Ghanaian government to improves access to credit for industrial companies

 

The cost and availability of credit is one of the central problems facing Ghana’s industrial sector. Across various segments, a lack of funds and high interest rates have constrained growth for a number of years. However, while many challenges persist, the current administration has made improving the domestic borrowing environment a top priority.

Although a stabilising fiscal and monetary environment saw the Bank of Ghana cut its benchmark interest rate four times in 2017, the cost of borrowing remains largely prohibitive. A 150-basis-point cut in July 2017 brought the rate down to 21%, a figure that still makes financing the sector difficult. Indeed, the average interest rate for vehicle, manufacturing, and construction loans ranged between 33% and 33.9% in May 2017, according to the central bank.

Long History

The cost of capital has been a hurdle for firms. When the Bank of Ghana increased its policy rate to 21% in 2014, there was concern about the credit implications, with commercial banks charging interest rates up to 40% and micro-finance institutions up to 100%. Such rates make the management of cash flows and business expansion difficult, particularly for small and medium-sized enterprises.

As a result, in May 2017 the manufacturing sector accounted for just 7.4% of outstanding credit extended by the Ghanaian commercial banking segment. Cognisant of the effects of a lack of access to credit on the economy, in July 2017 the government acted to provide financial relief to economically distressed companies. By July 2017 the state had provided relief to more than 80 companies. Ibrahim Mohammed Awal, the minister of business development, announced that the government intends to provide a stimulus package to local businesses. This relief came on the back of a similar package offered to 50 companies in April 2017. Many of these firms had suffered losses as a result of persistent blackouts, known locally as dumsor. The 2017 budget included provisions to establish a National Institutional Renewal Programme, with the government initially providing $50m as seed funding as well as a further $150m for debt alleviation later that year.

Credit Constraints

While the currency has stabilised, fluctuating only 6% between January and November 2017, the credit environment is unlikely to improve significantly in the near future, given the crowding-out effect of the government’s domestic borrowing (see Banking chapter). “On one hand, the government is trying to bring down the policy rate and reduce the Treasury bill rate to make borrowing cheaper, which is good,” Seth Twum-Akwaboah, the CEO of the Association of Ghana Industries (AGI), told local press in April 2017. “On the other hand, if you say you are going to rely so much on the domestic market, how will you balance the two, because that will [have negative effects] by way of higher interest costs,” he added.

Policy Solutions

Despite these difficulties, the current administration is exploring ways to deal with the long-term challenges of financing industrial and manufacturing development. In January 2017 Alan Kyerematen, the minister of trade and industry, told the local press that facilitating access to medium- and long-term capital was one of the government’s six key strategies to revitalise the sector – including the establishment of the Industrial Development Fund, which, according to Kyerematen, would help facilitate access to credit.

Other efforts are under way: in August 2017 the AGI told local press that it was confident that the Bank of Ghana would grant it a licence to establish an industrial bank in the country. If it is authorised to operate, the AGI’s bank plans to offer affordable long-term credit to small and medium-sized enterprises, which make up 70% of the association’s members.

While these plans predate the current administration, the AGI is confident the bank will launch soon. Details are yet to be released, but if it has enough capital to extend a high volume of competitive loans, it will resolve a key challenge facing the domestic industrial base.

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The Report: Ghana 2018

Industry & Retail chapter from The Report: Ghana 2018

The Report: Ghana 2018

The Report

This article is from the Industry & Retail chapter of The Report: Ghana 2018. Explore other chapters from this report.