Lending Rates Will Continue to Fall; Non-Performing Loans Poised to Decline – Fitch Analysis

Introduction

Lending rates will continue to fall and non-performing loans (NPLs) are expected to decline across Ghana’s banking sector, according to a recent report by Fitch Ratings. This analysis, featured in Life Pulse Daily, highlights critical shifts in the economic environment and regulatory framework influencing profitability and credit growth. As variable-rate loans dominate and sovereign debt restructuring concludes, the banking sector faces a complex balancing act between lower interest margins and improved capital adequacy.

Analysis

The Impact of Falling Interest Rates on Net Interest Margins

Fitch Ratings reports a sharp decline in the banking sector’s Net Interest Margin (NIM), dropping from 14.8% in January 2025 to just 11.4% in August 2025. This contraction stems primarily from reduced interest rates on variable-rate loans, which now dominate the market following central bank interventions since December 2022. The Central Bank of Ghana’s monetary policy adjustments, including repo rate cuts tied to global economic trends, have compressed profit margins for lenders.

Recovery of Bank Capital Post-Sovereign Debt Restructuring

The end of sovereign debt restructuring for Ghanaian government bonds (cedi-denominated) in late 2025 is a game-changer. Following years of elevated NIMs due to prior economic instability, banks are now shedding loan losses tied to defaulted government securities. Fitch projects that most institutions will meet capital adequacy requirements by year-end 2025, as provisions against bad loans are phased out.

Rising Loan Growth Amid Regulatory Incentives

Loan growth is forecast to surge as banks capitalize on lower sovereign yields and tighter Cash Reserve Ratio (CRR) rules. By incentivizing higher liquidity ratios, regulators have spurred banks to refocus on credit expansion. Preliminary data shows net loans expanded to just 19% of sector assets by mid-2025, leaving room for further disbursements as economic conditions stabilize.

Summary

Fitch’s research underscores two pivotal trends: (1) persistently low lending rates driven by monetary easing, and (2) impending reductions in non-performing loans due to regulatory deadlines. These factors collectively reshape profitability and credit dynamics in Ghana’s financial sector. While loan growth is poised to accelerate, banks must navigate the dual challenge of shrinking NIMs and rising impairment charges.

Key Points

Practical Advice

For Borrowers: Leveraging Lower Rates

With lending rates falling, individuals and businesses should explore refinancing options or variable-rate loans to reduce debt burdens. However, caution is advised as slower economic growth may limit high-return borrowing opportunities.

For Banks: Strategic Focus on Credit Quality

Institutions must balance aggressive loan growth with prudent risk management. Diversifying portfolios and strengthening underwriting standards can offset NIM pressures while meeting capital targets.

Points of Caution

Profitability Under Threat from Slower Rate Hikes

The report warns that accelerated loan growth may not fully offset NIM compression. Banks facing this trend could see earnings volatility in 2025-2026 unless operational costs decline.

Regulatory Risks for Underperforming Institutions

Non-compliance with non-performing loan regulations could trigger enforcement actions, including capital adequacy monitoring and industry exit penalties.

Comparison

This period marks a stark contrast to Ghana’s banking sector performance during 2022-2023, when sovereign debt defaults and inflationary pressures drove NIMs above 20%. The current phase reflects a post-crisis normalization, with regulators prioritizing systemic stability over short-term profitability.

Legal Implications

Banks must align portfolios with the Bank of Ghana’s revised capital adequacy framework. Failure to reduce NPLs below 15% by late 2026 could result in penalties or restrictions on profit repatriation, as outlined in the Banking Act, 2009 (Act 574).

Conclusion

Fitch Ratings’ analysis paints a cautiously optimistic outlook for Ghana’s banking sector. While lending rates will continue to fall and NPLs are likely to decline, institutions must adapt to a landscape where profitability hinges on growth over margins. Strategic foresight will determine which banks thrive in this evolving environment.

FAQ