Financial Development, A Key Lubricant To Oil Private Sector Led Growth In Ghana



The level of financial development is undoubtedly one of the key factors that greatly enhance economic growth as finance is seen as the lubricant that oils the wheels of development. Financial development affects economic growth via its impact on savings and investment. Ghana’s financial sector has experienced tremendous development since 1957 through the implementation of several financial sector policies and programs undertaken by successive governments since independence. Notable among the financial sector reforms undertaken in Ghana are: (1) the establishment of the Agricultural Development Bank in 1965 purposely to provide financial credit at concessional rates to meet the investment needs of the fisheries and agricultural sector; (2) the establishment of Rural and Community Banks (RCBs), and the introduction of regulations such as commercial banks being required to set aside 20% of total portfolio, to promote lending to agriculture and small scale industries in the 1970s and early 1980s; (3) shifting from a restrictive financial sector regime to a liberalized regime in 1986; (4) the promulgation of PNDC Law 328 in 1991 to allow the establishment of different categories of non-bank financial institutions, including savings and loans companies, and credit unions, as well as (5) the establishment of the Ghana Stock Exchange in July 1989 to provide long term credit to companies that list on the exchange (Asiamah & Osei, 2007). The above policies among others have brought about the emergence of three broad categories of bank financial institutions in Ghana. These are: (1) formal credit providers such as savings and loans companies, rural and community banks, as well as some development and commercial banks; (2) semi-formal financial intermediaries such as credit unions, financial non-governmental organizations, and cooperatives; and (3) informal credit suppliers such as susu collectors and clubs, rotating and accumulating savings and credit associations such as traders, money lenders and other individuals (Bank of Ghana, 2008). With the tremendous growth in the number and size of financial institutions in Ghana, the amount of credit granted to the private sector has increased significantly in the last three decades. For instance, percentage of small firms (5-19 workers) in the formal sector with a line of credit or a loan from a (formal) financial institution rose from 12.5% in 2013 to 19.9% in 2016 whiles the Percentage of firms in the formal sector with a line of credit or a loan from a formal financial institution rose marginally from 22.2% in 2013 to 23.3% in 2016. The number of companies listed on the Ghana Stock Exchange has grown significantly from 11 in 1994 to 40 at the end of December 2017 and the total market capitalization has increased greatly from GHc3.05million in 1990 to GHc65,658.33million as at 16th February, 2018. All the above indicators point to an increasing availability of financial credit to Ghana’s private sector to propel the private sector lead growth agenda. The private sector continues to be the largest recipient of banks’ credit (both domestic and foreign) with the share in total credit increasing from 84.7 percent in October 2016 to 88.1 percent in October 2017. Credit to private enterprises (a sub-component of private sector credit) picked up from 67.8 percent to 71.1 percent (Bank of Ghana, 2017) Despite the significant increase in credit availability to the private sector in Ghana in recent years, a significant number of private enterprises particularly Small and Medium Enterprises (SMEs) do not have access to financial credit either as a result of the stringent requirements they have to go through before getting credit or the high cost of borrowing which makes many projects with high potential unprofitable relative to the high interest on financial credit. Results of the credit conditions survey conducted in October 2017 by the Bank of Ghana pointed towards a net tightening in credit stance on loans to enterprises, while the stance on loans to households eased. Banks tightened credit stance on both short and long-term loans to large enterprises as well as to Small and Medium Enterprises (SMEs), mainly as a result of the high rate of adversely rated loans. The private sector being the largest recipient of outstanding credit balances accounted for the greater proportion of banks’ Non-Performing Loans (NPLs) with its share increasing to 94.7 percent from 88.7 percent over the review period. Indigenous private enterprises accounted for 78.2 percent of total NPLs in October 2017 compared with a share of 75.6 percent in the corresponding period in 2016. Other reasons included current capital positions and risks related to largest borrowers. The net ease in banks’ credit stance on loans to households during the latest survey round was reflected in loans for house purchases, consumer credit and other lending. In order to enhance the finance for shared growth agenda in Ghana, there is a dire need to ensure the continuous availability of short and long-term financing options to the private sector by deepening the resource mobilization of the banking system through national savings campaign programs; and more importantly ensuring that banks are willing to and are able to safely grant financial credit at minimal risk levels to private sector businesses particularly SMEs. The government through the Bank of Ghana is encouraged to institute periodic capacity building seminars on credit risk assessment to help banks strengthen their systems for verifying client information before loan disbursements. Banks and other financial institutions must strive to do a detailed scrutiny of loan applicants to verify their credit history, background of businesses to determine credit worthiness and identify clients with high potential of defaulting payment before making loan disbursements. The Securities and Exchange Commission should intensify their public education to encourage stock market investments and to encourage firms with high growth potential to list on the stock market so as to enable productive formal sector firms to find the mix of equity and debt finance they need to grow, as well as minimize high debt levels.


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