Ghana: Banks reassess reliance on government securities amid falling yields

Banks are increasingly rethinking their long-standing dependence on government securities as sharply lower Treasury yields erode the once-attractive, risk-free returns that dominated balance sheets in recent years.

The shift is already nudging banks back toward private sector lending. Credit growth began to recover toward the end of 2025, although momentum remains below early-year levels as lenders continue to weigh residual credit risk after a prolonged period of financial stress.

This adjustment follows an aggressive monetary easing cycle by the Bank of Ghana (BoG), which has cut the policy rate by a cumulative 900 basis points over the past year. The most recent move, a 250-basis-point reduction at the January 2026 Monetary Policy Committee meeting, brought the benchmark rate down to 15.5 percent.

The easing has been underpinned by a sharp decline in inflation, a stronger cedi and easing fiscal pressures, giving the central bank room to lower rates without unsettling markets. Money market yields have responded swiftly: the 91-day Treasury bill rate fell to about 11 percent in December 2025, down from nearly 28 percent a year earlier. As yields compressed and the curve flattened, the carry trade that once encouraged banks to park excess liquidity in sovereign paper has largely faded.

With returns on government securities diminished, banks have begun to rebalance their portfolios toward lending. Data from the BoG show that credit to the private sector closed 2025 with growth of 16 percent, while total advances reached GH¢111 billion by December, recovering from a mid-year slowdown when growth slipped into single digits. At the start of the year, credit expansion had stood at 27.1 percent, highlighting the lag between policy easing, lending rates and banks’ risk appetite.

Inflation and policy adjustments shaped credit conditions throughout the year. Headline inflation declined steadily from 23.5 percent in January to single digits by September, reaching 9.4 percent, before ending the year at lower levels. Despite the rapid disinflation, the BoG initially maintained a cautious stance, only accelerating rate cuts in the second half of the year as stability became more entrenched.

Commercial lending rates followed suit, albeit with a delay. The Ghana Reference Rate fell from 29.72 percent at the start of the year to 15.9 percent by December, reflecting banks’ gradual response to improving macroeconomic conditions and lingering risk concerns.

Liquidity conditions remain supportive. Total deposits rose to GH¢325.3 billion by December 2025, up from GH¢276.2 billion a year earlier, while the liquid-assets-to-total-assets ratio stood at 30.9 percent, positioning banks to meet a potential rise in loan demand in 2026.

Balance-sheet quality also improved alongside macroeconomic stabilisation. The non-performing loan ratio declined to 18.9 percent in December from 23.6 percent in May, capital adequacy strengthened to 17.5 percent, and profitability remained solid, with return on equity at 30.8 percent despite narrowing interest margins.

Fiscal consolidation reinforced the shift. The budget deficit narrowed, public debt fell to about 45.5 percent of GDP, and domestic financing needs eased following debt restructuring, reducing pressure on banks to absorb government issuances. Improved external buffers, driven by strong gold exports and reserves of $13.8 billion, helped the cedi appreciate by more than 40 percent in 2025.

BoG Governor Dr Johnson Asiama said the policy pivot reflects restored macroeconomic stability rather than a relaxation of discipline.

“Macroeconomic conditions have improved significantly, supported by tight monetary policy, fiscal consolidation and a strong build-up of reserves,” he said after the MPC meeting. “With stability largely achieved, policy focus is gradually shifting toward consolidating these gains and supporting real sector recovery, job creation and stronger financial intermediation.”

He added that the convergence of lower inflation, improved asset quality and a policy rate of 15.5 percent should support stronger credit growth to households and businesses in 2026.