ELS: MBN360 BANKING
Ghana’s banking sector is navigating a fundamental shift as Treasury bill yields continue their steep decline, squeezing the easy returns that once propped up profits.
After years of sky-high rates that made government securities a near-risk-free cash machine, the 91-day Treasury bill now yields around 4.7 percent, down from nearly 28 percent at the end of 2024.
Longer tenors have followed suit, with the 182-day bill near 6.5 percent and the 364-day bill hovering around 10 percent in recent auctions. This rapid compression, driven by falling inflation, a stronger cedi, and successive policy rate cuts by the Bank of Ghana, is forcing lenders to rethink how they make money.
Sharp Drop in Yields Reshapes Banking Landscape
The change has been dramatic. At the height of Ghana’s debt crisis and high inflation period, banks parked large portions of deposits in Treasury bills and Bank of Ghana instruments.
In 2025, Treasury bills alone accounted for roughly 62 percent of banks’ total investments. Those high yields delivered strong net interest income with minimal credit risk. Today the picture looks very different. Interest rates on six-month bills have fallen to about 6.48 percent and one-year bills to 9.98 percent from levels near 30 percent a year earlier, according to recent assessments.
The Bank of Ghana has cut its monetary policy rate substantially too, bringing it to 14 percent by March 2026 after cumulative reductions of around 1,400 basis points since mid-2025. Inflation dropped to multi-year lows, briefly reaching 3.8 percent earlier this year, while the cedi strengthened markedly. These improvements reduced the government’s borrowing costs and flooded the market with liquidity, pushing yields lower still. Recent auctions have often been oversubscribed, though the most recent one saw the government fall slightly short of its target, with the 91-day yield holding near 4.69 percent.
For banks, the decline delivers mixed results. Existing securities gain in market value as rates fall, easing some of the paper losses that lingered after the 2022 domestic debt exchange. Yet new investments and maturing bills must be rolled over at far thinner returns. That reality is already showing up in the numbers.
From Easy Profits to Margin Compression
Net interest income, long the backbone of bank earnings, contracted by 3.1 percent year-on-year in the first half of 2026. This reversed a 20.2 percent expansion recorded in the same period of 2025. Interest spreads narrowed to 4.4 percent from 6.0 percent, while gross yields on earning assets dropped to 6.1 percent from 8.9 percent. Industry profit after tax slipped slightly to GH¢7.1 billion from GH¢7.2 billion a year earlier. Return on equity fell to 22.9 percent from 32.2 percent, and return on assets eased to 4.4 percent from 5.6 percent.
Many banks had grown heavily dependent on government paper. By 2025, securities generated a larger share of net interest income than loans in some analyses, reversing the more balanced model of a decade earlier. When those high-yielding assets mature or are reinvested at single-digit rates, the impact on margins is immediate. Deposit costs have not fallen as quickly in every case, further tightening the spread. Community and mid-sized banks, which often hold relatively higher concentrations of securities, feel the pinch more than the largest institutions with broader fee businesses.
Analysts and central bank officials have long warned that this dependence left the sector exposed to rate cycles. The high-margin era that followed the debt restructuring allowed many banks to rebuild capital after the domestic debt exchange. That chapter is closing. Provisions for bad debts and impairments also rose sharply in the first half of 2026, adding another layer of pressure even as overall credit quality challenges from earlier years persist, with non-performing loans still elevated in some reports.
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Banks Pivot Toward Lending and Fee Income
The squeeze is prompting a visible shift in strategy. Fees and commissions grew 18.2 percent in the first half of 2026 and now contribute a larger share of total industry income, rising to 13.4 percent from 10.9 percent a year earlier. Other non-interest income has also expanded. Banks are pushing digital services, transaction fees, trade finance, and foreign exchange income to offset weaker interest earnings.
At the same time, private-sector credit is recovering strongly. Gross loans and advances rose 39.4 percent year-on-year to GH¢124.3 billion by June 2026, compared with just 5.5 percent growth in the corresponding period of 2025. The Ghana Reference Rate, a key benchmark for lending, has fallen sharply to around 10.2 percent in September 2026 from nearly 24 percent a year earlier. Lower borrowing costs are encouraging businesses to take on more credit, which should eventually support interest income from a larger loan book.
This pivot is not without risks. Expanding lending after years of preferring risk-free government paper requires careful underwriting. Past cycles have shown that rapid credit growth can later produce higher non-performing loans if economic conditions soften. Banks must also manage the transition carefully so that higher fees do not alienate customers already sensitive to charges. Regulators and consumer advocates are watching this space closely.
Broader Economic Implications and Risks Ahead
Lower yields are a clear win for the government and the wider economy. Reduced debt service costs ease fiscal pressure and free resources for other priorities. Businesses benefit from cheaper financing, which has supported stronger confidence and credit expansion. The successful return to longer-term bond issuance in 2026, including recent four-year bonds clearing around 12 percent, helps lengthen the debt maturity profile and reduces rollover risk that had been concentrated in short-term bills.
For the banking sector, the change marks a return to more normal intermediation. Instead of primarily funding the government, banks are being nudged toward supporting private enterprise and households. That is healthier for long-term growth, even if it compresses short-term profitability. The sector remains liquid and generally well capitalised after earlier recapitalisation efforts, though a handful of institutions still face challenges.
Risks remain. Any rebound in inflation or external shocks could reverse the yield decline and introduce new volatility. High non-performing loans from the crisis years continue to demand attention. Banks that fail to diversify revenue or control costs may see sharper earnings pressure in the second half of 2026 and into 2027. Competition for quality borrowers could also intensify, potentially limiting how far lending rates fall relative to funding costs.
Adaptation or Continued Pressure?
Ghana’s banks stand at an important juncture. The era of exceptionally high Treasury yields that cushioned balance sheets through crisis is over. Those that successfully expand fee-based businesses, grow quality loan books, and maintain disciplined cost control will emerge stronger. Others may struggle with thinner margins and slower profit growth.
The Bank of Ghana’s next monetary policy decisions will influence the path of yields and lending rates. For now, the data point to a banking system that is adjusting, with rising non-interest income and recovering credit growth providing partial offsets. The pressure from declining yields is real and measurable, yet it also creates an opportunity to rebuild a more balanced and resilient financial sector that better serves the real economy.
In the end, lower government borrowing costs and cheaper credit for businesses represent progress for Ghana. Banks must simply learn to thrive in this new, lower-yield environment rather than rely on the easy profits of the past.
