BoG integrates Business Model analysis into banking sector supervision

The Bank of Ghana (BoG) will incorporate business model analysis into its routine supervisory framework as part of efforts to detect structural risks earlier within the banking sector.

Governor Johnson Pandit Asiama announced the move during a post–Monetary Policy Committee engagement with bank chief executives in Accra. He explained that the decision follows a thematic review of banks’ funding models, asset allocation patterns, earnings structures and governance systems under both baseline and stress scenarios.

Although the review found the banking industry to be viable and profitable, it also highlighted structural characteristics that require closer regulatory attention as macroeconomic conditions stabilise.

“Business model analysis will now form an embedded part of supervisory assessment, supporting early identification of emerging risks and enabling timely policy and supervisory interventions,” Dr Asiama stated.

The shift marks a transition from largely compliance-based supervision to a more forward-looking approach that examines how banks generate income, manage funding exposures and deploy capital. Supervisors will assess the sustainability of revenue streams, concentration risks, governance quality and the resilience of business strategies under varying economic conditions.

Particular attention will be paid to earnings composition. Currently, about 68 percent of industry profitability is derived from net interest income, increasing sensitivity to interest rate cycles and sovereign exposure dynamics. Net interest margins have already narrowed, declining from 14.2 percent in December 2024 to 11.5 percent by December 2025, as the policy rate fell from 27 percent to 18 percent over the same period.

Despite return on equity after tax remaining strong at 30.8 percent at year-end 2025, the Governor cautioned that margin compression makes income diversification increasingly important. He noted that while reliance on interest income is not inherently problematic, future earnings resilience will depend more on growth in fee-based and transactional services.

Financial intermediation remains limited. As of December 2025, total loans stood at GH¢111 billion out of total industry assets of GH¢446.9 billion, representing less than 25 percent of assets. Banks continue to hold elevated concentrations in sovereign and central bank instruments, reflecting a preference for government securities over private sector lending.

Credit data show that nominal private sector credit growth remained subdued for much of mid-2025, with real credit contracting to as low as -7.3 percent in May before rebounding to 13.1 percent by December as interest rates eased.

Dr Asiama said the supervisory framework must evolve as monetary policy transitions from stabilisation to calibration, following a 250 basis-point reduction in the policy rate to 15.5 percent.

Although non-performing loans declined from 21.8 percent in December 2024 to 18.9 percent by December 2025, they remain above benchmark levels. The Governor emphasised the need for stronger underwriting standards and improved sectoral risk assessment, particularly as banks expand lending to agriculture, manufacturing, small- and medium-sized enterprises and other productive sectors.

The industry, however, is entering this phase from a stronger capital position. The capital adequacy ratio rose from 14 percent at the end of 2024 to 17.5 percent by December 2025 — and remained at that level even after excluding regulatory reliefs — compared to 11.3 percent a year earlier. Much of the buffer rebuilding followed reforms undertaken after the Domestic Debt Exchange Programme (DDEP).

“Stability must now translate into purposeful intermediation,” Dr Asiama urged.

The policy shift comes amid improving macroeconomic conditions. Real GDP expanded by 6.1 percent in the first three quarters of 2025, led by services and agriculture. Inflation declined significantly to 3.8 percent in January 2026, down from 23.8 percent a year earlier. Exchange rate stability and fiscal consolidation have also boosted investor confidence.

With inflation expectations anchored and financial conditions easing, lending rates have begun to decline and real private sector credit growth is recovering. The central bank expects further improvement but remains cautious, aiming to prevent a repeat of past cycles in which rapid credit expansion contributed to deteriorating asset quality.