In the days leading up to Ghana’s general election, Vice President Dr. Mahamadu Bawumia is set to launch a national credit scoring system. On the surface, this may seem like a positive step toward improving access to credit for Ghanaians, particularly within the informal sector.
However, with Ghana’s economy in crisis and the banking sector heavily impacted by a debt exchange program, this move appears less about substantive economic reform and more about political expediency. While credit scoring systems have their advantages, the timing of this launch suggests it is more of a political gimmick than a solution to the core challenges facing the financial sector.
This article argues that what Ghana’s banking sector truly needs is not a credit scoring system, but rather a stable macroeconomic environment, equity support for indigenous banks and policies that foster a conducive business climate.
Introducing a credit scoring system at this critical juncture will have minimal impact on solving the banking sector’s liquidity, non-performing loans and credit access issues. Instead, Ghana requires long-term economic stability, especially as the country’s financial architecture remains heavily dependent on collateralized loans and is deeply affected by the informal nature of its economy.
Ghana’s Banking Sector in Crisis
Ghana’s economy has been in distress for several years, a situation exacerbated by the government’s debt exchange program. This initiative was introduced as part of an effort to restructure Ghana’s unsustainable debt levels, but it has had significant repercussions for the financial sector. As part of the program, banks had to accept lower returns on government bonds, which has strained their balance sheets and liquidity positions. In some cases, this has pushed institutions to the brink of insolvency.
Currently, five banks in Ghana are technically insolvent but remain operational thanks to regulatory forbearance.
This precarious situation has eroded confidence in the banking sector. While interventions like the debt exchange program may have temporarily prevented the collapse of some banks through regulatory forbearance, they have not addressed the underlying issues of liquidity, non-performing loans and access to credit.
The banking sector is left in a fragile state, struggling to support corporate and small business clients at a time when these entities need financial backing more than ever. This is the real context within which the proposed credit scoring system is being introduced—a context where banks are risk-averse, capital-constrained, and operating in an environment of economic uncertainty.
A Warning Sign for Ghana’s Banking Sector
Ghana’s banking sector faces a serious challenge as Non-Performing Loans (NPLs) surged to 24.3% by August 2024, up from 20% the previous year. This rise in defaults, particularly from large borrowers, threatens the banks’ ability to extend credit, which is vital for economic activity.
Banks rely on loan repayments to fund new lending, especially for small and medium enterprises (SMEs). However, with NPLs increasing, they have become risk-averse, further restricting credit flow and stalling economic growth.
The impact of rising NPLs is severe, eroding banks’ capital reserves and undermining their role as financial intermediaries. Businesses struggle to access financing, stunting growth and job creation. Factors like rampant inflation (which hit 54.2% in early 2023) and currency depreciation have compounded the problem. Borrowers face higher costs and are unable to service loans, pushing default rates even higher.
The government’s Domestic Debt Exchange Program (DDEP) has worsened the situation by impairing asset quality across the sector. The DDEP has increased loan defaults, especially as contractors, SMEs, and large corporations that depend on government payments have been unable to meet their financial obligations. This has created a credit crunch, leaving banks unable to lend and businesses unable to grow.
Instead of a politically motivated credit scoring system, what the banking sector truly needs is macroeconomic stability. High inflation, currency volatility, and government debt mismanagement are the root causes of the financial sector’s troubles.
Addressing these will allow banks to function properly, restoring their role in supporting growth through financial intermediation. Without this, the sector risks further collapse, with devastating consequences for the economy.
The Structure of Loan Disbursement in Ghana
To understand why a credit scoring system will have limited impact, it’s important to look at the structure of loan disbursement in Ghana. The banking sector can be broken down into three main categories: corporate loans, small and medium-sized enterprise (SME) loans, and personal loans.
1. Corporate Loans: Corporate loans account for a significant portion of the banking sector’s lending portfolio. These loans are predominantly collateral based, meaning businesses must provide physical assets, such as real estate or equipment, as security for the loans. This approach minimizes the risk for banks but makes it difficult for companies without substantial assets to access credit.
2. SME Loans: Similarly, SME loans also rely heavily on collateral. While there are a few instances of cash flow-based lending, this only accounts for about 5% of SME loans. The majority of SMEs must secure their loans with physical assets, which poses a challenge for smaller businesses that may not have the necessary collateral. This leaves a significant portion of Ghana’s SME sector, which forms the backbone of the economy, underserved by the financial system.
3. Personal Loans: Personal loans in Ghana are typically salary or payroll loans. In these cases, repayment is deducted directly from the borrower’s salary by the employer and transferred to the bank. Because of this structure, the risk of default is low, making personal loans relatively accessible to salaried workers. However, this form of lending does not extend to the large informal sector, which makes up about 85% of Ghana’s economy.
Given this breakdown, it is evident that Ghana’s banking system is not structured around creditworthiness as measured by a credit scoring system.
Instead, lending decisions are primarily based on the availability of collateral. Without collateral, businesses and individuals struggle to access credit, regardless of their credit score. This system excludes most of the informal sector from traditional banking, further complicating the effectiveness of a credit scoring system.
Why a Credit Scoring System Won’t Solve the Core Problem
Credit scoring systems are designed to help banks and financial institutions assess the risk of lending to individuals and businesses based on their financial history and behaviour. In developed economies, where financial records are well-maintained and a significant portion of the economy operates within the formal sector, credit scores are a useful tool for expanding access to credit.
However, in Ghana’s financial sector, where collateral remains the dominant factor in lending decisions, a credit scoring system will likely have minimal impact.
Collateral Still Reigns Supreme: The reality in Ghana is that collateral-based lending dominates the banking sector. Even for SMEs and corporate entities, creditworthiness as measured by cash flow or credit scores does not outweigh the importance of having physical assets to secure a loan. This preference for collateral is a direct response to the broader economic instability that has made banks more risk averse. In such a context, a credit score is unlikely to be a decisive factor for banks when it comes to approving loans.
The Informal Economy Conundrum: Furthermore, Ghana’s informal sector presents a unique challenge for the implementation of a credit scoring system. With 85% of the economy operating informally, many businesses and individuals lack the financial records necessary to generate accurate credit scores.
Most transactions in the informal sector are done in cash, and many participants do not have bank accounts, let alone credit histories. This limits the ability of a credit scoring system to include a large portion of the population. For the informal sector to benefit from a credit scoring system, there would need to be a substantial shift toward formalizing economic activities, something that cannot be achieved overnight.
Existing Salary-Based Loans: For personal loans, credit scoring may also have limited utility. As mentioned earlier, most personal loans in Ghana are tied to salary or payroll deductions. This system already provides a high level of security for banks, as repayments are deducted directly from the borrower’s salary before they even receive their income. In this case, a credit score adds little value because the bank’s risk is mitigated through salary deductions, not the borrower’s credit history.
The Real Solution: Macroeconomic Stability, Equity Support, and Capital Strengthening for Indigenous Banks>
While the introduction of a credit scoring system may be well-intentioned, it sidesteps the root causes of Ghana’s banking sector challenges. What Ghana’s financial sector truly requires is macroeconomic stability alongside capital support to revitalize indigenous banks whose balance sheets were deeply impaired by the Domestic Debt Exchange Program (DDEP).
The current economic crisis—characterized by high inflation, currency depreciation, and rising interest rates—has made it nearly impossible for banks to lend sustainably. This has stifled economic growth, worsened unemployment, and left a severe dent in the sector’s financial health.
The debt exchange program further strained the banking sector by diminishing the returns on government bonds, previously a significant revenue source for banks.
Indigenous banks, already undercapitalized relative to larger foreign-owned institutions, were hit hardest, leaving them with weakened balance sheets and limited capacity to absorb shocks or extend credit. In this situation, stability and targeted capital injections are critical. Without this liquidity and support, indigenous banks remain hamstrung, regardless of any additional tools for risk assessment.
A practical solution lies not in quick-fix policies but in promoting long-term macroeconomic stability and targeted equity support to shore up the sector. The government should focus on policies to control inflation, stabilize the currency, and implement fiscal reforms that prioritize sustainable debt levels. Additionally, a strategic plan to recapitalize indigenous banks would not only rebuild their balance sheets but also help restore their role in supporting SMEs and local enterprises.
Finally, fostering an environment that encourages business formalization, especially within the informal sector, would expand the scope and impact of future credit assessment tools. In this way, indigenous banks can play a more significant role in economic development, offering much-needed support to local businesses and contributing to long-term financial stability.
Political Gimmick or Digitisation?
The timing of the credit scoring system’s launch, just days before a general election, raises questions about the motivations behind the initiative. While a credit scoring system can play a role in improving access to credit, its introduction at this time appears to be more of a political manoeuvre than a genuine economic reform.
The banking sector is still grappling with the aftershocks of the debt exchange program, and the broader economy remains fragile. In such an environment, the launch of a credit scoring system is unlikely to have a meaningful impact on the availability of credit.
Rather than focusing on politically expedient projects, the government should prioritize addressing the fundamental economic challenges facing Ghana. This would involve making difficult but necessary reforms to restore confidence in the banking sector, promote investment, and create an environment where businesses can thrive.
Conclusion
Ghana’s banking sector does not need a credit scoring system right now. What it needs is a stable macroeconomic environment, policies that promote business growth, and reforms that address the structural weaknesses in the financial system. The introduction of a credit scoring system, particularly at this politically sensitive time, risks being seen as a distraction from the more pressing issues facing the economy. For Ghana’s banking sector to truly recover and support the broader economy, the focus must be on long-term stability and meaningful economic reform, not quick-fix solutions.
