Fi­nanc­ing Ghana’s in­dus­trial revo­lu­tion

Amidst a vast re­struc­tur­ing of the fi­nan­cial sec­tor, some lo­cal banks are lend­ing to man­u­fac­tur­ers, but the big money needed may yet come from China


Ghana’s gov­ern­ment launched the ‘One District One Fac­tory’ (1D1F) pol­icy in 2017 to spur in­dus­trial devel­op­ment, but many of the coun­try’s banks are not ready to de­liver the dream of a mod­ern in­dus­tri­alised econ­omy. The bank­ing sec­tor stum­bled into a cri­sis in 2017 and 2018 due to a com­bi­na­tion of eco­nomic chal­lenges and poor management. In Jan­uary, the cen­tral bank com­pleted a re­struc­tur­ing of the fi­nan­cial sec­tor that raised cap­i­tal re­quire­ments and cut the num­ber of banks to 23. Ghana’s strong­est banks are lend­ing to com­pa­nies set­ting up fac­to­ries, but there re­mains a big fi­nanc­ing gap.

The 1D1F pro­gramme aims to es­tab­lish at least one fac­tory or in­dus­trial busi­ness in each of the coun­try’s 216 dis­tricts by 2021. Trade and in­dus­try min­is­ter Alan Ky­ere­maten said in May that 57 fac­to­ries had been set up since the 1D1F launch and are now op­er­a­tional. Pri­vate com­pa­nies are de­vel­op­ing the projects, which the gov­ern­ment is sup­port­ing through tax breaks and other in­cen­tives.

Prince Moses Ofori-atta, com­mu­ni­ca­tions ad­viser at Ghana’s min­istry of fi­nance, ar­gues that the bank­ing sec­tor has the po­ten­tial to steer growth in the in­dus­trial sec­tor if banks are pru­dent. The gov­ern­ment, he says, has made “sig­nif­i­cant strides in en­sur­ing that Ghana­ian banks are in a strong po­si­tion” to pro­vide long-term fi­nance. The cen­tral bank spent about $2.3bn on bond is­suances as part of the fi­nan­cial sec­tor re­struc­tur­ing.

Ghana­ian econ­o­mist Em­manuel Anyi­doho says the prob­lems are too deep-rooted to be solved quickly. He points to banks’ reliance on fi­nanc­ing the gov­ern­ment rather than the real econ­omy. There has been a pro­longed pe­riod of bud­get deficits and deficit fi­nanc­ing, un­der­pinned by trea­sury bill is­suance by the Bank of Ghana. The bills have high in­ter­est rates, cur­rently around 15%. Com­mer­cial banks are keen to buy them at that rate, Anyi­doho says, mean­ing that banks are re­luc­tant to lend to the pri­vate sec­tor – a clas­sic case of ‘crowd­ing out’. The gov­ern­ment has “pro­vided a dis­in­cen­tive to the banks,” he says.

High de­fault rates on in­dus­trial loans are a fur­ther ob­sta­cle, Anyi­doho says. The coun­try’s credit rat­ing agency has a weak “com­mer­cial ad­dress­ing sys­tem”, which means it is un­able to mon­i­tor bor­row­ers ad­e­quately. The prob­lems are com­pounded

by gov­ern­ment debts to con­trac­tors, who are the banks’ largest clients. “The level of lend­ing at the mo­ment can­not be said to be ad­e­quate or sus­tain­able,” he adds.

Ofori-atta at the fi­nance min­istry says that higher cap­i­tal ad­e­quacy ra­tios will lead to credit growth and sup­port pri­vate-sec­tor devel­op­ment, but he agrees that high costs of funds, op­er­at­ing costs and de­fault risk re­main sig­nif­i­cant chal­lenges for banks.

Banks un­re­spon­sive

The main bank­ing play­ers in Ghana in­clude Ecobank, GCB, Bar­clays, Stan­dard Char­tered and So­ciété Générale. Lucy Quainoo, a mem­ber of the board of ad­vis­ers at the Cham­ber of Agribusi­ness Ghana, says that banks are, to a large ex­tent, shoul­der­ing the bur­den of fi­nanc­ing in­dus­trial pol­icy. She points to prob­lems like the lim­ited sup­ply of medium- to long-term credit fi­nanc­ing – mean­ing be­tween three and 10 years –for in­dus­try.

Ox­ford Busi­ness Group has es­ti­mated that Ghana needs to raise $1.5bn if district fac­to­ries and in­dus­trial zones are to gen­er­ate ex­port rev­enue. Elikem Kuenye­hia, Ghana chair­man for law firm En­safrica, says that banks have not been as re­spon­sive as the gov­ern­ment ex­pected. More than 30 banks were at the flagship launch of 1D1F, he says, but only five signed up to ac­tively take part. The stressed en­vi­ron­ment of bank re­struc­tur­ing made it harder for banks to com­mit to the in­dus­trial agenda, he points out, with most hav­ing to fo­cus on cap­i­tal rais­ing and strength­en­ing liq­uid­ity.

GCB, Ghana’s largest bank in terms of as­sets, said it will com­mit 1bn ($194m) to 1D1F projects and set up an in­ter­nal unit focused on the pro­gramme. Two fac­to­ries it has fi­nanced – a tim­ber pro­ces­sor and a pa­per goods com­pany – are al­ready op­er­a­tional in Eastern Re­gion. The sec­ond-largest com­mit­ment came from the Ghana­ian oper­a­tions of Nigeria’s United Bank for Africa, to­talling 880m. The gov­ern­ment es­ti­mated the lo­cal bank­ing sec­tor’s will­ing­ness to fi­nance fac­to­ries at 4.4bn.

In­dus­try bor­row­ing re­quire­ments are mostly long-term, while the fund­ing base of most banks in Ghana is short- to medium-term, Kuenye­hia says. This mis­match “af­fects their will­ing­ness to be bullish in exposure to in­dus­try,” he says. Kuenye­hia adds that poor credit risk assess­ment by banks has led to high rates of non-per­form­ing loans. He ex­pects greater par­tic­i­pa­tion from the banks fol­low­ing the re­struc­tur­ing, as im­proved cor­po­rate gov­er­nance practices are likely to re­duce this risk.

Par­tial gov­ern­ment sub­si­dies on the in­ter­est to be paid on 1D1F loans – an­nounced in March 2019 – will help, he ex­plains. Deputy in­dus­try min­is­ter Robert Ahomka-lindsay has said that the gov­ern­ment will cover up to 10% of the in­ter­est due on loans for 1D1F projects.

What may make a big im­pact in Ghana’s in­dus­tri­al­i­sa­tion is help from Bei­jing. Ghana is im­por­tant to Bei­jing be­cause of its nat­u­ral re­sources, and, from a neg­li­gi­ble base, China has rapidly be­come Ghana’s largest trad­ing part­ner. Bi­lat­eral trade be­tween the two coun­tries was worth $6.7bn in 2017. In that year, Ghana signed a $10bn mem­o­ran­dum of un­der­stand­ing with the China Devel­op­ment Bank to de­velop its baux­ite in­dus­try, with China also of­fer­ing $2bn to fi­nance the ex­pan­sion of Ghana’s agri­cul­tural in­dus­try and of­fer­ing fi­nanc­ing of up to 85% of the to­tal for 1D1F projects.

The fa­cil­ity will be of­fered to banks at low in­ter­est rates for the banks to then make the loans, Kuenye­hia says. Ghana’s gov­ern­ment hopes that Chi­nese de­mand for ex­ported com­modi­ties will bring in $2.5bn of an­nual rev­enue.

Reroy Ca­bles in Tema used an Ifc-backed col­lat­eral reg­istry to get a loan from Cal­bank

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