No country has been developed by foreigners, and Ghana will not be the exception. Where foreigners have ‘developed’ a country, they have stayed and dominated the economies of host countries to the detriment of indigenes. In most cases, they have also assumed political power or influenced politics to entrench and extend their dominance. So, the case for Ghanaians owning and controlling the Ghanaian economy is non-negotiable and should not be left to the whims and caprices of any group of persons. Unless Ghanaians control the economy of Ghana, our children have no future. It is a matter of national interest, and so shall it remain.
Challenges of the eighties and early nineties made commercial banks ‘allergic’ to Small and Medium Sized Enterprises (SMEs) lending. These banks carried huge balances of non-performing loans on their balance sheets. A Non-Performing Assets Recovery Trust (NPRAT) was established to clean-up the balance sheets of affected financial institutions and recover the amounts due. This made traditional banks shy away from SME-lending, and the gap created has been bridged by Non-Bank Financial Institutions (NBFIs) mostly owned by Ghanaians.
From mid-2017 to January 2020, the Minister for Finance, Honorable Ken Ofori-Atta, supervised a banking sector clean-up. Three years later, following COVID, the Domestic Debt Exchange Programme (DDEP) and a massive slowdown in economic activity, the financial sector is once again under a considerable amount of pressure – with the greatest impact on survival of NBFIs.
Creating a Supportive Business Environment
The approach to dealing with this situation must include recognising the NBFIs’ contribution to economic development. It must also include measures that address the fundamental reasons which make lending in Ghana risky.
While the institutions and regulatory environment are evolving, our environment is structurally ‘difficult’ for lenders and borrowers. Interest rates are too high (APR’s northward of 52% are common). The commercial litigation processes are long-winded and painful – cases in court for over 12 years are not uncommon. And when you eventually get judgement, a volley of interpleaders and long-winded procedures frustrate the process. The hapless land registration system coupled with a fractious property address system thrown into the cocktail makes the whole system toxic. Loan recovery is tortuous, and borrowers are happy to be taken to court.
This has got nothing to do with Ghanaian culture. It has everything to do with the lack of incentives for borrowers to repay their debts. Our governments have an insatiable appetite for debt, and this keeps interest rates high. So, while the private sector does its best to lend to SMEs, those with the wherewithal to make change foozle and frazzle… pretending that everything is fine. The result is not palatable for any of us, and it will take a Ghanaian-owned financial institution that wants to forge ahead to address this situation effectively.
Over the last few years, ‘clever’ financial institutions have piled into government securities and increased borrowing to public sector employees (called ‘lazy’ banking). As at end of the year 31st December 2021, some banks in Ghana had as much as 62% of their total assets invested in securities. From the banks’ perspective, this was good business. Why take risks lending to SMEs if government would pay you more than 30% per annum in interest? Unfortunately, Ghana will not develop if our financial institutions are only interested in lending to government. In progressive jurisdictions, financial institutions are ‘encouraged’ through regulation to increase lending for the private sector.
If every financial institution only gave loans to public servants and/or bought government securities, there would be no economic development. Unless businesses can borrow at reasonable rates, they cannot grow, employ our young people and contribute to economic development.
Often, we are reminded of the financial sector’s strength in other jurisdictions. However, the jurisdictions that we admire have evolved over time and have been through similar crises. Since 1792, the USA has had over thirteen banking crises.
SMEs are the engine of growth, and we must fund their development. A well-functioning financial system helps accelerate economic growth and poverty alleviation, while poorly-functioning financial institutions impede economic progress.
Impact of NBFIs on SMEs and the Financial Sector
NBFIs mobilise deposits from the general public, corporate institutions, churches, NGOs, Credit Unions and Provident Funds. NBFIs then lend to businesses for periods which depend on the transaction’s dynamics. It is this fund mobilisation activity that supports lending to SMEs. They also lend their surplus funds to other NBFIs and banks.
NBFIs are mostly Ghanaian-owned and provide financial services predominantly in the rural and peri-urban areas of Ghana, where poverty is endemic and the banks do not have a presence. NBFIs serve more clients than all the commercial banks put together. Their clients exceed seven (7) million Ghanaians and they employ tens of thousands of people. So, an assessment of the NBFIs’ impact on the Ghanaian economy solely on the basis of their total asset value is flawed.
Until the early 1990s, there was no law regulating financial institutions that were not banks. During this period, institutions like PRYAM and R5 – which were pyramid schemes – thrived. These institutions took public deposits and offered high returns. Eventually, they collapsed or were closed down. The promulgation of PNDC Law 328 in 1991 allowed the establishment of different categories of financial institutions. The PNDC Law 328 that created NBFIs bridged the lending gap to SMEs, resulting in increased support for SMEs. This initiative helped SMEs to grow and contribute to the Ghanaian economy.
Over time, NBFIs became attractive to banks. They were more stable as clients than individuals, and were able to borrow from banks to lend to the SME sector. By providing intermediation between the commercial banks and SMEs, there was a boom in economic activity. NBFIs have supported businesses in manufacturing, cocoa, purchase of cash crops such as cashew nuts, warehousing, logistics, LPO financing, working capital financing, real estate and all manner of trading activities. As capital for the banks increased, especially the foreign-owned ones, they then looked at the SME space to expand their businesses; and after some time, banks began to compete with NBFIs over financing SMEs.
Operations of Foreign Financial Institutions
In some jurisdictions, public institutions such as SSNIT and other parastatal institutions cannot deposit funds with foreign financial institutions. In other jurisdictions, public institutions deposit funds with foreign financial institutions. These institutions then use the same funds to purchase government securities which are priced higher. Ghanaians pay tax and give those taxes to non-Ghanaian institutions – who then lend the same funds back to us (government). These institutions make profits, and the profits are repatriated as dividends to develop their countries. Surely, this does not make sense.
There are certain risks that a foreign financial institution will not take; this is fine, since their focus is on maximising their return on investments. Also, with foreign finance institutions, risk management decisions on lending are taken outside the country by people far removed from the realities and uniqueness of Ghanaian business dynamics. Their decision to invest in the Ghanaian financial sector is not necessarily to help businesses grow, but rather make money. Their considerations are completely different from if those decisions were taken by progressive Ghanaians.
Conclusion
There are many reasons why the Ghanaian financial sector should be controlled by Ghanaians. It would help ensure the sector is accountable to the people who use it. When Ghanaians have control over the financial sector, they can help ensure that it operates in a way that benefits everyone – not just a few wealthy individuals or corporations. It would also ensure that Ghana develops and opportunities are created for Ghanaian children. The Ghanaian investor’s vision goes beyond profitability. Having strong Ghanaian-owned financial institutions is not a matter for debate. We must be the masters of our destiny.
The writer is MD-Dalex Finance
