The case for a Development Bank for Ghana is being made, and there are certainly compelling reasons for its establishment. Any Ghanaian entrepreneur can give you a tall list of the various challenges they face operating in this economy, with financing being one of the most important.
As the lifeblood of every business, the appropriate capital/financing allows you to fine tune your business model and then scale it as much as market forces and your business’ capacity allows. Without affordable and long-term capital many businesses remain small, unprofitable and ultimately unable to contribute sustainably to the economic growth and development we need.
On the supply side, banks and financial institutions face an array of macro and micro factors that make them able to finance only a segment of the universe of enterprises that operate in the economy. The reasons for that are best left for another conversation, and while many of them are valid and important, the larger issue remains—that the financing options available for entrepreneurs are insufficient and largely mis-aligned with the maturation time-horizon for most businesses.
It is for these and related reasons that the DBG is being created. It marks a major move of government towards increasing the commercial long-term options available to businesses to power the private sector for growth and transformation. Indeed, development banks have helped transform other economies in the past—from post-war Germany to the four Asian tigers to China—and we are wise to emulate these successful examples.
Despite these laudable ideas and intentions, there are valid reasons for concern. I would posit that these concerns fall in two main categories First, that the development bank is to be government-owned, and secondly that it is operating as a bank. I will treat each concern separately.
The fact that DBG is to be government-owned or backed may cause some apprehension given the history of similar institutions. Corporate governance tends to suffer when it encounters political influence, whether intentionally or unintentionally.
This leads to business decisions that are not purely commercial but rather factor in political and other concerns. Once this culture is built in an institution, it is impossible for it to accomplish its commercial goals because, logically, commercial considerations are not in the driving seat. It is fair to say that this unfortunate pattern has led to the past failures of many government-backed institutions that were meant to operate in the marketplace.
Thankfully, the structure of the DBG as is being presented by government is in the right direction. By following global best practice around the structure of similar development banks/finance institutions, DBG is by its design likely to avoid some of the pitfalls of quasi-government financiers in the past. A clear governance structure, with regulatory oversight and management/board appointments done via professional recruitment firms and not by government appointment are all best practice. While encouraging, these are not foolproof and continuous vigilance will be necessary to make sure that breaches of the structures are not tolerated. Indeed, adding another layer of an independent Investment Committee to the governance structure will ensure that even board members are not directly approving investments, but are rather overseeing investment professionals’ decisions and holding them accountable for results. It is also encouraging that other private investors, both local and international, will be sought out in future years so that the institutions’ capital capacity is not only a function of governmental will (especially as government’s change over time) and macroeconomic performance.
The second major concern has to do with the institution’s structure as a bank working primarily through banks. First of all, I would note here that we have the exciting opportunity to create an institution that best meets our medium to long-term goals. This is the time to be bold and fresh and innovative with our objectives.
The intention is not to have the balance sheet of DBG look like that of the commercial banks whether in five years or in 20 years. The objective is not only to be profitable but to operate as a change agent within the financing sphere. The vision and strategic focus should be simple, clear and rallying. What is one of the sure bets to generate significant employment and economic growth? Entrepreneurship.
What do we want from entrepreneurs? Large, profitable and impactful businesses that will last for generations, employ our citizenry for decades and become transformative institutions that change Ghana and the world. So why not aim to back 100 businesses (all with turnover of GHS 10 million or less) to become GHS 100 million businesses in 5 years. Or 1000 businesses that hit the GHS 1 billion turnover mark in 10 years? 20% of these businesses can be in the food value-chain for instance. This kind of bold, fresh vision is simple enough to be understood by all and to be measured accordingly.
DBG is meant to largely work through the commercial banks rather than directly with businesses. A lot of funding has been made available to commercial banks in the past to enable them support specific segments of the economy; agriculture, women, youth and so on. These have yielded mixed results. Again, here I will not go into the reasons but will simply focus on the fact that our problem of inadequate appropriate funding remains. How can DBG help here?
By structuring the financing to meet our felt needs as a country. Case in point. If you offer a business a 20-year loan of GHS 10M at 10% p.a. rather than 24% p.a., the business saves that 1,400 bps or 14% p.a.
That translates to GHS 1.4m a year if the loan is a bullet-style facility. If even 50% of that must be ‘compensated for’ via employment generation (about GHS 700,000) that translates to almost 12 jobs that pay GHS 5,000 a month. Imagine the multiplier effect of that on graduate unemployment. So simply, make that a condition of the favorable loan and audit that religiously. Every quarter as you review how current the company was in its loan repayments, review the number of jobs created and sustained as well. If the company falters, simply restructure the loan to reflect the market rate of 24% p.a. Very few entrepreneurs will allow that to happen because this structure still allows them to be profitable and expand their businesses.
Now, you don’t do direct the business regarding who to employ or try to determine their business strategy (for instance they can choose to employ 60 people who earn GHS 1000 a month so long as it is meets their business needs, and the wage paid is at least 20% above minimum wage), but they must meet the necessary metrics. Monitoring of these structures should be done, both by the DBG/partner banks and by independent third-party firms to ensure compliance and accountability.
The multiplier effects of these structured financings on employment generation and consumption can be catalytic and lead to even more taxes and economic growth. With government as an automatic partner in every business (due for 25% of declared income) the return on investment for government when businesses and workers are thriving is well worth the tax dollar. This kind of enterprise approach is what will make this institution effective to transform businesses and the economy for the long term.
The writer is an investment executive with over 12 years’ experience in investment banking, private equity and venture capital. She is an Investment Manager at Oasis Capital in Accra and a director of many Oasis portfolio companies.