Financing headache

Ghana's bankers and industrialists recently met in Accra to discuss the difficulties of finding finance for projects.


The relationship between banks and industry in Ghana is widely perceived as weak. The banks are accused of being reluctant to fund long-term projects, while on the other hand, industrialists are being blamed for not creating business environments that I attractive to the banks. Together, the two players have blamed

government for the confusion.

Undoubtedly, the harsh conditions industrialists' face in sourcing finance can be attributed to the less friendly macro economic environment. Ghanaian industrialists have been forced to operate at interest rates of 35 percent to 55 percent over the past decade. This together with other variables such as accelerated depreciation of the local currency, the cedi, has contributed to industrial distress especially for those that are geared to the domestic market and have high import costs.

Nonetheless, the industrialists believe the banks can do a lot better in terms of identifying the financial needs of industry and satisfying them at a profit. "Most banks have been pretending over the past few years that they are doing very well. They continue this illusion by pilling interest upon interest on loans that went bad years ago," says Kwabena Darko, an industrialist and a poultry farmer.

In the opinion of Darko, until the banks begin to face the rock hard realities of the industrial scene, the mutual interlinking of the fortunes of both players will not sink home.

But, the bankers insist they are constrained by high reserve ratio and the dictates of the harsh macro economic environment inform their investment decisions. "Interest rates are determined by macro economic variables which are beyond our control," says Kwabena Quansah, Managing Director of Barclays Bank, Ghana. "Government pays very high interest on short term paper (Treasury bills). As banks and also as commercial entities looking at maximising returns on shareholders funds, the prudent thing to do is to hold more short term paper," Quansah adds.

Besides the inverse yield curve, which leaves the banks with the obvious option of holding more short-term financial instruments, the banks are also constrained by the high reserve ratio imposed on them by the central bank. The primary and secondary reserve ratios in Ghana are 9 percent and 35 percent respectively.

Technically, what this means is that if a bank mobilises 100 million, it has to set aside 44 million in reserve. Moreover, the problem is compounded by the fact that banks have to post cedi cover for foreign exchange deposits.

To be certain, the onus lies on government to reduce or even eliminate the mismatch between its monetary and fiscal policies in order to improve the business climate for all players to benefit. However, looking at the enormity of the task ahead, any suggestion that government can do it all alone will certainly leave the two players nowhere.

To date, the only survey on industry indicates that most industrialists think access to adequate and cost-effective credit is the main constraint to their improved performance. According to the only survey conducted on enterprise finance in Ghana in 1992 by Professor Ernest Aryitey, a Ghanaian economist of international repute, 40 percent of the entire sample saw inadequacy of credit for working capital as one of the most important constraints they face.

Identifying lack of credit as the cause of their woes is obviously an over simplification of the issue. Says Darko: "We do not have a culture of individuals coming together to pool their savings to invest in business as equity partners. We have a poor culture of collaboration due probably to our reluctance to manage our businesses in a transparent manner and with adequate recording of transaction that can be monitored through an audit trail."

This important observation is believed to be the root cause of the difficulties industry face in sourcing finance. And the West African Regional Manager of the African Project Development Facility, APDF, of the World Bank, Modou Njie shares this view. According to Njie, many of the project proposals his office receives come from sole proprietors. "You can have all of them probably losing the opportunity to access our facility because they do not have the required financing to be able to either manage or meet the minimum requirement as far as request of international financing is concerned. Njie is of the opinion that pooling resources to raise adequate equity to match the loan component is the best way to attract assistance from international bodies like APDF.

Beyond this, the consensus is also that there should be the establishment of more venture capital funds. Some countries in West Africa and elsewhere have found ingenious ways of injecting fresh capital into Small and Medium Scale Enterprises (SMEs). In Nigeria for instance, although the World Bank was not comfortable with the idea, the government instituted a 10 percent of the profit of banks to be invested as equity into SMEs.

For the banks, investing capital into these SMEs gave them the opportunity to provide the mentorship they reckon the businesses needed. This they did by conveniently securing board representations. In the case of Ghana, however, the stakeholders particularly the banks are of the opinion that the government's initiative of restructuring the mounting domestic debt into medium term bonds is a good short-term measure that will encourage more banks to find innovative ways of reducing private sector credit squeeze.

"Even though the Government of Ghana Indexed Linked Bonds are hurting the banks (because of their low liquidity) we think it is a step in the right direction. In that, by creating a three year paper that is indexed to inflation, the inverse yield curve will eventually return to normal," Quansah says.

For Ghanaian banks, what this means is to create for example, negotiable certificates of deposit for 2 or 3 years, which they will sell to the public to enable them, raise medium term funds. This will position them well so that when industrialists approach them they will have the wherewithal to lend to them.

But as a long term measure, many have suggested a review of the law that created the Social Security and National Insurance Trust (SSNIT) the nation's most endowed long term funds provider, that enjoys state monopoly over the mobilisation of pension funds.

In the view of the bankers and the industrialists the proposed review of the SSNIT law should allow for maximum collaboration between SSNIT and the banks. The former can lend to the latter at lower than market rate and the banks can in turn lend to industry at equally reduced interest rates.

Ultimately however, there cannot be a more appropriate prescription for the financing difficulties of industry than encouraging them to list on the Ghana Stock Exchange (GSE). As the Managing Director of the GSE, Frank Tweneboah, said: "The answer to our industrialists' quest for long term finance lies in the capital market in the form of equity issue, bond issue, assets securitisation and venture capital sourcing which the banks can ill afford to offer."


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