Community banks face profit reset as government shifts borrowing strategy

Community banks across the country may be heading into a period of weaker earnings growth as the government’s shift away from short-term Treasury bills begins to erode a major source of recent profitability, a community banking expert has warned.

According to the Executive Director of Proven Trusted Solutions Limited, Joseph Akossey, the era in which many community banks posted what he described as “supernormal profits” from elevated Treasury bill (T-bill) yields is gradually fading, forcing institutions to rethink their business models, lending strategies and cost structures.

The caution comes as yields on the 91-day Treasury bill, which averaged around 28 percent in 2024 and remained elevated in early 2025, have fallen sharply to below 5 percent amid the government’s renewed preference for longer-term domestic borrowing instruments. The development is expected to squeeze interest income for many community banks, which traditionally invest a significant portion of customer deposits in short-term government securities rather than higher-risk loan portfolios.

Speaking in an interview with the B&FT, Akossey urged boards and management of community banks to moderate expectations regarding profitability, arguing that the macroeconomic conditions that supported unusually high earnings are disappearing.

“Currently, the government is switching to long-term funds to support its big push agenda. Moreover, it intends to reduce rollover risk associated with short-term securities. No wonder the government recently reintroduced the domestic bond,” he said.

According to him, the likelihood of another sharp rise in Treasury bill rates remains low unless economic conditions deteriorate unexpectedly.

“The decline in T-bill rates is a macroeconomic reality beyond the control of community banks. They must shift their focus from supernormal profit to normal profit because the conditions that supported those extraordinary earnings are being wiped out,” he stated.

He explained that supernormal profit, by economic definition, is often temporary and difficult to sustain over the long term. “This year will be one of normalised earnings, and profitability will no longer come effortlessly. Banks will need prudent measures and deliberate strategies to remain competitive,” he added.

Akossey noted that while a few banks may continue to outperform due to stronger deposit mobilisation, larger loan books and diversified investments, many institutions will now have to search for alternative revenue streams to offset declining interest income from government securities.

In his view, lending will become central to the next phase of growth for community banks.

“This year is a year of credit,” he said, stressing that community banks would be making a major mistake if they continue to undervalue their credit departments and loan officers. “To lend prudently, community banks must strengthen credit risk management systems to avert high levels of non-performing loans (NPLs). Credit officers must be properly trained in loan appraisal, monitoring and recovery,” he said.

He further suggested that some banks may need to recruit experienced credit officers from competing institutions to improve loan performance. “Credit is the backbone of banking. Management should not focus only on the cost of hiring skilled personnel because the long-term benefits are far greater,” he added.

Akossey also encouraged community banks to become more aggressive in marketing loan products instead of waiting passively for borrowers. “A loan is a product. You must actively look for qualified customers rather than sit idle and complain that people are not applying for loans,” he said.

However, he cautioned against reckless loan expansion, warning that poor-quality lending could quickly erode profitability and capital reserves. He also pointed to the Bank of Ghana’s (BoG) directive requiring banks to maintain a non-performing loan ratio below 10 percent by December 2026, describing it as an additional reason for stronger credit discipline.

Beyond traditional lending, Akossey urged community banks to revisit microfinance schemes such as group lending, arguing that the model remains profitable when implemented properly.

“The challenge is not that group lending cannot work in urban areas. The problem is that many banks simply replicate rural methodologies in cities, even though the dynamics are completely different,” he explained.

According to him, some foreign financial institutions operating similar urban microfinance models are recording NPL ratios of less than one percent. “How come they are succeeding in our own environment while we struggle? It simply means we are not doing it right,” he remarked.

He acknowledged institutions such as Nyakrom Community Bank, Juaben Community Bank, Twifo Community Bank, Kwahu Praso Community Bank and Ankobra West Community Bank for prioritising microfinance operations.

Akossey further identified susu loans as another promising area for expansion in a lower-interest-rate environment. “The interest rates are attractive, while recovery rates are generally high because mobile bankers maintain regular contact with borrowers,” he said.

He stressed that mobile bankers should be better rewarded because of the strategic role they play in identifying reliable borrowers and maintaining repayment discipline. “Dismissing the value of mobile bankers is a strategic mistake for any community bank that wants to remain competitive,” he said.

On operational efficiency, Akossey advised community banks to reduce wasteful spending and focus resources on strategic investments capable of driving long-term growth.

“Banks must distinguish between value-creating expenditure and value-subtracting expenditure. Investments in marketing, credit systems and staff capacity-building should not be treated as unnecessary costs,” he said.

He also called for stronger collaboration among community banks in pricing financial services to improve bargaining power within the sector.

According to him, many community banks continue to charge significantly lower fees for services such as SMS alerts and ATM usage compared to universal banks, despite facing similar operational costs.

“You must strengthen co-opetition rather than destructive competition when it comes to pricing,” he said.

Akossey further advised community banks to develop innovative loan products targeting underserved customer segments while prioritising low-cost deposits to reduce funding costs.

“Some banks are still paying high single-digit and even double-digit rates on term deposits. Going forward, institutions must focus more on mobilising cheaper deposits to improve margins,” he added.