Bank of Ghana Sounds Alarm: Over-Reliance on Interest Income Poses Systemic Profitability Risks

The Bank of Ghana (BoG) has issued a stark and strategic warning to the nation’s commercial banking sector, flagging significant and persistent profitability dangers for institutions overly dependent on net interest income (NII). In a pivotal address to bank executives in Accra, Governor Dr. Johnson Asiama highlighted that a normalizing monetary policy environment, coupled with structural economic shifts, is fundamentally challenging the traditional revenue model of many Ghanaian banks. This comprehensive analysis unpacks the Governor’s caution, explores the underlying macroeconomic and regulatory drivers, and provides a actionable framework for banks to build resilient, diversified earnings streams.

Introduction: A Regulatory Pivot Toward Resilient Banking Models

The traditional banking playbook—heavy reliance on the spread between lending rates and deposit costs, augmented by high-yield government securities—has been a cornerstone of profitability for banks in many emerging markets, including Ghana. However, the era of exceptionally high and stable interest margins appears to be waning. Governor Asiama’s February 2026 address represents more than a routine supervisory note; it signals a decisive regulatory pivot. The central bank is proactively steering the industry away from a concentrated, cyclical business model toward one anchored in stable, fee-based transactions. This shift is not merely about responding to a temporary economic cycle but is a strategic imperative for long-term systemic stability and individual bank survival in a new normal of lower, more volatile yields and tighter competition.

Key Points: The Core of the BoG’s Warning

The Governor’s message can be distilled into several critical, interconnected points that define the immediate challenge and the required response:

• High NII Concentration is a Vulnerability: Banks deriving a dominant portion of their profits from net interest income are acutely sensitive to interest rate cycles. As rates stabilize or decline from recent highs, these margins will compress predictably.
• Sovereign Risk is a Double-Edged Sword: The historical practice of parking significant funds in high-yielding Ghanaian government treasury bills and bonds is becoming less rewarding. Declining yields on these “risk-free” (in a credit sense) assets directly erode a major profit source. Furthermore, heavy portfolio concentration in sovereign debt ties bank health directly to the fiscal trajectory of the state, creating a dangerous contagion channel.
• Diversification is Non-Negotiable: Future earnings resilience will depend on growing non-interest income. This includes transactional fees, commissions from trade services, payments processing, treasury and wealth management fees, and other balance-sheet-light activities.
• Regulatory Expectation is Evolving: The BoG is moving from passive supervision to active strategic guidance. The engagement with bank leadership is part of a broader “supervisory dialogue” aimed at reshaping business models before a crisis forces painful, rapid adjustments.
• The Macroeconomic Context is Shifting: The warning is grounded in the observable “normalization” of Ghana’s economic prerequisites—implying a move from a period of hyperinflation and extremely high policy rates toward a more stable, lower-rate environment, a consequence of ongoing IMF-supported adjustment programs and fiscal consolidation.

Background: The Ghanaian Banking Landscape and Its Historical Model

The Legacy of High-Yield Government Securities

For over a decade, Ghanaian banks operated within a unique and lucrative ecosystem. Persistent fiscal deficits were financed by issuing short-term treasury instruments (like the 91-day bill) at very high nominal rates, often exceeding 25-30% during periods of acute currency pressure and inflation. For banks, these instruments were a magnet: they were considered sovereign-guaranteed, highly liquid, and offered returns that dwarfed traditional corporate lending. A significant portion of a bank’s asset book—sometimes 30-40% or more—was allocated to these government securities. The resulting net interest margin (NIM) was exceptionally wide, making the sector highly profitable on paper, even if the underlying economic activity was not robust.

The “Dutch Disease” of Financial Intermediation

Economists term this phenomenon a form of “financial Dutch disease.” The outsized returns from holding government debt crowded out productive private sector lending. Banks had little incentive to develop costly, high-touch relationships with small and medium-sized enterprises (SMEs) or to innovate in retail banking when they could simply “buy” high returns from the central bank’s discount window or the Ministry of Finance’s auctions. This created a systemic imbalance: the banking sector became a primary financier of the government rather than a catalyst for private sector growth, making the entire system vulnerable to any shift in government financing needs or policy rates.

The Turning Point: IMF Program and Rate Normalization

The catalyst for change is the current Extended Credit Facility (ECF) arrangement with the International Monetary Fund. A core condition is fiscal consolidation—reducing the budget deficit and, consequently, the government’s need for domestic borrowing. As the deficit narrows, the auction of treasury bills diminishes, and the competition for the remaining supply decreases, yields have begun a steady decline. Simultaneously, the BoG’s monetary policy, aimed at anchoring inflation expectations, has seen its policy rate peak and is now on a gradual downward trajectory. This “normalization” means the golden age of effortless, high-yield sovereign investing is ending, directly threatening the profit engine of interest-dependent banks.

Analysis: Deconstructing the Profitability Threat

The danger flagged by the BoG is multifaceted, extending beyond a simple reduction in one income line.

1. The Mechanical Compression of Net Interest Margin (NIM)

NIM is the difference between the average yield on earning assets (loans, securities) and the average cost of funds (customer deposits, interbank borrowing). In a falling rate environment:

• Asset Yields Fall: New loans are issued at lower rates. The portfolio of existing high-yield government securities matures and is replaced with new, lower-yielding ones.
• Funding Costs are “Sticky-Down”: Banks are often slow to reduce the interest they pay on customer deposits (especially in a competitive market for core deposits), creating a lag that temporarily cushions but ultimately cannot prevent NIM compression.

For a bank with 70% of its revenue from NII, a 1% absolute decline in NIM could translate to a 15-20% drop in pre-tax profit, all else being equal. This mechanical effect is unavoidable.

2. The Sovereign Concentration Risk Premium

Regulators globally warn against excessive bank holdings of domestic government debt. The risk is not default (in local currency), but duration and liquidity risk. If the yield curve shifts (as it is now), the mark-to-market value of a bank’s securities portfolio falls. More critically, if the government’s fiscal situation deteriorates again, the market for these securities could seize up, creating a liquidity crisis for banks that need to sell to meet withdrawal demands. The bank’s health becomes dangerously correlated with the state’s fiscal health—a single point of failure.

3. The Strategic Inertia Trap

Banks that have relied on this model for years often lack the organizational capabilities, technology platforms, and skilled personnel to pivot quickly to fee-based services. Developing a robust payments platform, building a corporate banking franchise for trade finance, or creating a wealth management arm requires significant investment and time. The warning from the BoG implies that banks must start this expensive and complex transformation now, while they still have the profits from the old model to fund the new one. Those that delay will face a profitability cliff.

4. Competitive Pressure from Fintech and Telcos

The space that banks are being urged to enter—payments, transactional services—is also the battleground for agile fintech startups and mobile network operators (like MTN, AirtelTigo with their mobile money platforms). These non-bank players often have lower cost structures, superior digital user experiences, and are unburdened by legacy IT systems or the need to maintain expensive physical branches. A traditional bank attempting to compete here without a clear digital strategy will face immense pressure on pricing and margins.

Practical Advice: A Blueprint for Building Earnings Resilience

For bank management teams and boards, the BoG’s warning is a call to action. The transition must be deliberate and multi-pronged.

1. Diagnose and Quantify Current Exposure

First, conduct a granular profitability analysis:

• What percentage of total revenue and profit comes from NII vs. non-interest income?
• What is the exact composition of the securities portfolio? What is its duration and average yield?
• How sensitive is profit to a 100-basis-point shift in the yield curve (interest rate gap analysis)?

This creates a baseline to measure progress against.

2. Develop a Phased Diversification Strategy

Prioritize initiatives based on competitive advantage, investment required, and speed to revenue:

• Short-Term (0-12 months): Optimize existing fee-based lines. Cross-sell more insurance (bancassurance), increase debit/credit card transaction volumes, and raise service fees on cash management for corporate clients. Improve the pricing power for existing services.
• Medium-Term (1-3 years): Invest in core technology. Modernize core banking systems for real-time payments. Launch or enhance a digital business banking platform for SMEs, bundling transactional accounts, basic invoicing, and access to trade finance. Build a dedicated team for large corporate relationship management to sell treasury and cash management services.
• Long-Term (3+ years): Build new ecosystems. Partner with fintechs for embedded finance (e.g., “buy now, pay later” at checkout). Develop a proper wealth and asset management arm for high-net-worth individuals. Explore opportunities in green finance or project finance, which can command premium fees.

3. Recalibrate Risk Management and Capital Allocation

The risk committee must update its framework:

• Set and enforce internal limits on sovereign debt concentration as a percentage of total assets and Tier 1 capital.
• Shift capital allocation metrics. Instead of rewarding business units solely on return on assets (ROA) from lending, develop metrics like risk-adjusted return on capital (RAROC) that value stable, low-capital-intensive fee income equally.
• Stress-test the business model not just for credit losses, but for a prolonged period of low interest rates and falling security yields.

4. Upskill and Reorganize the Workforce

The culture must shift from “loan officer” to “financial solutions provider.” Invest in training for relationship managers on treasury products, payments systems, and basic investment products. Consider creating dedicated “transaction banking” or “digital banking” divisions with their own P&L targets to drive focus.

FAQ: Addressing Common Questions

Q1: Is the BoG forcing banks to stop holding government securities?

A: No. The BoG is not mandating a specific portfolio composition. It is highlighting the risk of over-concentration and the trend of declining yields. Government securities will remain a crucial, low-risk liquidity and investment tool. The directive is to reduce dependency on them for the bulk of earnings and to manage the concentration risk prudently.

Q2: How low can interest rates on Ghanaian government securities go?

A: While specific forecasts are the domain of economists, the directional trend is clear. As fiscal deficits narrow and public debt stabilizes, the risk premium embedded in Ghana’s rates will decline. Yields are expected to converge toward regional and peer emerging market averages over the medium term, potentially in the high single digits to low teens, rather than the 20%+ levels seen in recent crisis years. This represents a permanent, structural reduction.

Q3: Can’t banks just make up for lost interest income with more loan volume?

A: In a normalizing economy, credit growth is typically moderate and targeted to productive sectors. Aggressively chasing loan volume to compensate for margin compression often leads to underpricing risk and poor underwriting, sowing the seeds for the next non-performing loan (NPL) cycle. Furthermore, competitive pressure from other banks and non-bank lenders makes it difficult to significantly expand the loan book at sufficiently high margins.

Q4: Is this a uniquely Ghanaian problem?

A: No. It is a universal challenge for banks in economies transitioning from high-inflation, high-rate regimes to stability. European and Japanese banks have grappled with “low for long” interest rates for a decade. The specific trigger (end of high-yield sovereign investing) is acute in Ghana’s context, but the strategic imperative to diversify away from NII is a global banking sector theme.

Q5: What are the legal or regulatory risks for banks that ignore this advice?

A: While no specific new regulation has been announced yet, persistent non-compliance with the supervisory dialogue could lead to several actions under the BoG’s mandate: higher capital buffer requirements (a Pillar 2 measure) for interest-rate sensitive banks, more frequent and intrusive examinations, restrictions on dividend payouts to preserve capital, and ultimately, a downgrade in the bank’s composite rating. The most significant “legal” implication is the potential for a bank to become insolvent if its business model fails, triggering resolution procedures under the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930).

Conclusion: From Vulnerability to Competitive Advantage

The Bank of Ghana’s warning is a critical inflection point. It clarifies that the profitability of the past, built on a confluence of high rates and fiscal dominance, is not a reliable blueprint for the future. The banks that will thrive are those that interpret this signal not as a threat, but as a catalyst for strategic reinvention. Success will belong to institutions that can skillfully blend a prudent, relationship-based lending culture with a sophisticated, technology-enabled transactional services platform. The journey requires investment, cultural change, and disciplined execution. For Ghana’s banking sector, the goal is to transition from being primarily interest-dependent profit-takers to becoming full-service financial partners, driving sustainable growth that is decoupled from the vicissitudes of the yield curve. The resilience of the entire financial system depends on this essential evolution.

Sources and Further Reading

• Bank of Ghana. (2026, February 18). Speech by Dr. Johnson Asiama, Governor, Bank of Ghana, at the 2026 Banking Sector Roundtable [Press release and transcript]. Accra: Bank of Ghana Public Relations Department.
• Bank of Ghana. (2025). <em