government for the confusion.
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
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
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
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
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
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."