Editorial: Transforming local credit culture

West African Development Outlook
Accra, Ghana - July 19, 2010: People walking on the big market in the capital of Ghana, Acrca

The nation’s economy holds great promise for growth, but it faces a significant obstacle that hinders progress: a severely inadequate credit culture. The current state of credit affairs demands urgent attention and reform to avoid stunting economic growth, hindering business aspirations, and impeding national development. Comprehensive transformation is imperative.

One critical issue in the credit landscape is the declining standards of creditworthiness assessment. Policy and legal loopholes have been neglected, resulting in lax regulations and insufficient monitoring. As a consequence, loans are granted to individuals and businesses ill-prepared or incapable of repayment. This leads to a surge in non-performing loans, thus destabilising financial institutions. Stricter oversight and robust credit assessment mechanisms are necessary to restore credibility to the lending system.

The CEO-Association of Banks, John Awuah, rightly highlighted the detrimental impact of the prolonged judicial system on loan-recovery. Defaulting customers exploit the courts and it takes an average of three to five years for loan recovery, leaving banks vulnerable. This burdens financial institutions, hindering their ability to lend to deserving individuals and businesses. Delays in loan recovery not only impede economic growth but also erode confidence in the financial sector.

Another pressing issue is the lack of consequences faced by individuals who fold-up companies owing substantial debts to banks, only to establish new businesses without any repercussions. This practice undermines the financial system’s integrity and fosters an environment conducive to fraudulent activities.

The nation’s underdeveloped credit culture stifles entrepreneurial aspirations. Small and medium-sized enterprises (SMEs), crucial for a thriving economy, struggle to secure adequate financing due to the prevailing credit culture. Inaccessible affordable credit hampers innovation, job creation and economic diversification.

The absence of a robust credit culture has long-term consequences for the domestic economic trajectory. Businesses unable to obtain financing rely on limited internal resources, hindering expansion, technological investment and global competitiveness. It also deters foreign direct investment due to concerns about a weak credit environment. To ensure sustainable growth and attract foreign investment, we must foster accessibility, reliability and affordability in the credit environment.

Complacency and half-hearted attempts at credit reform in Ghana are no longer acceptable. It is imperative for stakeholders, including government, financial institutions and regulators, to come together and urgently revamp the credit culture. This involves formalising lending practices, strengthening creditworthiness assessment, and facilitating the flow of affordable credit to deserving individuals and businesses.

Only by cultivating a thriving credit ecosystem can the country unleash its true potential, fuel entrepreneurial growth and secure a prosperous future for its citizens. The nation cannot delay this crucial transformation any longer.

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