By Joshua Worlasi AMLANU
Ghana’s financial sector faces a pressing dilemma: banks, wary of high non-performing loans (NPLs), prefer investing in government treasury bills over lending to small and medium-sized enterprises (SMEs).
While this risk-averse approach offers banks a safer return on investment, it stifles economic growth by depriving SMEs of much-needed credit. Compounding the issue, government delays in honoring financial obligations have exacerbated liquidity challenges, further discouraging banks from extending credit to businesses.
SMEs serve as the backbone of Ghana’s economy, contributing approximately 70% of GDP and accounting for 92% of businesses. Despite their significance, these enterprises struggle to access affordable financing due to stringent lending policies, high impairment rates, and risk aversion among banks.
Recognizing the importance of SMEs, the government launched the SME Growth and Opportunity Programme (SME-GO) in 2024, committing GH¢8.2 billion to address financing constraints, complex tax systems, and business development challenges.
However, despite these interventions, financing for SMEs remains limited. The banking sector remains cautious, citing high default risks and a challenging macroeconomic environment.
Without meaningful reforms, Ghana’s SME sector will continue to face severe financial bottlenecks, limiting its contribution to economic growth.
Why banks prefer treasury bills Over SME lending
The reluctance of banks to lend to SMEs is rooted in several key factors:
High Impairment Rates and Risk Aversion
Lending to SMEs is perceived as a risky venture due to poor financial management, low creditworthiness, and high default rates. Many SMEs lack the financial literacy and business acumen necessary for sustained profitability, increasing the likelihood of loan defaults.
“Any financial system that does not tackle the SME sector is not tackling the country,” said John Awuah, CEO of the Ghana Association of Banks (GAB). However, he emphasized that supporting SMEs requires more than just financial assistance—it necessitates capacity building and financial education.
To address this, GAB, in collaboration with the Ghana Banking College, has piloted the YouStart Commercial Mode Programme, providing financial and technical support to young entrepreneurs. The program equips SME owners with critical skills such as cash flow management, business modeling, and strategies to navigate volatile economic conditions.
Impact of the Dynamic Cash Reserve Requirement (CRR)
In an effort to curb excessive reliance on government securities and stimulate private-sector lending, the Bank of Ghana (BoG) introduced a dynamic Cash Reserve Requirement (CRR) system in March 2024.
This policy was on the back of Private sector credit growth slowing sharply, In February 2024, as business credit growth stood at 5.1%, a stark decline from 29.5% in February 2023. Conversely, investments in government securities surged, reaching GH¢53.6 billion—a 67.6% year-on-year increase, reflecting banks’ preference for low-risk investments.
At the same time, the portion of deposits that commercial banks keep with the apex bank grew from 46.5 percent in April 2023 to 51.9 percent this year, with the new Cash Reserve Ratio directive attributed as the primary cause.
The policy was introduced as a tiered structure, incentivizing banks to increase their loan-to-deposit (L/D) ratio by lowering their reserve requirements.
- Banks with L/D ratios above 55% must maintain a 15% CRR
- Banks with L/D ratios below 40% must hold a 25% CRR
Despite this incentive structure, banks remained cautious. Instead of increasing lending, many opted to keep a significant portion of their deposits in reserves, citing a difficult operating environment.
The result?
“Commercial banks’ reserves with the Central Bank surged following the implementation of the dynamic Cash Reserve Requirement (CRR). As at the end of April 2024 reserve money growth, on a year-on-year basis, had increased to 51.9 percent (mainly due to the changes in regulatory reserves) relative to a growth of 46.5 percent in April 2023,” former BoG Governor, Dr. Ernest Addison said at during a press briefing for the 118th Monetary Policy Committee (MPC) meetings.
This was later affirmed during press briefing, following the 122nd MPC meeting in January, 2025, where the BoG Governor said, “obviously the CRR did not contribute to the NPLs. If you say they contributed to the NPLs, it means the banks are not doing their work, because the CRR was tiered in such a way to give them an incentive to lend. But most of them did not increase the lending anyway.”
“So the slightly higher NPLs that you see did not come about because of CRR. Rather, I think that, as I said, it was expected that you see NPLs go up slightly after you have a major economic crisis such as the one we had in 2022.So what you are saying is really a tapering of the conditions from the crisis,” the former Governor added.
Government’s role in the credit squeeze
A key contributor to Ghana’s rising NPLs is the government itself. Delayed payments to contractors and government-backed projects have left banks with a significant portion of non-performing loans tied to state contracts.
Beyond this is the higher auctions the government on the Treasury market. In January 2025, Investor demand for Treasury bills surged in January 2025, with total bids reaching GH¢40.59 billion, far exceeding the government’s target.
Of this, GH¢38.45 billion was accepted—an overperformance of approximately 39%. The strong appetite was reflected in average weekly bids of GH¢ 7.8 billion, up from GH¢ 5.3 billion in 2024. The Treasury market remains the government’s primary domestic financing avenue, buoyed by improving investor confidence.
“A significant portion of NPLs is coming from the government,” said Dela Agbo, CEO of EcoCapital Investment. “Banks lend to the government to finance projects, but when payments are delayed, contractors default on their loans, creating a ripple effect across the financial sector.”
This problem is further compounded by Ghana’s Domestic Debt Exchange Programme (DDEP), which forced banks to take haircuts on government securities. While deposits increased by 25.5% year-on-year, a large portion of this liquidity was absorbed by the CRR and government borrowing, leaving less capital available for private sector lending.
Bank credit to the private sector has continued to contract in real terms, albeit at a slower pace than in 2023, due to crowding out and high interest rates. In April 2024, bank credit to the private sector contracted by11.4 percent in real terms, only a modest improvement from the 15.2 percent contraction recorded a year earlier, while bank holdings of government bills and bonds surged. With the government relying on Treasury bills for the funding the budget, short-term money market rates showed broadly upward trends.
At the same time, tight liquidity management efforts decelerated the annual growth in monetary aggregates, with broad money supply (M2+) expanding by 25.5 percent in February 2024, compared to the 43.9 percent growth observed in February 2023 (World Bank 8th economic update, 2024). Bank credit to the private sector remains weak.
As of April 2024, private sector credit growth stood at 10.8 percent of GDP, contrasting starkly with the 19�8 percent growth observed in April 2023. In real terms, credit growth contracted by 11.4 percent in April, only a modest improvement from the 15.2 percent contraction recorded a year earlier, reflecting the persistence of risk aversion among banks due to the macroeconomic crisis and consequent increase in non-performing loans (NPLs) of banks.
Conversely, by February 2024, banks’ allocations to Government and BoG instruments had surged to GH¢53.6 billion, marking a significant year-on-year increase of 67.6 percent, surpassing the 36.9 percent increase recorded for the corresponding period in 2023. This trend raises concerns as it underscores the phenomenon of crowding out private sector borrowing, with potential adverse implications for overall economic growth prospects
The Treasury Bill Trap
The growing reliance on treasury bills has created a paradox within Ghana’s financial system. On one hand, banks are justified in their risk-averse stance, given the country’s economic volatility and high SME default rates. On the other hand, excessive investment in government securities diverts funds away from productive sectors, ultimately slowing economic growth.
Money market rates have declined, with the 91-day and 182-day Treasury bill rates falling to 27.73% and 28.43% in December 2024, down from 29.39% and 31.70% in December 2023. Likewise, the Interbank Weighted Average Rate (IWAR) also declined from 30.19% in December 2023 to 27.03% in December 2024, contributing to lower lending rates.
Despite this, lending to SMEs remains low. Many banks remain cautious, unwilling to increase their NPL exposure in a high-risk environment.
“Banks are afraid of defaults, so they prefer to invest in treasury bills,” Agbo noted. “But this approach is unsustainable. Without addressing risk premiums and restructuring loan recovery systems, banks will continue neglecting their role in supporting economic growth.”
Restoring Confidence
To resolve this conundrum, Ghana’s financial ecosystem requires a multi-faceted approach:
- Revising Interest Rate Structures
In Ghana, banks should adjust interest rates to accurately reflect the specific risk profiles of small and medium-sized enterprises (SMEs), rather than broadly categorizing them as high-risk borrowers. Implementing a tiered interest rate system based on factors such as business creditworthiness, industry sector, and financial discipline could incentivize responsible borrowing among SMEs.
For instance, the Bank of Ghana’s 2024 Annualized Percentage Rates (APR) report highlights significant disparities in SME loan interest rates across financial institutions. Stanbic Bank offers an APR of 44.24% for SME loans, while GCB Bank provides a more affordable rate at 29.58%. This variation suggests that some banks may be applying a more nuanced assessment of SME risk profiles, leading to more favorable lending rates for certain businesses.
By adopting a tiered interest rate approach, banks can better align lending rates with the actual risk presented by individual SMEs, promoting financial inclusion and supporting the growth of this vital sector in Ghana’s economy.
Enhancing Loan Recovery Mechanisms
To enhance the efficiency of loan recovery processes in Ghana, it is recommended that the judiciary expedites financial dispute resolutions. The Ghana Association of Banks (GAB) has collaborated with the Judicial Training Institute (JTI) to improve judges’ comprehension of financial and banking laws.
For instance, in October 2022, the International Finance Corporation’s Ghana Investment Climate Project, in partnership with the Office of the Registrar of Companies, organized capacity-building workshops on the Corporate Insolvency and Restructuring Act. These workshops targeted Commercial and High Court Judges, aiming to equip them with the necessary knowledge to handle insolvency and restructuring cases efficiently.
Additionally, the Chief Justice has advocated for the use of Alternative Dispute Resolution (ADR) mechanisms to settle disputes. In November 2023, during the launch of the annual ADR week, the Chief Justice emphasized that ADR is less time-consuming and emotionally draining compared to traditional court processes, and encouraged its adoption to resolve disputes amicably.
By implementing these measures, financial institutions in Ghana can anticipate more timely loan recoveries, thereby reducing the perceived risk associated with lending to Small and Medium-sized Enterprises (SMEs).
The GAB also played a role in reviving the Court Users’ Committee, a forum aimed at streamlining financial dispute resolution.
“If financial institutions can recover loans within a reasonable timeframe, lending to SMEs will no longer be perceived as excessively risky,” Awuah emphasized.
Strengthening Mortgage and Collateral Registration
To further enhance loan recovery processes, the Ghana Association of Banks (GAB) has collaborated with the Lands Commission to establish a dedicated office for mortgage and collateral registration.
This initiative aims to eliminate bureaucratic bottlenecks and improve banks’ ability to secure loans with tangible assets. A practical example of such efforts is the establishment of the Collateral Registry under the Borrowers and Lenders Act, 2020 (Act 1052).
The Registry provides a platform for registering security interests in collateral, thereby improving the mechanism for enforcing credit agreements and allowing lenders to realize security interests without initiating court proceedings.
By implementing these measures, Ghana can create a more secure lending environment, encouraging financial institutions to extend credit to SMEs with greater confidence.
Government Accountability
The Ghanaian government must prioritize prompt payments to contractors and honor financial commitments to prevent liquidity shortfalls in the private sector. Delayed payments have significantly impacted the construction industry, leading to financial strain and project delays.
For instance, as of May 2024, the government owed contractors approximately GH¢15 billion, with debts accumulating since 2014. This substantial backlog has resulted in severe economic hardships for contractors, including business closures and legal challenges.
The Ghana Chamber of Construction Industry has highlighted that such delays are crippling the sector, leading to job losses and stalling infrastructure development. The Chamber emphasizes that timely payments are crucial for sustaining operations and maintaining the financial health of contractors.
Furthermore, the bureaucratic and cumbersome payment procedures exacerbate the issue, often resulting in payment delays ranging from 6 to 19 months. These delays not only strain contractors but also disrupt the broader economic ecosystem, affecting suppliers and workers dependent on timely project execution.
By ensuring prompt payments, the government can enhance liquidity within the private sector, foster trust with contractors, and promote sustainable economic growth.
Promoting Alternative Financing for SMEs
While traditional bank loans remain a primary source of financing for small and medium-sized enterprises (SMEs) in Ghana, recent initiatives have introduced alternative funding models to bridge the persistent financing gap.
In June 2022, the Development Bank Ghana (DBG) was inaugurated to provide long-term financing and de-risking services to SMEs. With an initial capitalization of approximately US$800 million, DBG collaborates with commercial banks to offer loans with favorable terms to SMEs across various sectors, including agribusiness, manufacturing, and high-value services.
Additionally, in October 2024, ex-President Nana Addo Dankwa Akufo-Addo unveiled the SME Growth and Opportunity (GO) Programme, backed by a substantial GH¢ 8.2 billion funding package. This comprehensive initiative aims to support SMEs through targeted financing solutions and technical assistance. Key components include:
- Ghana Exim Bank: Allocated GH¢ 700 million to offer highly subsidized financial support for both capital and operating expenditures, with a dedicated window for the One-District-One-Factory initiative.
- Ghana Enterprises Agency (GEA): Provided GH¢ 230 million to target high-growth SMEs employing 100 or more people, offering small-scale grants and loans at highly subsidized rates.
- Development Bank Ghana (DBG): Granted GH¢ 1.4 billion to provide loans with tailored repayment conditions through financial institutions, supporting SMEs with robust growth prospects.
Furthermore, the programme includes the establishment of a Food Innovation Hub at the University of Ghana to support food industry SMEs with modern processing equipment, warehousing, testing labs, and regulatory assistance.
These initiatives, alongside existing funding models such as venture capital, private equity, and credit guarantee schemes, aim to create a more secure and diversified lending environment. By leveraging these alternative funding sources, this seeks to stimulate entrepreneurship, drive job creation, and enhance economic resilience among its SMEs.
Conclusion
Ghana’s economic growth depends on a financial system that actively supports private sector expansion rather than being constrained by risk aversion and excessive government borrowing. While treasury bills provide banks with a low-risk investment option, does an overreliance on government securities come at the expense of SMEs—the very enterprises that drive job creation and economic progress?
To unlock the full potential of Ghana’s private sector, financial institutions must rethink their lending strategies to better accommodate SMEs while ensuring effective risk management. Could a more tiered approach to interest rates, based on business creditworthiness and industry performance, encourage responsible borrowing?
Meanwhile, the judiciary must expedite loan recovery processes to enhance lender confidence. How can legal frameworks be further strengthened to ensure swift financial dispute resolution?
Additionally, the government must honor its financial commitments by making timely payments to contractors and reducing its reliance on domestic debt markets, which often crowd out private sector borrowing. What policy reforms could help the country shift away from its treasury bill dependency and create a financial ecosystem that prioritizes long-term, sustainable growth?
