Finding the sweet spot – why banks need a smart approach to lending

Imagine a tightrope walker. They need perfect balance to avoid falling. This is similar to the challenge facing banks in Ghana today.

Recently, Dr. Johnson Pandit Asiama, Governor of the Bank of Ghana (BoG), met with bank leaders. He urged them to adopt a smarter way to lend money. His message was clear: maintain balance while supporting businesses that can grow the economy.

Dr. Asiama highlighted the importance of managing bad loans, known as Non-Performing Loans (NPLs). Banks must find a way to profit while being cautious about lending.

So, what does a ‘balanced credit strategy’ mean? It’s a sensible approach to lending. Banks should be selective about who they lend to. This ensures funds go to businesses that create jobs and wealth.

Key elements include:

1. Diversifying loans across various business types.
2. Thoroughly checking borrowers and setting strict qualification rules.
3. Regularly monitoring loans for potential issues.
4. Setting aside funds for possible losses from unpaid loans.

This strategy helps banks lend without accumulating excessive bad debt.

What can Ghana learn from other countries? Many nations have successfully navigated similar challenges:

- In Canada, banks were careful with mortgages during the 2008 crisis.
- Singapore's Monetary Authority enforces strict risk management rules.
- Germany has diverse banking types supporting small businesses while managing risks.

These examples offer valuable lessons for Ghana.

Why is this important now? Reducing bad loans is crucial for banks' survival and ability to lend more money. A balanced approach strengthens banks and supports economic growth.

Dr. Asiama emphasized lending to key sectors like agriculture and manufacturing. This focus can boost opportunities in Ghana's economy.

Stability in our financial system is vital too. Proper risk management prevents financial crises, as seen in past banking troubles.

How can banks achieve this balanced strategy? Here are some key focuses:

1. Smarter risk management using data analysis tools.
2. Understanding industry risks, avoiding overexposure in volatile sectors.
3. Better loan checks with strong collateral requirements.
4. Assessing borrowers' cash flow capabilities closely.
5. Early warning systems using technology like AI for default detection.
6. Regular loan reviews to identify issues early on.
7. Preparing for losses by saving during profitable times and following accounting standards like IFRS 9.

However, caution is necessary:

- Avoid over-regulation that hinders good businesses from accessing credit.
- Consider external factors like exchange rates or global economic shifts.
- Resist pressure to fund risky politically favored projects.

In conclusion, Dr. Asiama’s call for a balanced credit strategy is wise for Ghana's future growth and stability. By improving risk assessment and monitoring loans closely, banks can reduce bad debt while continuing to support viable businesses.

The Bank of Ghana plays an essential role in guiding this process while allowing sound business decisions by banks. If done correctly, it will lead to a stable financial future and long-term prosperity for Ghana—a sweet spot where growth meets stability and risks yield rewards for our nation.


The writer is a Chartered Banker and Global Investment Analyst with nine years of banking experience at various levels. Currently, he heads Member Experience and Growth at the Chartered Institute of Bankers in Ghana since 2013 after earning an EMBA from Kwame Nkrumah University of Science and Technology and a BA from the University of Ghana respectively.Follow Patrick on social media platforms: Facebook: www.facebook.com/PatrickTVGh/ Instagram: @PatrickTVGH