Credit Risk Management Directive: BoG to begin implementation for banks, others from July 1, 2027

Effective from July 1, 2027, the Bank of Ghana will commence the implementation of the Credit Risk Management Directive for banks, savings and loans institutions, finance houses, and financial holding firms. The primary goal of the directive is to bolster the resilience of regulated financial institutions (RFIs) by mandating the establishment and full implementation of comprehensive credit risk management systems aligned with their risk-taking activities and capital strength.

Specific objectives include developing an appropriate framework for credit risk management, ensuring a suitable credit risk environment, and assessing the quality of RFIs' credit risk management practices using a proportionality principle. This assessment will consider factors such as the RFI's profile, systemic importance, market conditions, and the scale and complexity of their operations.

The Bank of Ghana has outlined that the board of RFIs shall bear ultimate responsibility for the credit risk assumed by the institution and ensure the ongoing effectiveness of the credit risk management framework. The board must review and approve the RFI's credit risk appetite, credit risk management strategy, as well as credit policies, procedures, controls, and management information systems at least annually or when significant changes occur.

Senior management of each RFI is tasked with implementing the approved credit risk management strategy and establishing, maintaining, and enforcing policies and processes for identifying, measuring, monitoring, reporting, and controlling or mitigating credit risk. These policies and processes should apply to all credit-related activities at both the individual exposure and portfolio levels.

The senior management's responsibilities include defining credit origination, assessment, approval, monitoring, and review responsibilities, ensuring clear assignment, and supporting appropriate segregation of duties.

Effective credit risk management is crucial for the safety and soundness of regulated financial institutions, as demonstrated by the global financial developments over the past two decades. The 2008-2009 global financial crisis and the 2017-2019 Ghanaian banking sector clean-up highlighted the consequences of weak credit underwriting standards, excessive leverage, inadequate risk governance, and deteriorating asset quality, which can lead to widespread loan defaults and systemic distress.

In contrast, RFIs that establish and adhere to robust credit risk management practices have shown stronger financial resilience.