including in comparison with other sub-Saharan countries. Staff analysis suggests high operating costs are a drag to financial intermediation, as bank lending rates have not fully responded to the sizeable reduction in funding costs

Operational costs to gross income were recorded at 55.1 percent at the end of December 2023, showing an improvement from 90.7 percent in 2022 following the debt restructuring period

1. Reserve Requirements (Cash Reserve Requirements, Cash in Vault Reserves, Credit Risk Reserves).

Ghana has had a long history of using reserve requirements for both prudential and monetary management purposes (Bawumia, 2010). Within the Bank of Ghana’s monetary policy operational framework, primary/ cash reserve requirements have a role in helping with prudential and liquidity management. High CRR “mops up” excess liquidity from the banking system. When liquidity is tight, the scarcity of funds naturally drives up the interest rate at which those remaining funds are lent out. The Bank of Ghana (BoG) uses Cash Reserve Requirements (CRR) as a tool to manage liquidity and inflation, which directly influences lending rates by altering the volume and cost of funds available to banks. High CRR levels typically sustain or increase high lending rates by restricting the supply of loanable funds

High cash reserve requirements (CRR) in Ghana, particularly the 2024 implementation of a tiered, high-CRR regime (15 percent – 25 percent), and had significantly increased bank lending rates. By forcing banks to hold larger amounts of unremunerated, non-earning liquidity, banks  raised interest rates on loans to compensate for reduced income capacity and lower credit risk. The BoG introduced the new regime on 25 March 2024 directly linking CRR requirements to LDRs on a tiered basis. Banks with LDRs below 40 percent will be subject to a CRR of 25 percent of deposits, those with LDRs between 40 percent and 55 percent will be subject to a 20% CRR, while those with LDRs above 55% will be subject to a 15 percent CRR. The new policy marks a material increase for banks with low LDRs as the current requirement is 15 percent.  As of April 2024, the BoG penalizes banks with lower loan-to-deposit (LDR) ratios by requiring them to maintain higher cash reserves. While aimed at encouraging lending, in a volatile market, this often results in banks paying for higher reserves, leading to higher lending costs to sustain margins. High CRRs ensure that commercial banks hold high levels of liquidity, which they have frequently deployed into government securities rather than risky private sector loans, keeping market interest rates high, as highlighted in reports on. With the Bank of Ghana (BoG) implementing a stricter, tiered CRR regime (up to 25 percent for some), banks are required to park a larger portion of their deposits in non-earning accounts. To maintain profitability, commercial banks pass the opportunity cost of these trapped funds onto customers through higher lending rates. By increasing the CRR, the Central Bank deliberately reduces the liquidity available for lending. This restriction on available funds encourages banks to prioritize low-risk investments like treasury bills rather than lending to the private sector, contributing to high borrowing costs. The Bank of Ghana (BoG) uses Cash Reserve Requirements (CRR) as a tool to manage liquidity and inflation, which directly influences lending rates by altering the volume and cost of funds available to banks. High CRR levels typically sustain or increase high lending rates by restricting the supply of loanable funds. Primary/Cash Reserve Requirements aim not only at contributing to the sterilization of commercial bank reserves but also at keeping liquidity buffers for financial stability reasons. Concerning the reserve requirement system, the Bank of Ghana mandates commercial banks to hold a certain ratio of their liabilities subject to reserve requirements in their accounts with the central bank.

The reserve requirement ratio of total deposits (domestic and foreign) stood at 15 percent since November 2023 and was mandatorily held in domestic currency. The reserve ratio was calculated as the simple average of all deposits (including demand, time, savings, and foreign currency deposits) and has a maintenance period of one week. The reserves are currently unremunerated and unavailable to commercial banks for lending. The Primary/ Cash Reserve Ratio (CRR) is a major component of the BoG’s monetary policy. The central bank uses this percentage to regulate the cash flow, money supply, inflation level, and liquidity in the economy. When the CRR increases, the liquidity reduces with the banks, and vice versa. During high inflation, the Bank of Ghana tries to reduce cash flow in the economy by increasing the current Cash Reserve Ratio based on the Bank’s loan-to-deposit ratio. However, Bank of Ghana’s Monetary Policy Committee held in March 2024, while maintaining the policy rate at 29 percent at its 117^th policy meeting, also recalibrated the Cash Reserve Ratio (CRR) based on the Loan-Deposit (L/D) ratio.

This action is a departure from the unified CRR that prevailed previously and, perhaps, was the main plot of the 117th MPC meeting. Per the new CRR directive, banks with an L/D ratio above 55 percent will continue to maintain CRR at the current rate of 15%. However, effective April 1, 2024, universal banks with L/D ratio between 40 percent to 55 percent and less than 40% are required to maintain a Cash Reserve Ratio of 20 percent and 25 percent, respectively, an increase of 5 percent and 10 percent for the two categories from the current level.  As of June-2025, the Bank of Ghana adopted a tiered dynamic Cash Reserve Ratio (CRR) of 15 percent to 25 percent based on bank loan-to-deposit ratios, with a requirement to hold these reserves in the same currency as deposits. These reserves are used to control inflation, manage liquidity and ensure financial stability. Liquid assets, reserve money, primary reserves, cash in vault and currency matched deposits.

Key aspects of Ghanaian Bank Cash Reserves: Effective June 5, 2025, banks must hold reserves in the original currency of the deposit to improve sector stability. Tiered Structure: *25 percent CRR: For banks with loan-to-deposit ratios (LDR) below 40%; *20 percent CRR. For LDRs between 40 percent and 55 percent; *15% CRR, For LDRs above 55 percent.  Bank of Ghana announced that effective 5^th June 2025, commercial banks were required to hold cash reserve in the original currencies in which deposits were made. Bank of Ghana decided to amend the Dynamic Cash Reserves as follows: The CRR for all banks will be maintained in their respective currencies. This means that foreign currency reserves could be backed by foreign currency deposits while domestic currency reserves could be backed by domestic currency deposits. As of June 5, 2025, the BoG mandated that reserves for foreign-currency deposits must be held in that same currency (rather than Cedi-equivalent), aiming to reduce exchange rate risks that previously contributed to volatile lending costs. High cash reserve requirements which act as implicit financial tax. High cash reserve requirements (CRR) imposed by the Bank of Ghana (BoG) serve as a crucial monetary policy tool for inflation targeting and liquidity management, but act as an implicit financial tax that reduces the profitability and lending capacity of Ghanaian banks. By forcing commercial banks to hold significant amounts of customer deposits as unremunerated (non-interest-bearing) assets at the central bank, these policies create an opportunity cost that restricts revenue generation. High Cash Reserve Requirements (CRR) in Ghana function as an implicit financial tax because they mandate that commercial banks hold a significant portion of their deposits at the Bank of Ghana (BoG) without earning any interest. This unremunerated “locked” capital creates an opportunity cost, as these funds cannot be deployed for profitable lending or investments. The BoG continues using the CRR and the monetary policy rate as key policy tools to steer inflation on the lower path. The latest CRR directive adds to the net increase of 2 percent in the CRR in 2023, helping the BoG to mop up excess liquidity from the banking sector at no cost but at a cost to banking sector   The Cash Reserve Ratio (CRR) in Ghana is primarily backed by the Bank of Ghana Act, 2002 (Act 612), as amended by the Bank of Ghana (Amendment) Act, 2016 (Act 918), which grants the central bank authority to regulate monetary policy and bank liquidity. These laws, alongside the Banks and Specialized Deposit-Taking Institutions Act, 2016 (Act 930), empower the Bank of Ghana to issue directives to control excess liquidity. The main purpose of statutory cash reserve requirements set by the Bank of Ghana is to protect depositors’ funds.

Bank of Ghana (Amendment) Act, 2016 (Act 918): Confirms the MPC as a statutorily constituted body for setting monetary policy, including reserve requirements.  Banks therefore charge high lending rates on the available funds to make up for the reserved funds which are deemed to be “idle” and yielding no income. These reserves earn no interest from the commercial banks, resulting in a loss of potential interest income that could have been earned if the funds were invested in treasury bills or loaned to the private sector. Because banks have a higher cost of funds due to the non-earning reserves, they often pass this cost onto borrowers through higher interest rates on loans, widening the spread between deposit and lending rates. : Because these reserves earn nothing, the “tax” value is the interest the bank would have earned if those funds were invested in the open market (e.g., Treasury bills or commercial loans). While it can be beneficial for central banks to implement higher Cash/Primary Reserve ratios to control inflation and stabilize the local currency’s value, excessive ratios can lead commercial banks to hold more cash with the central bank, thereby limiting their ability to lend. Conversely, lower cash reserve ratios allow banks to maintain less cash with the central bank, boosting their lending capacity. Since cash reserves held at the BoG are unremunerated (earn no interest), higher CRR levels increase the “opportunity cost” for banks. To maintain profitability, banks often pass this cost to borrowers through higher lending rates. Despite the incentives, high Non-Performing Loan (NPL) ratios (recorded at 18.90 percent in December, 2025) mean banks remain cautious. Many banks may prefer to “tolerate” the higher 25% CRR rather than lend to risky borrowers, which keeps lending rates elevated to cover potential defaults.

1. Banks had weaknesses in loan origination and credit risk management have exposed banks to elevated credit risks, as also illustrated by elevated NPL ratio and lending rates

Weaknesses in loan underwriting and risk management have created elevated credit risks for banks, evidenced by high non-performing loan (NPL) ratios, often exceeding 10–19.5 percent in stressed markets, and elevated lending rates. Poorly managed credit portfolios increase provisioning costs, reduce profitability, and force banks to raise rates or reduce lending. Rising NPLs necessitate increased loan loss provisions, which directly reduce net income. Banks often increase lending rates to offset anticipated credit losses from poor-quality loans Banks could experience credit supply constraints: An increase in the NPL ratio by 1 percentage point can reduce lending growth by approximately 3 percent, as banks turn cautious and capital is eroded. According to Brownbridge (1998) many of the bad debts were attributable to moral hazard: the adverse incentives on bank owners to adopt imprudent lending strategies, in particular insider lending and lending at high interest rates to borrowers in the riskiest segments of the credit markets

vii. The judicial system in adjudicating commercial cases is quite laborious and costly. Thus, in case of loan defaults, it becomes very costly for banks to take legal action to enforce the realization of the security package. Such costs are timely factored into the loan pricing of the credit to the borrower. Procedural delays and case backlogs, weak enforcement of collaterals and perceived bias and lack of specialized knowledge of banking and finance have all contributed to the high lending rates. According to Dankwa (2025) the judicial inefficiencies affecting Ghana’s loan recovery system can be grouped into three main categories: Procedural delays and case backlogs – Many loan-related cases are trapped within a congested court system. Banks seeking judgment for defaulting borrowers face long adjournments, repeated injunctions, and procedural technicalities. The commercial courts, though established to expedite financial disputes, are themselves overwhelmed by case volumes.  Weak enforcement of collateral – Even when banks obtain favourable judgments, enforcing those rulings is another challenge. The process of auctioning collateral is often hampered by administrative bureaucracy, corruption, or interference. Borrowers sometimes use legal loopholes to obtain injunctions that halt asset disposal indefinitely.  Perceived bias and lack of specialized knowledge – Some judges handling financial disputes may lack specialized knowledge of banking and finance, leading to inconsistent interpretations of loan contracts, interest compounding, or collateral agreements. In addition, there is a growing perception among financial institutions that courts tend to show sympathy toward defaulting borrowers, especially in cases with political or social influence, undermining the principle of commercial fairness. It is not uncommon for loan recovery cases to take between 3 to 7 years before final judgment.

vii. Structural Deficiencies in the Financial Sector: Limited access to long-term funding sources, high cash reserve requirements (CRR), and legal bottlenecks in enforcing collateral through the court system increase the cost of doing business for banks.

3.0 Conclusion

With the recent statement by Dr Johnson Pandit Asiamah the Governor of Bank of Ghana that the central bank is committed to driving down interest rates, as high interest in recent years have been detrimental to the economy and private sector expansion and also noted that borrowing rates above 30 percent in the past were not sustainable.

The Governor of the Bank of Ghana has stated a long-term goal to drive average lending rates down to 10 percent could be achievable if only Government of Ghana and Bank of Ghana adopt multi-pronged strategy in addressing high interest regime. Reducing Ghana’s high lending rates is not solely a matter of adjusting the policy rate. It requires a multi-pronged strategy that addresses the structural risks of NPLs, reduces the government’s fiscal dominance in the credit market, and reforms the legal framework for debt recovery. Sustained macroeconomic stability is essential to foster a predictable environment where banks can confidently lower the cost of credit to support Small and Medium Enterprises (SMEs) and broader economic growth.  Ghana’s high lending rate regime, which has frequently exceeded 20-30 percent over the past decade, is the result of a complex interplay of macroeconomic instability, structural inefficiencies, and significant credit risks. While high inflation and the Bank of Ghana’s aggressive monetary policy responses have historically driven these rates, their persistence, even as inflation falls, reveals deeper issues such as elevated Non-Performing Loans (NPLs), high operational overheads, and the “crowding out” effect caused by heavy government borrowing.

Also, the high Cash Reserve Requirements (CRR), which currently range from 15 percent to 25 percent, act as an “implicit financial tax” that restricts the funds available for lending and forces banks to pass the opportunity cost onto borrowers. This is further compounded by a laborious judicial system where loan recovery can take between 3 and 7 years, necessitating high-risk premiums to hedge against the difficulty of enforcing collateral.

Ultimately, achieving a sustainable reduction in lending rates requires a coordinated, multi-pronged approach. Success depends on the government’s ability to exercise fiscal discipline and clear legacy debts, the Bank of Ghana’s commitment to progressive policy rate cuts as inflation stabilizes, and urgent judicial reforms to expedite debt recovery. Establishing macroeconomic stability is the indispensable cornerstone of this transition; only by fostering a predictable environment with low inflation and a stable currency can Ghana reduce the risk premiums that currently stifle private sector investment and SME growth.

4.0 Strategic Recommendations for Policy Direction

The Government of Ghana and the Bank of Ghana (BoG) must adopt a multi-pronged approach to reduce high lending rates, primarily focusing on cutting the policy rate, reducing government domestic borrowing, strengthening the Cedi, and government clearing the legacy debt due to both the energy and non-energy sectors. By the end of 2026, serious efforts be made to reduce of the Monetary Policy Rate (MPR) to 10% and that could lead to a significant decline in the Ghana Reference Rate (GRR) that could also bring the borrowing cost down.  To bring down high lending rates in Ghana, the Government and the Bank of Ghana must employ a mix of monetary policy easing and key structural reforms. Key strategies include reducing the monetary policy rates as the country continues to experience downward inflation to lower the cost of funds for banks, tightening fiscal policy to reduce government borrowing from the domestic market and reform the banking sector to reduce both the high non-performing loans (NPLs) and Cash Reserve Requirements (CRR).

First, the Government clearing legacy debt of energy and non-energy arrears is a significant step expected to drive down the high-interest regime in the Ghanaian banking sector by improving bank liquidity, reducing non-performing loans (NPLs), and easing the risk premium associated with government lending.  As of early 2026, persistent arrears remained a major cause of high NPLs, which exceeded 18.90 percent in late 2025. Clearing these arrears, such as the US$1.47 billion energy sector and road contractors’ debt by the end of 2026, could help banks clean up their balance sheets, which could support the reduction in the high-interest rate environment. By reducing these bad debts, banks could strengthen their capital positions, improve profitability, reduce the high lending rate and boost lending capacity to private sector and crucial for meeting the Bank of Ghana’s goal of reducing the NPL ratio to 10 percent by end of December, 2026. Swift clearance of government arrears to private entities is necessary to reduce the accumulation of new bad loans and drive down the high lending rate.

The government’s continued efforts in settling arrears are essential for enhancing banks’ balance sheets as a substantial portion of NPLs is linked to state-related liabilities. The government must endeavor to clear all arrears to suppliers, independent power producers, road contractors could lower NPLs, if Ministry of Finance have fiscal space to make repayments larger scale. The clearance of government arrears to banks’ clients must be topmost priority to reducing the high non-performing assets in the banking industry which have bedeviled the sector.

The government must address Non-Performing Loans (NPLs): The central bank is enforcing strict credit underwriting standards and using loan recovery agencies to reduce NPLs, which have decreased from 22.7 percent in 2027 to 18.90 percent by December 2025, reducing risk premiums. The Government must repay the legacy debt to both non-energy and energy sectors to free funds for banks to reduce the cost of borrowing.

Second, the Government of Ghana and Bank of Ghana must continue with the promoting a strong, stable, and viable banking industry to support robust macro-economic growth in terms of stable exchange rate, lower inflation, lower policy rate, lower fiscal deficits, positive terms of trade and manageable public debts that could impact positively on the NPLs in the banking sector. Macroeconomic stability, characterized by low and stable inflation, manageable debt levels, sustainable fiscal and external balances, and a sound financial system, fosters a predictable environment that encourages private sector confidence and investment. The Bank of Ghana should also strength its monitoring framework which comprises of macroeconomic prudential indicators such as inflation and real effective exchange rate in assessing the stability and soundness of the banking system. Without a long macroeconomic stability, the Ghanaian banks cannot reduce the endemic non-performing loans in the banking sector which have bedeviled the industry for the past decade.

There are several factors that will enable Ghanaian economy to achieve a state of macroeconomic stability, such as moderate inflation, low exchange rate volatility, modest fiscal deficits, sustainable levels of public debt and current account balance, and appropriate interest rates levels. A comprehensive grasp of economic forces is pivotal in managing non-performing loans effectively. Long term macroeconomic stability is very critical for banks’ capital management planning, forecasting and overall building a strong and vibrant banking sector that not only creates sustainable capital buffers but also boost up solvency, liquidity and creating shareholder value. Macroeconomic stability is the cornerstone of any successful effort to increase private sector development and economic growth that enables the banking sector to improve the NPAs because of lower inflation and stable exchange rates.

Macroeconomic stability is the cornerstone of any successful effort to increase private sector development and economic growth that enables the banking sector to improve its non-performing assets (NPAs) is accurate and widely supported by economic literature. Macroeconomic stability exists when key economic relationships are in balance, for example, between domestic demand and output, the balance of payments, fiscal revenues and expenditure, and savings and investment. These relationships, however, need not necessarily be in exact balance. Imbalances such as fiscal and current account deficits or surpluses are perfectly compatible with economic stability if they can be financed in a sustainable manner. Stability reduces uncertainty and risk for both domestic and foreign investors, leading to increased private investment, job creation, and overall economic growth. Macroeconomic stability depends not only on the macroeconomic management of an economy, but also on the structure of key markets and sectors. To enhance macroeconomic stability, Ghana needs to support macroeconomic policy with structural reforms that strengthen and improve the functioning of these markets and sectors. Prudent macroeconomic policies can result in low and stable inflation, stabilizing the local currency which could contribute to lowering the NPLs in the banking sector. Inflation hurts the poor by lowering growth and by redistributing real incomes and wealth to the detriment of those in society least able to defend their economic interests.

The government must ensure that macroeconomic stability is associated with prudent monetary and fiscal policies, such as low and stable levels of inflation, lower fiscal deficit, reasonable public debt levels, exchange rate volatility (nominal or real), and interest rates, among others, all of which could be quantitatively assessed on the financial sector as well as the economy.  The results have shown that improvement in macroeconomic conditions causes improvement in credit quality. Also, it was disclosed that better macroeconomic conditions ensure better conditions for maintenance of the banking sector`s financial stability.  Bank of Ghana should also strength its monitoring framework which comprises of macroeconomic prudential indicators such as inflation and real effective exchange rate in assessing the stability and soundness of the banking system. A growing economy improves the ability of individuals and businesses to repay their loans (service their debt), which directly reduces the level of non-performing loans (NPLs) or NPAs in the banking sector. Ghana’s stable macroeconomic environment is a prerequisite for a healthy private sector and a resilient banking system with low NPAs. This dynamic ensures that banks can continue to lend, thus sustaining the cycle of economic development.

Third, Bank of Ghana may have to adopt progressive policy rate cuts as the country continues to experience decline in the inflationary trend: The downward trend in the policy rate must also impact on the lowering the Ghana reference rate to trigger downward revision of borrowing cost.  Continual reductions in the Bank of Ghana’s policy rate is designed to lower the high cost of borrowing for businesses. While policy cuts signal lower lending rates, commercial banks are often slow to adjust rates downward, with lending rates still hovering between 18-19.70 percent despite the policy decrease. The Bank of Ghana (BoG) reduction of the Policy Rate to stimulate the economy. The Bank of Ghana has transitioned into a “dovish” stance, cutting the Monetary Policy Rate (MPR) multiple times—including a 150-basis points reduction to 14.0 percent in March 2026—driven by 14 consecutive months of declining inflation. Bank of Ghana must act cautiously in view of the current geopolitics of Iran and USA war continue to cut policy rate to reduce the cost capital for universal banks to encourage them to lower lending rates. The effectiveness of these cuts depends on the willingness of banks to adjust their rates, which is often slow in the Ghanaian banking sector. The Bank of Ghana’s strategy of aggressive policy rate cuts is expected to lower lending rates, though a gap remains between the central bank’s benchmark and what commercial banks charge businesses. However, Bank of Ghana should be wary of geopolitical risks: Rising tensions in the Middle East pose risks to fuel prices and imported inflation, which may lead to more cautious future cuts.

Fourth, the government must limit domestic borrowing from money market: To prevent “crowding out” the private sector, the government is focusing on strict debt sustainability, reducing its reliance on domestic borrowing and restricting it in accordance with the 2026-2029 Medium-Term Debt Strategy (MTDS). Government must focus on reducing its reliance on domestic borrowing to minimize crowding out the private sector aiming to decrease demand for treasury bills as well as the new seven -year domestic bonds.

91-day Treasury bill rates have fallen to around 10 percent (and as low as 4.8 percent in recent tenders), reducing the “crowding out” effect and encouraging banks to lend to the private sector at lower rates

Fifth, Bank of Ghana may consider downward review the current cash reserve requirements. The Bank of Ghana must lower the current cash reserve requirements for banks to manage liquidity and in view the stability of the Cedi, which in turn helps manage inflation expectations. The overall downward review of the Central Bank’s cash reserve ratio is likely to improve the lending capacity of banks as well as reduce the cost of borrowing significantly. This could increase the amount of money that banks have available to lend to customers, which may lead to a reduction in credit availability, particularly for businesses and individuals who are already struggling due to the economic impact of the debt restructuring program. The policy of cash reserve ratio (CRR) increases and its impact on banks has been analyzed from three angles.

Firstly, the CRR affects the computation of the Ghana Reference Rate through its pass-through effect on Treasury bill rate.  Any increase in CRR simultaneously increases the weighted effect of Treasury bill rates on the GRR and increases the GRR.  The second is the real economy, its transmission effect on marginal propensity to borrow and invest. Thirdly, the balance sheet when conceptualized as transmission mechanism that broadcasts economic shocks and monetary policies to the wider economy Bushman 2014) helps us to analyses the real impact of the CRR changes by the Bank of Ghana. The cash-reserve ratio becomes an effective instrument if the market for the asset side and their quality were high and there is no loan burnout in the market.  The high cost of borrowing makes the policy ineffective as the high cost of business has also increased the level of loan burnout.

Sixth, the Ghanaian government through the Attorney General and Minister of Justice; Judicial Service and Chief Justice must develop more efficient legal enforcement mechanisms and proactive judiciary mechanism processes that will enable in the reduction of high non-performing assets in the banking industry. By establishing Digital Fast Debt Recovery Track Courts in all regional capitals in the country to handle with defaulters for speedy recovery cases from Banks and Specialized Deposit Taking Institutions. Weak and lengthy debt enforcement procedures, as well as weak creditors’ rights hamper banks’ ability to resolve NPAs in Ghana. Enhancing collateral recovery mechanisms to reduce the time it takes for banks to recover bad loans. Weak and lengthy debt enforcement procedures, combined with shortcomings in creditor rights, significantly hinder the ability of banks in Ghana to resolve non-performing assets (NPAs) and non-performing loans (NPLs). Despite legal frameworks like the Borrowers and Lenders Act, 2020 (Act 1052), banks face substantial delays in collateral enforcement, which has driven the banking sector’s NPL ratio to remain elevated, hovering around 18.90 percent in December 2025. Some SSA countries have taken various steps to reinforce their judicial system (World Bank 2018b). First, to facilitate the enforcement of credit claims, measures in recent years have included expanding court automation by introducing electronic payment or by publishing judgement decisions (Rwanda, Zambia); adopting electronic filing (Namibia); introducing or expanding specialized commercial courts (Ethiopia); and establishing collateral registries (Zambia). Second, some countries have also made progress to facilitate corporate and personal insolvency. This can accelerate and improve the value of claims that banks try to recover from businesses and individuals. Measures have included introducing or upgrading insolvency procedures (Cabo Verde, Liberia, Malawi) and regulating the insolvency administrator profession to facilitate rapid rehabilitation or liquidation (Liberia, Malawi). A pan-African insolvency regime is also contemplated for the effective operation of the African Continental Free Trade Area (IMF, 2021)

Seventh, addressing high operational costs and inefficiencies in the Ghanaian banking sector requires a multi-pronged approach focused on technology, asset quality, and regulatory compliance. Banks should reduce the reliance on physical branches and focus on lean service centers, as high personnel expenses and overheads (half of operating costs) are a major driver of inefficiencies. Ghanaian banks have historically faced high cost-to-income ratios—often driven by large physical branch networks, high personnel expenses, and significant non-performing loans (NPLs). Ghanaian banks must shift from traditional “brick-and-mortar” banking to digital platforms is the primary strategy for reducing overhead. Migrate low-value transactions (such as cash withdrawals and balance inquiries) to mobile apps, internet banking, and ATMs to reduce the need for expensive physical branches. Shifting from traditional, branch-based banking to digital, mobile, and internet banking reduces overhead costs associated with physical infrastructure. Ghanaian banks must have strategic collaboration with Fintech: Partnering with fintech companies can help traditional banks offer innovative, low-cost services, improve service delivery, and reach unbanked populations. Banks must automate of Processes: Implementing automated business rules and decision models for loan processing and customer queries reduces employee workload and minimizes human error. Banks by implementing AI and automated business rules to handle routine customer queries and internal decision-making, which speeds up processing and reduces the time staff spend on manual information retrieval. Banks must move from costly in-house legacy IT systems to cloud-based platforms and third-party data centers (such as MainOne) to leverage specialized expertise without high upfront capital investments. Banks must adhere to the BoG’s Corporate Governance Directive (2018) is critical to prevent the insider lending and mismanagement that characterized previous banking failures. Banks developing a shared digital identity layer and standardized APIs to facilitate seamless KYC (Know Your Customer) and onboarding, thereby reducing the cost of acquiring and verifying new customers. High operational costs and inefficiencies in the Ghanaian banking sector, often driven by high personnel expenses, heavy branch infrastructure, and non-performing loans (NPLs), can be mitigated through strategic digital transformation, rigorous cost management, and structural reforms. Banks should strengthen credit risk assessment by improving loan evaluation and monitoring systems is essential to reduce the overhang of Non-Performing Loans (NPLs). Banks by leveraging data analytics for credit scoring and customer insight allows for smarter risk-taking and reduced default rates. Strengthening board oversight and implementing strong risk management frameworks (as required by the Bank of Ghana) reduces inefficiencies and prevents bank failures.

About the author:

Dr Richmond Akwasi Atuahene is a Corporate Governance/Banking Consultant

Salman Partners and Financial Consultant Ltd

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