Banks urged to establish impact funds
Experts from finance and the private sector have emphasised the crucial role that banks can play in providing funding for both start-ups and established small and medium-sized enterprises (SMEs).
This comes on the back of limited access to bank credit by SMEs, which has been further exacerbated by the Domestic Debt Exchange Programme (DDEP), necessitating a focus on the impact investing approach by banks alongside their financial returns.
In an interview with the B&FT, following dissemination of research findings on the role of impact investing as a panacea to mitigating bank liquidity challenges, Dr. Richmond Odartey Lamptey – a private equity consultant and lecturer at the University of Greenwich – suggested that commercial banks need to change their approach to financing the private sector by setting up funds focusing on impact investing, which would prove to be a great way to provide funding. “Such funds can come from different opportunities and even from de-risking commercial banks’ loan portfolios.
“The banking industry could have a more significant impact on financing, especially for SMEs, if a paradigm shift is made in their approach to financial intermediation. Banks that focus on impact investment and collaborate with intermediaries to ensure effective allocation of funds are more likely to achieve positive financial results while making a meaningful impact,” he said.
The private equity consultant agreed that banks that take the lead in attracting such funds are likely to attract more capital and stimulate economic growth.
While discussing ways to restore commercial banks’ liquidity for SME financing post-DDEP through an impact investing funding model, Dr. Lamptey acknowledged the challenges faced by SMEs in accessing both funding and facilities.
“What we are articulating now is that the banks must seize the initiative because they have what it takes in terms of capabilities, expertise and also have a pipeline of SMEs that they can finance. So, instead of waiting for development financial institutions (DFIs), they should rather set up impact funds and then attract additional funds from the DFIs,” he said.
Dr. Lamptey empahsised that banks need to focus on the impact dimension of investment alongside the financial return aspect, and that governance mechanisms and intermediaries are essential to ensure the effective allocation of financial resources in the economy.
Similarly, Clifford Duke Mettle, Chairman of the International Chamber of Commerce-Ghana, said the implementation of the DDEP has caused some banks to suffer losses, resulting in a decrease in loans being granted to SMEs as just in 2022 alone, banks had incurred losses of approximately GH₵6.1billion due to the DDEP.
Mr. Mettle explained the need to explore ways to restore commercial banks’ liquidity and their ability to support SMEs, and suggested lenders should intentionally establish impact investment funds. He highlighted that such funds have an advantage of offering lower interest rates and contributing to the sustainability of businesses.
Furthermore, Mr. Mettle said impact investment funds can make commercial banks more finance-oriented, offer de-risking opportunities, and focus on a dual mission of achieving financial returns and social and developmental impact. These funds are known for yielding positive financial returns and supporting the United Nations Sustainable Development Goals and SMEs in developing countries.
To achieve positive financial results while making a significant impact, both experts agreed that the banking industry must shift its approach to financial intermediation, given that banks that focus on impact investments and collaborate with intermediaries to allocate funds effectively are more likely to stimulate economic growth and achieve long-term sustainable results.