Business Incubators as a De-Risking Tool for SME Financing in Ghana – Hamza Mumuni writes

Ghana’s banking sector continues to navigate a difficult credit environment. While progress has been made in reducing non-performing loans (NPLs), levels remain elevated, posing ongoing risks to financial stability, credit expansion, and the growth of small and medium-sized enterprises (SMEs).

As of April 2025, the sector’s NPL ratio stood at 23.6%, with private sector borrowers, predominantly SMEs, accounting for more than 93% of distressed credit. By October 2025, this had declined to 19.5%, and further to 18.9% by December. Although the downward trend is encouraging, the underlying structural vulnerabilities remain.

A closer look at sector performance reveals that SMEs in agriculture, transportation, and construction continue to record the highest default rates. These patterns point to systemic challenges that go beyond access to finance, underscoring the need for a more holistic approach to credit risk management.

Strengthening Regulation and Industry Response

In response to persistent asset quality concerns, the Bank of Ghana has intensified regulatory oversight. Its revised measures now set a prudential NPL limit of 10% for banks and 5% for microfinance institutions. Financial institutions that exceed these thresholds are required to submit NPL reduction plans within strict timelines, with enforcement measures including restrictions on dividends, bonuses, and loan book expansion, expected to take full effect from 2027.

These interventions signal a clear regulatory direction: stronger discipline, improved underwriting standards, and a more resilient banking system.

Banks have responded with decisive action. In 2025 alone, the industry wrote off approximately GH¢1.39 billion in bad loans, representing a significant increase from the previous year. Alongside these write-offs, institutions are tightening credit processes, restructuring distressed exposures, and strengthening internal risk management frameworks.

Improving macroeconomic conditions are also offering some support. The decline in the Ghana Reference Rate from 29.72% in 2025 to 10.06% by April 2026 is expected to ease borrowing costs and reduce default pressures over time.

Yet, even with stronger regulation and improved bank-level practices, the long-term solution lies beyond compliance.

The Structural Challenge: SME Readiness

A significant proportion of SME defaults can be traced to internal business weaknesses rather than external shocks alone. Poor record-keeping, weak governance structures, limited financial planning, and inconsistent cash flows continue to undermine the ability of many SMEs to meet their credit obligations.

This raises an important question: how can the system better prepare SMEs—not just to access finance, but to manage it effectively?

Business Incubators as Risk Mitigation Platforms

Business incubators are increasingly emerging as a practical response to this challenge. By focusing on enterprise development before and after financing, incubators help address the root causes of SME credit risk.

First, incubators play a critical role in strengthening financial capability. Through structured training in bookkeeping, cash flow management, and compliance, SMEs are better positioned to maintain accurate records and make informed financial decisions. These improvements directly enhance creditworthiness.

Second, incubators support credit readiness. Many SMEs approach banks without the documentation or business structure required for financing. Incubation programmes help bridge this gap by guiding entrepreneurs through business diagnostics, developing bankable plans, and preparing them for engagement with lenders.

Third, incubators contribute to revenue stability. By facilitating market access, supplier linkages, and, in some cases, export readiness, they help SMEs build more predictable income streams. Businesses with stable revenues are less likely to default.

Finally, incubators can strengthen post-financing support. In collaboration with financial institutions, they can help monitor business performance, identify early signs of distress, and support restructuring efforts before loans become impaired. This reduces the burden on banks while improving outcomes for borrowers.

Towards an Ecosystem Approach

The persistence of high NPLs, particularly among SMEs, highlights the limitations of isolated interventions. Sustainable progress requires coordination across regulators, financial institutions, and enterprise support organizations.

An ecosystem approach where incubators, banks, and policymakers work together can significantly improve credit outcomes. Incubators, in particular, can serve as a bridge between SMEs and the financial system, ensuring that businesses are not only funded but also equipped to succeed.

This includes promoting the adoption of digital tools for accounting, inventory management, and sales tracking. Reliable data improves transparency, supports credit assessment, and aligns with regulatory expectations for stronger underwriting standards.

A Long-Term Pathway to Stability

Reducing NPLs to sustainable levels will take time. Regulatory enforcement and bank-led interventions are necessary, but they are only part of the solution. The resilience of the banking sector is ultimately tied to the resilience of the businesses it finances.

Strengthening SMEs, through better governance, improved financial management, and stronger market positioning, is essential to building a healthier credit environment.

Business incubators offer a credible pathway to achieving this. By addressing the structural gaps that drive defaults, they contribute not only to improved asset quality but also to broader economic development.

As Ghana continues to refine its financial system, the focus must shift from short-term fixes to long-term sustainability. Supporting SMEs to grow responsibly and endure will be central to that journey.