Lines of credit: Although borrowing remains expensive, access to finance is improving

Lack of access to credit and high borrowing rates are significant problems for Ghanaian businesses and for small and medium-sized enterprises (SMEs) in particular. These issues are a result of factors such as the high cost of doing business for banks, competition from government borrowing and problems particular to SMEs, such as lack of collateral and poor recordkeeping. However, private sector lending is growing rapidly and a number of banks are concentrating their efforts on the SME segment in particular.

FACTORS HAMPERING GROWTH: Ghana ranked 48th out of 183 countries in the getting credit category of the World Bank’s 2012 “Doing Business” rankings, down slightly from 45th place in 2011. However, while the ranking suggests access to financing is reasonably good by global standards, there is little doubt that structural challenges have dampened demand for credit and limited broader GDP growth.

For example, respondents to the 2010-11 “Global Competitiveness Report” ranked access to financing as the most problematic factor for doing business in the country by a large margin. While the GCR ranked Ghana in 89th place out of 143 countries in the availability of financial services category with a score of 4.2 out of 7, it ranked Ghana’s interest rate spread in 123rd place and gave it a score of 2 out of 7 in the ease of access to loans category, ranking it in 126th place. The interest spread is indeed high, though it has been coming down; in 2010 the average deposit interest rate at commercial banks stood at 8.3% while the average industry lending rate for household loans was 24.7%.

Reasons for credit remaining expensive include the competition from government borrowing. “In the past the macro environment has often been very unstable, making it hard for banks to plan ahead, so they have often preferred to buy government paper,” said Kofi Boateng Agyen, the senior operations officer for finance and private sector development at the World Bank’s Accra offices. Some observers argue that another of the important factors these days is high operating costs for banks, driven by expenses like staff and transportation. “The macroeconomic side of Ghana’s credit problem has improved as the policy rate has come down; however, the costs are high,” said Dante Mossi, the senior operations officer at the World Bank in Ghana.

Government competition for credit is a big factor in high borrowing costs, but inefficiencies in the banking sector – high administrative operational costs and overheads – also play a role, according to J K Kwakye, a senior economist at the Institute of Economic Affairs Ghana. Many banks have not modernised their systems, which increases their costs in the long run.

HIGH COSTS: Low levels of productivity in addition to a shortage of qualified staff have also sustained high expenditures for financial institutions. The entry of new banks such as Nigerian lenders has increased competition for qualified staff, pushing up wages and operational costs. Another cost for banks and constraint on lending is the requirement that they keep 9% of their deposits as reserves at the central bank, which does not pay interest on them, despite the fact that the banks themselves pay out interest on the deposits – though the system is partly in lieu of a deposit insurance scheme, which would also impose costs on banks.

High lending risks are another problem. The non-performing loan (NPL) rate stood at 14.2% at the end of 2011, down from 16.1% a year earlier (partly due to banks such as ADB writing off NPLs) but still high. “With a high NPL and risk level, high personnel costs and high costs of distribution, credit cannot be cheap in Ghana,” said Gilbert Hie, the managing director of SG-SSB.

SMES: The problem is acute for SMEs. The Ghana Association for Industry’s Business Barometer, based on a survey of local CEOs, respectively ranked access to credit and the cost of credit as the fourth and sixth most important challenges for the first quarter of 2012; however, access to credit was the second most important challenge for SMEs. Simon Dornoo, the managing director of Ghana Commercial Bank, told OBG, “SMEs are a huge opportunity, because they constitute a large proportion of the Ghanaian business community, but the smaller ones present a number of challenges.” SHY AROUND SMEs: There are many reasons banks were often reluctant to deal with the segment. SMEs are a difficult market in Ghana and the region as they are less organised and therefore more of a risk than the corporates. NPL ratios are also much higher in the SME segment than the corporate and personal segments. Also, accounting is often less transparent and does not seem to be improving, and collateral is much lower, while the quality of management can be poor. “SMEs also have a tendency to over-invest during the good times and furthermore tend to primarily work with other SMEs, which means that when one collapses, you often see a cascade of failures as each firm in turn becomes unable to pay its creditors,” Hie said.

Banks are reluctant to lend to SMEs because of the risks involved and the level of returns compared to other investments, according to John Gorlorwulu, a mission economist at USAID Ghana, told OBG. Collateral is a particular problem due to the high cost of credit, he said. Ghana’s high bank interest rates mean that SMEs can require collateral worth twice the cost of the loan they are seeking. “Everyone knows that the SME market represents the major opportunity for the banking sector in Ghana, but the difficulty is how to adequately assess risk,” Nii Anyetei Ampa-Sowa, the vice-president and head of research at Databank, told OBG.

IMPROVING SITUATION: There are signs that the situation for business in general and SMEs in particular is improving, in terms of access to credit, banks costs and commercial loan rates. Private sector credit expanded by 42.9% (31.6% in real terms) between February 2011 and February 2012, according to figures cited by the governor of the BoG, to reach approximately GHS9bn ($5.3bn). Some see the factors underpinning high interest rates as improving, too. “Costs have been coming down and are likely to fall further as the economy continues to open up,” said Unibank CEO Felix Nyarko-Pong, adding that Unibank itself has been working on improving its cost-to-income ratio, with some success. Others have been doing the same; for example, a few banks have increased their base rates recently, despite the increase in the policy rate, and many are trying instead to compensate by cutting costs.

Banks are increasingly showing interest in the SME segment in particular. “SME banking is one of the most promising product lines,” Sulemana Mohammed, a research analyst at Ecobank Capital, told OBG. “Many banks initially ignored it despite the fact that most economic activity takes place in the sector, but now most banks have SME-focused departments.” For example, Agricultural Development Bank’s SME loan book grew by 42% from GHS110.4m ($65.5m) in 2010 to GHS156.9 ($93m) in 2011. The bank’s credit to SMEs now represents 24% of its total assets.

Some – mainly local rather than foreign-owned banks – are even making the SME market their primary area of focus, such as Unibank. “2011 was a good year in terms of results, with 111% growth in pre-tax profits and 61% growth in our loan book, driven largely by the SME and micro segments, with SMEs accounting for around 70% of our loan portfolio, or perhaps as much as 85% according to international definitions,” Nyarko-Pong told OBG. However, industry players note that the onus will be on businesses to improve their credit-worthiness and reduce risk. “SMEs have improved access to credit,” said Andani. “What would enhance it further is better governance. SMEs are often family-run, with weak accounting standards. There is a need to move away from mom-and-pop-style business practices.”