Across the globe, National Development Banks (NDBs) have huge potential to support their country’s development strategies and the transition to low-carbon, climate-resilient economies. However, a perception of problematic governance and weak performance means that these banks may be overlooked, both in terms of their potential role in supporting national development and as partners for international development finance institutions, international climate funds, donors, and private actors.
Here in Ghana, the Government announced readiness to launch the long-awaited development bank in Ghana by end of July 2021, following almost a five-year preparation to set up the entity. This has so far been met with mixed reactions, largely a pessimistic context of institutional weakness and problematic governance, presenting challenges both to the autonomy of NDBs from political interests, and the capacity of these institutions to fulfill their mandates.
Development Bank of Ghana when fully functional will primarily focus on accelerating the structural transformation of the economy and enhance job creation, through unlocking capital for medium- and long-term private investment particularly to SMEs and other key sectors for the government’s economic diversification agenda.
Though the DBG will not relate directly with SMEs, SMEs are the ultimate beneficiaries of the DBG’s activities.
Small and Medium Enterprises (SMEs) – found across all sectors of the economy including agriculture, tourism, information and communication technology, services, energy, general infrastructure, fisheries, manufacturing, and waste management – play a major role in Ghana’s economy and has been a major contributor in the reduction of poverty. SMEs represent about 85% of private-sector businesses and contribute about 70% to the country’s Gross Domestic Product (GDP).
Notwithstanding their contribution to the country’s growth, SMEs in Ghana face higher credit constraints than large firms, as banks lend to a limited number of firms, prioritising large borrowers, being cautious of SMEs which are perceived to be riskier.
Bank credit to the private sector has substantially decreased over the last few years. This is due to reduced risk appitte of banks arising from economic slowdown and strong deterioration in asset quality, as well as the transfer of bad assets from defunct banks to receiverships, in a scenario where investment in government securities remains highly profitable. This has been worsened during the pandemic era.
Prior to the pandemic, the stock of bank’s non-Performing loans (NPLs), according to the banking sector report of January 2020, declined further by 5.2 percent to GH¢6.30 billion in December 2019, following a contraction of 18.9 percent a year earlier. This was attributed to a combination of loan recoveries and further write-offs.
In this, the private sector continued to account for the highest proportion of NPLs in the industry. However, its share in total banking industry NPLs declined marginally to 96.7 percent in December 2019 from 97.1 percent in December 2018 while the share of NPLs attributed to the public sector increased to 3.3 percent from 2.9 percent over the same period.
Nonetheless, the March 2021 banking sector report indicates that the pandemic-induced loan repayment challenges and a slowdown in credit growth continue to impact the quality of assets within the banking sector. Although the negative impact on asset quality seemed to have waned somewhat in the second half of 2020, supported by reliefs provided by banks in the form of loan restructuring and loan repayment moratoria, a marginal deterioration in asset quality was recorded during the first two months of 2021.
Accordingly, the end-February 2021 NPL ratio of 15.3 percent was marginally higher than the year-end NPL ratio of 14.8 percent and the previous years’ NPL ratio of 13.8 percent. Similarly, the adjusted NPL ratio, which excludes the fully provisioned loss category loans, increased from 5.2 percent and 6.5 percent in February and December 2020 respectively, to 6.6 percent at end-February 2021. The increase in the NPL ratio over the one-year period reflects an actual increase in the stock of NPLs (deterioration in loan quality) by 15.1 percent to GH¢7.3 billion at end-February 2021, as well as the lower credit growth recorded this year relative to last year.
This has been a key impeding factor for SMEs to accessing finance. Without finance, SMEs cannot acquire or absorb new technologies nor expand to compete in global markets or even strike business linkages with larger firms.
The DBG has been designed to be a wholesale lender to the Participating Financial Institutions (PFIs) by providing them with medium to long-term loans, with tenures greater than 3 years, for onward lending to all types of Ghanaian Businesses, including refinancing facility of long-term loans to sectors such as agribusiness, manufacturing, IT-enabled technology services and high-value services.
The DBG will also be mandated to provide credit guarantees and operate an online factoring platform to be used by financial institutions and other key stakeholders. The objective of these services is to play a catalytic role in deepening and broadening the Ghanaian credit market (working capital and medium to long-term) for the strategic priority sectors.
Effectively, these PFIs will have access to cheap funding for on-lending to SMEs, providing a partial guarantee that reduces the risk level of lending to businesses.
Apart from providing access to finance for SMEs DBG will be critical to Ghana’s industrial development, which is a key focus of the government. Development banks generally are key to driving industrial development in an economy, through the extension of credit to industries for capital-intensive investments thus expanding their operations and hence increasing productive capacity. This will result in the economic diversification agenda of government as well as in job creation opportunities, and increasing government revenue through taxation.
DBG will be vital in the infrastructure development of the country by supporting huge infrastructure development projects, given that it has the capacity to mobilize and extend long-term credit at a competitive rate to critical actors in both the private and public sectors of the economy.
Due to its strategic positioning in terms of capital, technical expertise among others, DBG can re-align and focus on investing in social impact projects with the resultant effect of significantly resulting in the economic growth and development in the long-run. This can be done by investing in renewable energy, water systems, mostly in rural communities, education and health infrastructure.
Key to the survival of most private sector businesses is the access to technical assistance and management expertise on credit management, international trade and finance, baseline survey, which DBG could equally provide. Same support could be extended to the government in respect of financial engineering, international finance, international trade and the dynamics in the global financial market.
Despite the inherent potential of DBG, postioned as an anchor of economic recovery, it is equally important that we pay critical attention to potential risks associated with the very survival of the entity.
The first risk is associated with political interference.
According to a research by ODI, (Authored by Samantha Attridge, Yunnan Chen and Michael Mbate), based on econometric analysis measuring the specific impact of political influence on governance, and the financial performance of banks, most African National Development Banks (NDBs) have traditional corporate governance structures, and political appointments are prevalent. This is based on evidence from NDBs in Africa, made up of 33 banks in 21 countries over the period 2014 to 2019.
This traditional corporate governance structure form of representation, which has some degree of government representation on the board on one hand will ensure alignment with government policy, but at the same time, this needs to be balanced with a degree of independence to avoid undue political influence.
The governance structures of NDBs invariably determine their overall performance. Crucially, higher levels of political influence through appointments are associated with weaker financial performance and impact. This effect can be mitigated with board independence.
The research further indicates that transparency is poor. For the vast majority of African NDBs, very little information and data are publicly available, which limits understanding of these banks and undermines accountability.
Although a sole and centralised government ownership is expected of the DBG, increasing institutional distance from ownership by depoliticising appointments of executive management, and increasing the representation of independent board members, can lower the risks of non-performance, as this has been the case of the studied national development banks in Africa. If government adopts this option, DBG will have sufficient independence and capacity to mitigate against political interference that could threaten it’s long-term performance and impact in driving sustainable national growth.
DBG has been designed to have 100% government equity, but this stands as a potential risk to the independence of the bank. The best option will be to establish it with international or private shareholding to dilute government influence and boost governance.
Furthermore, maintaining a ratio of independent board members relative to government appointed members will help balance the policy direction of the bank with greater independence for the board and management.
Over time, government should boost the capitalisation of DBG and international development partners should also step up their engagement with the bank. Boosting governance is not enough.
About the Author
Ebenezer is an astute and driven business leader and economist with significant experience covering strategic planning, policy analysis, financial consulting, organisational development and business development.He is currently the Group Head and Management Consultant of EKAM Group, one of Ghana’s budding group of companies.