Development Bank will address credit market failures – Addison

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Despite surge in inflation in recent months prompting expectations of another increase in policy rate, the Monetary Policy Committee (MPC) of the Bank of Ghana has, in an unexpected turn of events, pressed the pause button on the rate increment.

Governor of the Bank of Ghana, Dr. Ernest Addison, says the Development Bank Ghana will help address market failures in the Ghanaian credit markets, thereby helping businesses invest long-term and promote economic growth and job creation.

Currently, there are shortcomings in the financial landscape which have a direct bearing on the country’s economic growth – whereby banks and Specialised Deposit-taking Institutions (SDIs) focus on short-term financing for commercial purposes with little support for the long-term financing needed to accelerate economic development and transformation.

Available data show that less than 15 percent of loans granted by banks are for five years or longer, making investments in long gestation projects unviable – especially for Small-, Medium-sized Enterprises (SMEs).

“The Bank of Ghana’s expectation is that DBG, together with the other Development Finance Institutions (DFIs) licenced by the Bank, will help address market failures in the Ghanaian credit markets; thereby helping businesses invest long-term and promote economic growth and job creation,” the Governor said at the Development Bank Ghana’s launch in Accra.

Dr. Addison noted that the current share of banks’ credit to the agriculture and manufacturing sectors hovers around four percent and eight percent respectively. “This data show that only a small share of lending goes to key sectors such as agriculture and manufacturing relative to their shares in GDP and employment.

“This therefore necessitates the establishment of modern, market-oriented development finance institutions which will focus on providing medium- to long-term financing to support key sectors of the economy. This is what DBG brings on board,” he said.

Touching on oversight of the development bank, the central bank has assured of maintaining oversight of the Participating Financial Institutions (PFIs) that DBG will be working with.

“As the regulator, the Bank will deploy the requisite tools to ensure effective regulation and supervision of DFIs.

“Starting with the DBG, the Bank will also ensure that DFIs in Ghana operate in a financially sustainable manner – to achieve the development mandate, foster confidence, and attract more investments into the economy to support growth,” he added.

DBG will play a catalyst role in supporting businesses which form the core of Ghana’s economy, and provide access to funding that is currently not available. This will be based on an innovative model that provides competitively priced loans through partner financial institutions for on-lending.

Given the crucial role of development banks, DBG’s presence on the financial landscape is designed to provide and ensure more long-term finance to firms – an area that banks and SDIs are ordinarily unable to finance. Such successful synergy between banks and DFIs is expected to ensure greater depth in Ghana’s financial sector.

SMEs make a significant contribution to the national economy: employing about 80 percent of the workforce and generating some 70 percent of GDP. However, this enormous contribution is seriously underserved when it comes to long-term loans.

The DBG intends to develop strong partnerships with the Development Finance Institutions (DFIs) and Participating Financial Institutions (PFIs) – especially commercial banks and other groups – to provide business development services for these SMEs to help secure loans and use them to grow their businesses.

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