High rates, cedi volatility increase bad loans — Analyst

By Solomon Nartey Tetteh

Financial Consultant and Analyst, Dr Kenneth Kwadwo Obeng, has warned that Ghana’s unstable economic indicators and high lending rates are contributing significantly to the rise in Non-Performing Loans (NPLs) within the banking sector.

Non-performing loans, which occur when borrowers default or are unable to meet repayment obligations, remain a major concern for Ghana’s financial system.

According to the World Bank’s 9th Economic Update, the NPL ratio has remained elevated, fluctuating between 20.4 percent and 24.6 percent throughout the year.

It currently stands at 23.6 percent, significantly higher than the international benchmark of 5 percent.

Speaking on Business Breakfast on Zed101.9FM, Dr Obeng explained that once borrowers secure a loan at a prevailing interest rate, subsequent reductions in the policy rate by the Bank of Ghana do not affect the already contracted facility.

“For instance, if you take a loan at 35 percent today and the Bank of Ghana reduces the rate the following week, your loan still remains at 35 percent. Banks are profit-driven institutions, so they are not going to revise rates downward on loans that have already been disbursed,” he said.

Dr Obeng noted that this situation often places borrowers at a disadvantage, particularly when a decline in interest rates leads to reduced market prices.

“If you borrowed at a high rate to purchase goods, and prices later drop, you are forced to sell at a loss while still servicing the expensive loan,” he explained.

The analyst linked this challenge to Ghana’s volatile economic environment, highlighting the sharp depreciation and subsequent appreciation of the cedi in recent months.

“At one point, the dollar was around 17 cedis. Within six months it dropped to about 10.8 cedis. Anyone who borrowed at the peak to import goods is now facing huge losses because prices have shifted drastically,” he stated.

Dr Obeng indicated that such fluctuations undermine businesses’ ability to repay loans, feeding into the growing levels of non-performing loans in the banking system.

Currently, NPLs in Ghana are estimated at nearly one-fifth of total loans granted.

Dr Obeng also emphasised the need for more stable macroeconomic indicators to safeguard businesses and reduce risks to the banking sector.