Why Banks in Ghana Are Not Lending to the Real Sector
In recent years, banks in Ghana have significantly reduced lending to the real sector (manufacturing, agriculture, construction, etc.) due to a combination of macroeconomic challenges, regulatory constraints, and structural inefficiencies. Some of the key reasons include:
1. High Government Borrowing and Crowding Out Effect
– The government’s reliance on domestic borrowing through treasury bills and bonds has made risk-free assets more attractive to banks than lending to businesses.
– Banks prefer lending to the government due to lower credit risk and attractive interest rates compared to private sector loans.
2. Elevated Credit Risks
– Many businesses in the real sector face challenges such as poor corporate governance, lack of financial transparency, and weak cash flow management.
– High non-performing loan (NPL) ratios discourage banks from extending credit, as past loan defaults have eroded confidence in business lending.
3. High Cost of Funds and Interest Rates
– Tight monetary policy by the Bank of Ghana (BoG) has led to high policy rates, making lending expensive.
– Banks struggle to provide affordable credit due to high operational costs, inflationary pressures, and forex volatility.
4. Weak Collateral Framework and Credit Information Gaps
– Many businesses, particularly SMEs, lack acceptable collateral, making it difficult to secure loans.
– Credit referencing systems, though improved, still have gaps, leading to information asymmetry and higher perceived risk.
5. Limited Long-Term Funding Sources
– Banks mainly rely on short-term deposits for funding, making it difficult to lend to sectors that require long-term financing (e.g., agriculture and manufacturing).
– Absence of a well-developed corporate bond market to support alternative long-term financing.
Impact of Recent Prudential Guidelines on Banking Operations
The Bank of Ghana has introduced stricter prudential guidelines to strengthen financial stability, but they have also affected banks’ ability to lend. Key impacts include:
1. Higher Capital Adequacy Requirements
– Banks are required to hold more capital against riskier loans, reducing their appetite for lending to sectors perceived as high-risk, such as agriculture and manufacturing.
2. Stricter Loan Classification and Provisioning Rules
– The new guidelines require banks to classify loans as non-performing earlier and make higher provisions for bad loans.
– This discourages risk-taking and pushes banks toward safer investments like government securities.
3. Increased FX Exposure Limits
– Limits on foreign exchange exposure have reduced banks’ ability to provide FX loans to businesses engaged in import and export activities.
4. Enhanced Liquidity and Funding Requirements
– Banks must maintain higher liquidity buffers, limiting the amount of funds available for lending.
– Restrictions on reliance on short-term deposits for long-term loans have tightened available credit.
5. Stricter Corporate Governance and Risk Management Standards
– Increased regulatory scrutiny on loan approvals, credit risk assessment, and governance has made loan disbursement more complex and time-consuming.
While these prudential measures are crucial for financial stability, they have also made it more difficult for banks to lend to the real sector.
Addressing these challenges will require policy interventions such as de-risking mechanisms, credit guarantees, alternative funding sources, and a balance between regulation and economic growth.
