"Financing the real sector, the show must go on\u2026."

" \n The show must go on\u2026.. whether licenses are revoked or COVID-19 is here to stay, we cannot stop. Ours is a market economy and the blood of any market economy is finance. \n \n\n \n On 16th August 2019, the Bank of Ghana revoked the operating license of 23 Savings and Loans Companies and Finance Houses. Two and half months before that, 347 microfinance companies had been shut down. Until the recent revocation of licences and shut downs, a growing finance sector had supported a sustained growth of Small and medium-sized enterprises (SMEs) There are many stories of \u2018table-top\u2019 businesses growing from one employee to full-fledged businesses that employ more than 50 people. Therefore, a strong finance sector is good for the Ghanaian economy. How did we get here? \n \n\n \n SMEs are the backbone of the Ghanaian economy \u2013 they represent about 85% of businesses, largely within the private sector and contribute about 70% of Ghana's gross domestic product (GDP). In terms of formal sector employment, they account for just over half of all fulltime employment, with the percentage likely much higher in the informal sector. \n \n\n \n Non Bank Finance Institutions (NBFI\u2019s) have been in business since the early 90s. But the early successes of UT Financial Services, co-founded by Joseph Nsonamoah and Prince Kofi Amoabeng in 1997 as Unique Trust Financial Services accelerated the sectors growth. Private capital, sensing opportunity to make decent returns, \u2018poured\u2019 into the sector. Other institutions, for example those licensed by the Securities and Exchange Commission also \u2018stretched\u2019 the scope of their licence and joined the \u2018party\u2019. \n \n\n \n Over time, look and feel became 'more' important than substance. Many people became 'wall street' bankers. Limousines, first class travel to chase 'non-existent' deals, high salaries and perks with wall street offices to match became de rigueur. Meanwhile most transactions were either direct or indirectly linked to government and others simply \u2018fueled\u2019 delusions of grandeur. \n \n\n \n As the sector got crowded, the economy slowed down, government was unable to pay its debts in full and\/or on time and transactions dried up, competition amongst financial institutions for business and deposits to refinance their exposures grew. Firms took more and more risk and the cost of funds kept rising. Some executives went rouge, concocting credit files and coaching borrowers to steal from their employers and clients. As if that was not bad enough, the recovery of loans was made torturous by systemic weaknesses. A weak land registration system, no address system, diversion of funds by SMEs and a creaking contract enforcement infrastructure contributed to a rise in loan defaults. And the rest they say is history. \n \n\n \n Commercial Banks do not lend to SMEs. They focus on government business, large corporates and multinationals. One of the main reasons they do this is their lack of confidence in the SMEs ability to manage their operations effectively, so as to be able to repay the loans they access. In some cases this is genuine. But the main reason is that banks can make money more easily. \u2018Breathing\u2019 down the neck of an irrepressible entrepreneur to ensure they repay their loan is too stressful in a suit and tie. In a high interest rate environment, the incentive for Commercial Banks to fund SME\u2019s is even much less. It is easier for the Commercial Banks to purchase government bonds or lend to government indirectly through parastatals and watch their money grow. Government business is good business. The government will always pay and hardly complains. \n \n\n \n Despite the challenges in the financial sector, SMEs, \u2018the engine of growth\u2019 still require financing. Investment in the non bank sector is dominated by Ghanaians and control of the financial sector by indigenous companies is a matter of National Security. There are certain risks a foreign financial institution will never take and lending to SME\u2019s is just not interesting for them. Unless we support our financial institutions to lend to SME\u2019s Ghana will never develop. We put a great deal of premium on foreign financial institutions, forgetting that some of those institutions we admire have been in business for over 200 years. Because that is how institutions are built. It takes time, patience and foresight. These financial institutions have survived many storms, battered and bruised, and have approached the shore, masts broken, sails torn and taking in water by the ship full. As recently as 2007\u20132008, during the global financial crisis, some of them had to run for cover and have not recovered. We must grow our finance institutions to support our businesses. One day, these institutions will be financing Ghanaian companies in cross border transactions. The South African and Nigerian banks have done that well in Ghana. \n \n\n \n Payroll lending is great but if all NBFI\u2019s become payroll lenders, there would be no development. Who would finance our SMEs? What our NBFI\u2019s require is tough love, not vilification. \n \n\n \n A lot has been done and a lot more can be done to strengthen NBFI\u2019s, the Bank of Ghana Corporate Governance Directives, calibrated over time, will strengthen corporate governance. Institutions must also work extra hard to get rid of the perception that they are run by rouges. The judicial system must dispatch commercial cases expeditiously. Also, the Bank of Ghana should introduce a Bank Verification Number (BVN) system as implemented by the Central Bank of Nigeria. The BVN is an 11-digit number which acts as your universal ID in all commercial banks in Nigeria. It helps to prevent issues of identity theft, reduce fraud, enhances the banking industry\u2019s chances of being able to fish out blacklisted customers and encourages standardized of banking operations. \n \n\n \n These actions will increase investor confidence, attract funds to the financial sector and ultimately reduce the cost of operations and the cost of loans to SME\u2019s. Ghana will not develop if we do not have a strong and vibrant financial sector to support SMEs. The more we work together to strengthen it, the better for all us. The show must go on! \n "

"Financing the real sector, the show must go on\u2026."

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