Ghana is now beginning to experience a reduction in elevated interest rate levels. On 30 July 2025, the Bank of Ghana (BoG) lowered the Monetary Policy Rate by 300 basis points to 25.0%, indicating potential for additional reductions provided inflation decreases further.
This choice concluded several months of enhanced economic indicators and signified a shift away from the strict monetary policy implemented earlier to control inflationary trends. The reduction has already started to affect loan prices, paving the way for a fundamental transformation in borrowing and financing practices throughout the finance industry, with banks being notably impacted.
The transmission to borrowing conditions can be observed in two aspects. Firstly, according to BoG’s summary statistics, the average loan interest rate decreased from 31.6% at the beginning of 2025 to 27.0% by June, marking its lowest level in approximately two years, even though the monetary approach remained only slightly easing.
Secondly, on August 6, 2025, the Ghana Association of Banks (GAB) also verified or declared a significant reduction in the Ghana Reference Rate (GRR), dropping from 23.69% to 19.67%. As commonly understood, the GRR serves as the key benchmark utilized by banks for adjusting loan rates, indicating more affordable lending options ahead.
Although there have been some favorable changes, the credit system remains vulnerable and continues to encounter difficulties, particularly concerning non-performing loans (NPLs). According to the Bank of Ghana’s Banking Sector Indicators, the overall Non-Performing Loan (NPL) rate was recorded at 23.1% in June 2025, an increase from approximately 20% toward the end of 2024, despite declining inflation and stabilized economic growth.
This highlights the lingering effects of the macroeconomic adjustment, the Domestic Debt Exchange, along with liquidity pressures experienced by small and medium enterprises due to extremely elevated lending rates. Reduced interest rates could help decrease newly formed non-performing loans, as borrowers would face less difficulty in meeting their repayment obligations. Nevertheless, current levels of non-performing loan stock still demand improved management practices and effective resolution mechanisms for normalization. It is exactly at this point that Islamic banking can provide genuine and systemic benefits.
Islamic Banking in focus
At the heart of Islamic financial systems lies the substitution of interest-driven loans with agreements based on tangible assets or collaborative risk models like murābaḥah (a markup sales arrangement), ijārah (rental agreement), mushārakah (partnership), and muḍārabah (shared profit-and-loss structure). As funding is connected to actual properties or organized through joint ventures involving shared risks, it becomes more difficult to misappropriate these resources, and the financier’s earnings are directly associated with the performance of the fundamental endeavor.
International initiatives led by the IMF and the Islamic Financial Services Board (IFSB) have consistently emphasized that these structural characteristics, along with effective Shariah compliance mechanisms, contribute to financial security, enhance access, and broaden financing options when governed by solid regulatory frameworks.
Potential for Banking Institutions in Ghana
The chance in Ghana comes at an appropriate time for two reasons.
First,
There is demand. At minimum, almost one out of every five Ghanaians considers themselves Muslim, and polls repeatedly indicate greater curiosity about ethical, honest financial practices even among non-Muslim clients.
An authentic Islamic financial channel or a comprehensive Islamic bank would create significant opportunities for deposits and loan services, especially appealing to individual clients, merchants, and small-to-medium enterprises who favor asset-backed financing instead of traditional cash loans.
Second,
The foundation for regulation is being established. Statements made by the BoG in 2025 suggest that, after the required oversight and legal frameworks are set up, the Bank will evaluate applications from entities seeking licenses to function as Islamic banks or provide Shariah-aligned financial services. This position has been supported during domestic policy conversations all year long.
Islamic Banking and NPLs
What role can Islamic finance play in helping Ghana tackle the dual issues of elevated non-performing loans and traditionally costly lending, despite decreasing interest rates? Begin with the quality of new business generation. Contracts based on tangible assets demand precise recognition of the items, services, or productive resources being funded; these arrangements frequently involve the lender temporarily holding ownership or certain rights. Such structure inherently incorporates “usage guidelines” within the financial instrument, minimizing improper use of borrowed money—a major cause of late payments in small and medium-sized enterprise records.
Although profit-and-loss-sharing mechanisms are employed with greater caution, they bring together the interests of borrowers and financiers by tying earnings to the success of projects, thereby minimizing the inclination towards excessive borrowing. Evidence from different countries indicates that investment portfolios based on Islamic guidelines may show similar or even improved performance regarding asset quality compared to traditional counterparts, assuming strong governance and effective risk control measures are in place. These insights hold significance for Ghana, where the non-performing loan rate stands at 23.1%.
Pricing: While Islamic finance forbids riba (interest), financial instruments tailored for Muslims in Ghana must still have clear standards to maintain equity and competition within a mixed system. In reality, banks across various markets tie murābaḥah profit margins and ijārah lease charges to a recognized benchmark rate.
In Ghana, the GRR currently offers a clear, formula-driven standard that has decreased from the mid-20s at the beginning of 2025 to 19.67% in August. This reduction allows Islamic financial institutions quick opportunity to offer more cost-effective asset-backed financing solutions without compromising their profit levels. With reference rates decreasing as monetary policies become less restrictive, the benefits related to affordability for short-term trade finance, equipment rental, and stock procurement may significantly increase, particularly benefiting small and medium enterprises that had been excluded due to higher costs.
Workout procedures: Exercise routines also vary in manners significant to Ghana’s non-performing loan burden. Islamic agreements usually limit the accumulation of fines on unpaid sums; any fees for delayed payments are primarily intended to offset real expenses and, in several frameworks, are directed towards charitable causes instead of the lender’s revenue.
This eliminates a mechanical factor contributing to balance sheet expansion when defaults occur, facilitating quicker and more effective restructuring processes. Most significantly, since the lender’s claim is linked to a specific asset or business entity, restructurings can employ methods such as sale-and-leaseback arrangements or interventionist management to maintain operational value instead of pushing for distress-driven, value-harming liquidations. Although these characteristics do not render Islamic credit entirely free from risk, they expand the range of instruments available for managing financial stress in alignment with Ghana’s present requirements.
Definitive guidelines: The IMF and IFSB highlight that Islamic banks should operate within an exclusive regulatory structure, featuring Shariah compliance mechanisms, customized capital and liquidity standards, as well as recovery and deposit insurance systems aligned with the distinct risk characteristics of Islamic financial instruments.
Ghana’s regulators can utilize the Core Principles for Islamic Finance Regulation (CPIFR), which has been acknowledged by the IMF for FSAP evaluations, to establish a framework that aligns smoothly with the current Basel-based regulations. Well-defined guidelines will maintain fairness, safeguard customers, and guarantee that the principle of risk sharing delivers tangible advantages to the economy instead of leading to regulatory loopholes.
Pioneering users and early entry advantage
Brands or financial institutions adopting Islamic banking concepts may secure an early advantage, thereby expanding their market presence, lowering risks associated with lending processes, and potentially cutting down or eradicating non-performing loans. Given the policy rate of 25% and the GRR under 20%, profit margins can remain stable while providing clients much more favorable total costs compared to previous periods of monetary restraint.
Islamic financial instruments inherently suit the industries that fuel employment in Ghana: commerce, farming, transportation, and small-scale industry, as they support physical stocks and machinery instead of intangible monetary requirements.
In collecting deposits, Shariah-compliant checking and investment accounts can attract savings from individuals and companies who have been previously underserved due to religious or moral beliefs, expanding the sources of financing and reducing the cost of funds. As inflation and interest rates stabilize more over time, an Islamic capital market structure—especially sukuk issued by highly rated firms—could enhance local currency funding alternatives and reduce reliance on banking balance sheets.
As such, banking institutions that focus on developing their abilities, establishing strong oversight, and designing suitable products today are expected to gain advantages as early adopters of the brand and see growth in their market presence once the structure for Islamic Banking is finalized and put into action.
The Execution Challenge
However, it should be emphasized that implementing such frameworks presents significant challenges. Financial institutions must establish reliable Shariah committees, enhance their product control mechanisms and legal paperwork, implement systems capable of managing asset-backed accruals, and employ personnel who possess knowledge of both religious principles and the economic aspects of the agreements they offer.
Nevertheless, the timing couldn’t be more favorable: borrowing costs are once again accessible, the system requires new methods for managing loan underwriting and debt restructuring, and regulators have shown willingness to accept Islamic financial institutions provided the necessary structure is established.
Mohammed serves as a Brand Ambassador and Director of Marketing & Communications at Agricultural Development Bank PLC. He possesses a background in Political Science, an Executive MBA in Marketing, a Master’s in Development Communication, is a Certified Banker, and is currently pursuing his Ph.D.
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