Periods of economic recovery and falling interest rates often bring a familiar challenge for banks: how to grow lending and sustain earnings while maintaining strong asset quality and balance sheet resilience. This tension is not new, but how it is managed defines long-term financial stability.
As yields on government securities decline and net interest margins compress, as has been the case in Ghana through much of 2025 and into early 2026, banks are naturally inclined to shift focus toward lending to the real economy. This shift aligns with the Bank of Ghana’s broader objective of strengthening credit intermediation and improving the transmission of monetary policy into productive sectors.
However, both local and global experience show that when credit expansion is not matched with strong risk discipline, short-term income gains often translate into medium-term solvency challenges. For boards and senior management, the lesson is clear. Credit growth on its own is not a measure of financial strength. Asset quality is.
The Macro Context Driving Credit Expansion
The current macroeconomic environment reinforces this tension. As yields fall, the contribution of government securities to bank profitability has been reduced significantly. At the same time, regulatory expectations around capital adequacy, liquidity, and provisioning remain appropriately demanding.
This creates a strong incentive to expand loan books, sometimes in ways that test the boundaries of prudent underwriting. In such environments, subtle shifts begin to occur. Approval standards may loosen, risk appetites may expand, and transactions that would not meet credit criteria under normal conditions may begin to pass.
The shift is often gradual but important. The central question moves from assessing whether a borrower can repay under realistic stress conditions to finding ways to make a deal work. When this happens, banks risk moving away from disciplined credit decisions toward volume-driven lending, often overlooking core fundamentals such as borrower resilience, cash flow strength, and appropriate risk-adjusted returns.
During this stage of the credit cycle, underwriting standards are particularly vulnerable. The erosion is rarely overt; it appears through incremental changes such as increased approval exceptions, more optimistic financial projections, heavier reliance on collateral, and greater tolerance for weaker covenants. These are early signals of future asset quality stress rather than harmless adjustments.
Reframing the Role of Credit Discipline
From a governance standpoint, credit discipline should not be viewed as a conservative constraint, but as a fundamental safeguard. It protects depositors, shareholders, and the broader financial system.
Ghana’s supervisory framework consistently emphasises core principles. Lending decisions must be based on demonstrated repayment capacity rather than assumptions about refinancing or asset liquidation. Pricing must adequately reflect credit, concentration, and tenor risks. Borrowers must be stress-tested under realistic adverse scenarios. Equally important is strong ownership of credit decisions at the first line, supported by independent and effective risk oversight.
Within this framework, declining a transaction that does not meet required standards is not a failure of the growth strategy. It is evidence that governance is functioning effectively. Moreover, sound credit discipline is also a form of customer protection. Lending beyond a borrower’s capacity can lead to financial distress, business failure, and loss of assets. Responsible banking requires resisting such outcomes, even in competitive environments.
Lessons from Recent History
Ghana’s financial sector reforms between 2017 and 2019 offer a clear reminder of the consequences of weak credit governance. The resolution of several banks during this period revealed common underlying issues, including poor underwriting standards, weak risk management, and approval processes that prioritised growth over credit fundamentals.
The broader impact went beyond individual institutions, carrying fiscal and reputational consequences for the entire financial system. These events reinforced the importance of strong supervision, board accountability, and risk-based capital management. They also underscored a simple but important principle: while credit risk may take time to materialise, it does so with certainty.
Asset Quality as a Strategic Indicator
Non-performing loan ratios are often seen as backward-looking metrics, but in reality, they reflect cumulative past decisions. Every impaired loan originates from a point where risk was either underestimated, mispriced, or accepted without sufficient safeguards.
As the Bank of Ghana continues to target more sustainable levels of non-performing loans, including a benchmark of around 10% by the end of 2026, banks must ensure that growth strategies do not undermine underwriting standards. This makes asset quality a strategic consideration, not merely a technical metric.
Boards and management teams must therefore interrogate growth plans more rigorously. They must assess whether increases in lending are supported by stable or improving risk-adjusted returns, whether sector and borrower concentrations are rising faster than available capital buffers, and whether early warning signals such as watchlist movements, restructurings, and delinquency trends align with reported growth quality.
Growth that weakens these indicators does not create value; it merely defers risk.
A Governance Test for the Next Cycle
Economic upturns present a unique test for banks. Unlike downturns, which challenge institutions through stress, upturns test them through optimism. When liquidity is abundant and default levels are low, maintaining discipline becomes more difficult.
Supervisory frameworks place ultimate responsibility on boards and senior management to ensure that risk appetite statements translate into consistent and enforceable credit decisions. In this context, leadership must ensure that profitability is driven by sound lending practices, rather than substituting discipline with growth.
The loans that are declined rarely appear in financial statements. Yet over time, they are just as critical to a bank’s resilience as the loans that are approved. Sustainable profitability is not built on the speed of balance sheet expansion, but on how well risks are controlled when growth appears easiest.
