Assessing the sectoral distribution of credit and Non-Performing Loans


Lending is one of the main activities of banks in Ghana. This is evidenced by the volume of loans that constitute bank assets and the annual volume of credit granted to borrowers in the private and public sectors of the economy. However, the banking industry has undergone a challenging period in recent years, surviving an economic depression and a rising tide of non-performing loans which are highly disturbing. Non-Performing Loan is a simple factor used to assess the credit risk of a bank as it directly has a significant impact on the financial sector of an economy. In a financial sector where there is high Non-Performing Loans relative to the total assets of a financial institution, a serious threat is posed to performance indicators such as return on assets and return on equity which could eventually lead to corporate failure.

NPLs and Credit as well as the sectoral distribution by Credit & NPLs

Loan is a form of credit vehicle in which a sum of money is borrowed by another party in exchange for future repayment of the value with financial charges. As a business grows, it requires more capital to fund its operational activities. Therefore, loan serves as both short and long term capital for such purposes. Loans can be secured, unsecured, commercial, and personal loans.

A non-performing loan is a loan in which the borrower is in default and has not paid the monthly principal and interest repayments for a specified period. In a situation where loans are classified as an NPL, it means that the likelihood of receiving repayments is significantly lower. The Banking Sector Report January (2020) revealed that the stock of the financial sectors Non-Performing Loans declined further by 5.2 percent to GH¢6.30 billion in December 2019, following a contraction of 18.9 percent a year earlier. The decline in the stock of NPLs was attributed to a combination of loan recoveries and further write-offs.


Data from the Bank of Ghana shows that, the total loan granted by commercial banks in Ghana amounted to GH¢ 36.5 billion in 2018. With this, an amount of GH¢ 7.84billion representing 21.5 % was granted to the service sector. Total loans granted to the Commerce & Finance, Manufacturing, Agricultural as well as the Mining & Quarry sectors were GH¢ 8.97 billion (24.6%), GH¢ 3.98 billion (10.9%), GH¢ 1.71 billion (4.7%) and GH¢ 1.17 (3.2%) respectively. Also, total loans granted to the construction, utility providers (water, electricity & gas) and transport sectors were GH¢ 2.85 billion (7.8%), GH¢ 3.14 billion (8.6%) and GH¢ 3.18 (8.7%) respectively. Again, data from the Bank of Ghana revealed that non-performing loans (NPL) of 18.2% was recorded in 2018. With this, the service sector contributed 15.1%  whereas the Commerce & Finance as well as the Manufacturing sectors contributed 25.4% and 14.6% respectively to the total NPL recorded in 2018. Construction, transport, utility providers, mining & quarry and agricultural sectors also contributed 8.0%, 4.5%, 17.8%, 1.2% and 9.1% respectively to the total NPL in 2018.

In 2019, a total of GH¢ 52.3 billion was granted as loan by commercial banks in Ghana. In terms of sectorial distribution , an amount of GH¢11.04 billion representing 24.1% was granted to the service sector. Commerce & Finance, Manufacturing, Agricultural as well as the Mining & Quarry sectors were granted  GH¢10.93 billion (20.9%), GH¢ 5.70 billion(10.9%), GH¢ 3.033 billion (5.8%) and  GH¢1.52 (2.9%) respectively. Also, construction, utility providers (water, electricity & gas) and transport sectors were granted GH¢ 4.28 billion (8.2%), GH¢ 3.29 billion (6.3%) and GH¢ 4.184 (8.0%) respectively. Non- performing loan (NPL) recorded in 2019 was 14.3%. In terms of sectorial contribution, service, commerce & finance, manufacturing and Construction sectors contributed 16.9%, 26.2%, 13.4% and 10.2% respectively to the total NPL recorded in 2019. Also, transport, utility providers, agricultural and mining & quarry sectors contributed 5.5%, 12.9%, 9.4% and 2.0% respectively to the total NPL recorded in 2019.

A breakdown of the industry NPLs into the various economic sectors showed that the Commerce &Finance sector, the largest recipient of industry credit also accounted for the biggest share of industry NPLs of 25.4 percent in 2018. The Mining and Quarrying sector, being the least recipient of credit, accounted for the least share of 1.2 percent.

Credit distribution in 2019 also revealed that, the service sector had the highest share of credit (24.1%) followed by the commerce and finance sector (20.9%).The third largest recipient of credit was the manufacturing sector with 10.9 percent.  These  three  sectors accounted  for 55.9   percent share of  the  banking  sector’s  credit  in  2019,while  the  remaining  44.1  percent went to the  other economic  sectors in  various  proportions  as shown in Figure 1.  For NPL, it can be deduced   that   the   top   three sector credit   recipients constituted the top three contributors to the total NPL in 2019. The    services    sector    with    the    largest    credit allocation, held a lower share of total NPLs of 16.9 percent compared with the proportion of NPLs attributed to the commerce and finance sector of 26.2 percent. The  mining  & quarrying  sector, with  the  least  share  in  total  credit  also accounted for the least share in total industry NPLs of 2.0 percent.

The incidence of Non-Performing Loans arise as a result of the following

High Lending rate

In Ghana, when the monetary policy rate rises, banks respond to it and also increase its lending rate. Banks release huge volumes of loanable funds in anticipation of higher earnings through interest on loans. Businesses will quickly yield to the call by the financial house, sometimes without considering the cost of the loan just because businesses are always in search of funds to fuel their projects. Due to the high lending rates it becomes difficult for businesses to honor the debt obligations.

Unsuitable Credit Risk Management Framework by Banks

A risk management framework allows the central bank to identify, mitigate, report, and monitor the risks the banking industry faces. With this, all banks have credit and risk management manuals that spell out the modalities to be followed in credit assessments/appraisal by officers as well as reporting lines and decision-making structure in credit administration. However, the modalities spelt out in credit risk manuals are most often not followed by bank officials in credit administration. For instance, most credit officers are often concerned about their loan targets and therefore ignore some red flags during the credit assessments stage. Again, factors such as over financing, underfinancing, lack of credit referencing, granting of loans based on collateral instead of cash flows of businesses and lack of monitoring of disbursed loans by banks all contribute to loan defaults.

Diversion of Funds by Borrowers: Most borrowers divert loans obtained from banks into other ventures instead of the purpose for which the loan was granted or intended for and these developments usually affect loan repayment capacity of borrowers negatively. Additionally, factors such as character of borrowers, change in government policies, funding mismatch, high operating cost, and exchange rate fluctuations also contribute to loan default.

The Way Forward

Banks must intensify loan recoveries in order to reduce NPLs because, high NPLs are not good for any bank, the banking industry and shareholders even if the loans are legacy debts. High NPLs affects profitability of banks and the banking industry in general negatively.  Proper due diligence, with improved credit risk assessments must be done before loans are approved and disbursed by banks. Also, there should be proper monitoring of loans by credit officers and recovery department so that early signs of default can be detected and dealt with accordingly.

The regulator (Bank of Ghana) must intensify its on-site examination of banks to ensure that policies and guidelines outlined by the Bank of Ghana and the banks themselves in credit administration are dully followed by banks.  Companies must also learn to choose the right sources of fund for all projects and must also desist from diverting of funds into other projects. The banking sector would be very solid and well equipped to perform their financial intermediation role if all the stakeholders play their respective roles. A healthy financial services sector would help boost economic development because of its ability to support other sectors of the economy and provide good jobs for the citizenry.



Edmund Obeng Amaning is a researcher/consultant. Contact: [email protected], Cell: +233 54 347 5499

James Afful  is experienced in credit risk management, financial modeling and data analysis, investment banking and project finance. Contact: [email protected], Cell: +233 24 296 9042.

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