How ESG practices could help Ghana's banks tackle rising bad loans

Ghana's banking sector continues to wrestle with non-performing loans (NPLs), a challenge that undermines the entire financial system's ability to lend and support economic growth. Whilst the Bank of Ghana reported progress—with the industry NPL ratio falling from 23.1 percent in June 2025 to 16.1 percent by June 2026—the sector remains far short of the regulatory target of 10 percent by end-2026. With this gap widening, banking experts and analysts are now asking whether conventional risk management tools alone are sufficient, or whether banks should explore environmental, social and governance (ESG) frameworks as an additional early-warning mechanism.

The problem extends beyond balance sheets. When banks tie up capital in bad loans, they have less capacity to fund new lending to businesses, households and government—ultimately slowing economic activity. Recent research into nine listed Ghanaian banks found that higher NPL ratios directly correlated with weaker financial health, measured by net interest margin and cost efficiency. For Ghana's banking industry to remain stable and support the broader economy, tackling NPLs is not optional; it is urgent.

Understanding the ESG-to-NPL connection

ESG refers to environmental, social and governance factors that shape an organisation's resilience and conduct. In traditional credit assessment, banks examine profitability, cash flows, leverage and collateral. However, ESG factors—often overlooked in standard analysis—can signal risks that financial statements alone may not reveal.

Consider a manufacturing company applying for a loan. Standard due diligence might show healthy profits and adequate collateral. Yet if that company is heavily dependent on water availability, operates in an environmentally fragile area, faces unresolved labour disputes, or has weak internal controls and related-party transactions, these ESG weaknesses could eventually disrupt operations, reduce revenues, raise costs and impair the company's ability to repay. The chain is clear: ESG weakness leads to operational disruption, weaker cash flow, difficulty servicing debt, and ultimately a non-performing loan.

This does not mean every ESG weakness will result in default. Rather, ESG information may highlight risks that purely financial analysis misses—providing banks with an additional layer of due diligence before credit is extended.

Why it matters for Ghana's banking sector

Ghana's economy depends heavily on sectors exposed to ESG risks. Agriculture, mining, construction and energy face environmental pressures; labour-intensive industries encounter social challenges; and many borrowers operate within governance frameworks that lack robust controls. For Ghanaian banks, integrating ESG assessment into credit decisions could mean:

• Earlier risk detection: Identifying stress factors before they appear in financial statements, allowing proactive monitoring or restructuring rather than reactive recovery.
• Better portfolio resilience: Reducing the likelihood that large cohorts of borrowers face simultaneous shocks (e.g., drought affecting agricultural borrowers, or labour unrest across a sector).
• Improved capital efficiency: Deploying capital to borrowers and sectors with stronger ESG foundations, freeing resources for new lending and economic growth.
• Regulatory alignment: As global and regional standards around ESG-linked lending strengthen, early adoption positions Ghanaian banks competitively and reduces future compliance burden.

The 2025 Bank of Ghana annual report acknowledged that whilst asset quality improved, credit risk remained elevated. This signals that conventional tools—underwriting, monitoring, early-warning systems, collateral recovery and write-offs—have worked but are insufficient. ESG assessment offers a complementary approach, deepening banks' understanding of borrower vulnerability.

The path forward

Implementing ESG-based credit assessment does not require banks to abandon proven risk disciplines. Instead, it calls for an expanded lens. Banks should train credit officers to evaluate environmental exposure, social relationships and governance quality alongside traditional financial metrics. Where feasible, they should link ESG performance to loan terms, pricing and monitoring intensity.

Ghana's Bank of Ghana and banking associations could facilitate this shift by publishing ESG assessment guidelines tailored to Ghanaian sectors, creating consistency and reducing implementation burden. International development partners and fintech providers could support smaller banks with affordable ESG data and assessment tools.

As Ghana's banking industry continues its recovery from the credit crisis of recent years, ESG integration represents not a distraction from core credit management, but an evolution of it. By identifying and managing credit risks earlier and more comprehensively, Ghanaian banks can strengthen their balance sheets, restore lender confidence and resume their vital role in financing Ghana's growth.