Judicial inefficiencies and their impact on non-performing loans in the banking sector

By Emmanel DANKWAH

Non-Performing Loans (NPLs) remain one of the most persistent threats to the stability and profitability of Ghana’s banking industry. The industry Non- Performing Loans stood at 20.8percent as at August 2025.

While factors such as macroeconomic volatility, weak credit appraisal systems, and poor borrower behaviour have received substantial attention, a less focused but equally consequential factor is the judicial inefficiency in loan recovery. The speed, fairness, and predictability of judicial processes directly affect the banking sector’s ability to recover delinquent loans, enforce collateral, and maintain financial discipline among borrowers.

Across emerging markets, studies have consistently shown that the efficiency of the legal and judicial system is a critical determinant of credit market performance (Aguiar-Díaz et.al,2024, Božovi? et. Al, 2021. Ndung’u, N. 2021). When the courts are slow, opaque, or inconsistent, banks’ ability to enforce contracts is weakened, leading to prolonged loan defaults, asset deterioration, and heightened credit risk. In Ghana, these inefficiencies manifest in prolonged litigation, excessive injunctions, cumbersome enforcement of collateral, and perceived judicial bias, all of which embolden borrowers and weaken creditor confidence.

According to the Bank of Ghana’s September 2025 Summary of Economic and Financial data, the industry’s NPL ratio stood at approximately 20.8percent as at August 2025, a 0.9 percentage point drop from the previous month. This is significantly high against international threshold regarded as healthy. Although this represents a modest decline from post-cleanup highs, it still reflects deep-seated structural weaknesses.

Key drivers of NPLs in Ghana include:

• Weak credit appraisal and monitoring frameworks
• Macroeconomic instability leading to currency depreciation and inflation shocks
• Poor corporate governance and insider lending
• Borrower moral hazard and strategic default.

However, an often-overlooked structural enabler of this persistent challenge is ineffective loan recovery through the judicial process. In several instances, cases involving defaulting borrowers drag on for five to ten years, during which time the value of collateral depreciates, documentation is lost, and bank provisions mount.

The cost of these inefficiencies is profound. Every delay in enforcing loan contracts not only weakens bank balance sheets but also transmits systemic risk across the financial sector, constraining credit expansion, reducing profitability, and undermining economic growth.

Understanding Judicial Inefficiencies in Loan Recovery

The judicial inefficiencies affecting Ghana’s loan recovery system can be grouped into three main categories:

1. Procedural delays and case backlogs – Many loan-related cases are trapped within a congested court system. Banks seeking judgment for defaulting borrowers face long adjournments, repeated injunctions, and procedural technicalities. The commercial courts, though established to expedite financial disputes, are themselves overwhelmed by case volumes. It is not uncommon for loan recovery cases to take between 3 to 7 years before final judgment.
2. Weak enforcement of collateral – Even when banks obtain favourable judgments, enforcing those rulings is another challenge. The process of auctioning collateral is often hampered by administrative bureaucracy, corruption, or interference. Borrowers sometimes use legal loopholes to obtain injunctions that halt asset disposal indefinitely.
3. Perceived bias and lack of specialized knowledge – Some judges handling financial disputes may lack specialized knowledge of banking and finance, leading to inconsistent interpretations of loan contracts, interest compounding, or collateral agreements. In addition, there is a growing perception among financial institutions that courts tend to show sympathy toward defaulting borrowers, especially in cases with political or social influence, undermining the principle of commercial fairness.

Economic consequences of judicial inefficiencies

The ripple effects of these judicial bottlenecks extend far beyond the courtroom:

1. High NPL ratios and capital erosion – Prolonged recovery timelines force banks to classify more loans as non-performing and make heavy loan-loss provisions. This reduces profitability and erodes capital buffers, weakening the banking system’s resilience.
2. Reduced credit supply and higher lending rates – Faced with the high cost and uncertainty of loan recovery, banks tend to tighten credit standards, ration lending, or demand excessive collateral. This restricts access to credit, especially for SMEs. Moreover, to compensate for recovery risk, banks charge higher interest rates, increasing the cost of borrowing across the economy.
3. Moral hazard and strategic default – Borrowers who observe that the judicial system favours delay tactics may intentionally default, knowing that enforcement is weak. This behaviour distorts credit discipline and fosters a culture of impunity, eroding trust between lenders and borrowers.
4. Macroeconomic implications – At the macro level, inefficient judicial enforcement undermines credit intermediation, the core function of banks. When banks cannot effectively recycle deposits into performing loans, credit to the private sector declines, slowing investment and economic growth. This contributes to unemployment, lower productivity, and fiscal pressures.

 International comparisons – Lessons for Ghana

Other emerging markets have recognized the crucial link between judicial efficiency and credit market health and have undertaken reforms with measurable success:

• India established specialized Debt Recovery Tribunals (DRTs) to fast-track loan default cases, leading to significant improvement in NPL resolution timelines.
• Kenya introduced alternative dispute resolution (ADR) mechanisms and strengthened insolvency laws to encourage voluntary settlement and asset recovery.
• Malaysia’s establishment of Danaharta, an asset management company with legal backing for expedited collateral enforcement, significantly reduced system-wide NPLs after the Asian financial crisis.

These examples highlight that judicial reform when coupled with financial regulatory changes can accelerate credit recovery, improve bank asset quality, and restore credit discipline.

Policy and institutional reform recommendations

To address the judicial dimensions of Ghana’s NPL challenge, the following reforms are proposed:

1. Establish specialized financial or commercial courts – Dedicated Financial Adjudication Courts staffed with judges trained in banking and finance law can expedite cases and ensure consistency in rulings. The specialization will enhance legal understanding and reduce procedural errors.
2. Digitize case management systems – A national E-Case Tracking System for financial disputes can improve transparency, track case progress, and reduce opportunities for undue delay or interference.
3. Introduce statutory timelines for loan recovery – Similar to fast-track commercial courts in other jurisdictions, Ghana could legislate maximum timelines for adjudicating credit enforcement cases (e.g., within six months), ensuring predictability and accountability.
4. Promote Alternative Dispute Resolution (ADR) mechanisms – Mediation and arbitration can provide faster, less adversarial means for resolving credit disputes, particularly between banks and SMEs.
5. Strengthen enforcement of judgments – Court bailiffs and enforcement officers should be adequately resourced, monitored, and held accountable for delays in executing judgments. The establishment of private enforcement agencies under judicial supervision could improve efficiency.
6. Collaborate with the Bank of Ghana, Ghana Bar Association and Chartered Institute of Bankers, Ghana – Joint training programmes can bridge the knowledge gap between judges, lawyers, and financial institutions, ensuring a uniform understanding of banking contracts and financial instruments.

Conclusion

The persistence of high NPLs in Ghana is not solely a reflection of poor credit practices or macroeconomic weakness, it is also a symptom of judicial inefficiency. The courts, as custodians of contract enforcement, play a pivotal role in sustaining creditor confidence and maintaining financial discipline.

A more efficient judicial system will not only accelerate loan recovery but also reduce credit risk premiums, boost private sector lending, and enhance overall financial stability. As Ghana seeks to build a resilient financial system capable of supporting sustainable growth, judicial reform must be viewed as an economic imperative and not merely a legal issue.

>>>the writer is a Financial Economist and Data Analyst. His areas of interest include financial market, Ethics, Sustainability, Financial Literacy, Data, Ai and Blockchain Analytics. He can be reached via [email protected]

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