World Bank in its study reviews has revealed that Micro, Small and Medium-sized Enterprises (MSMEs) constitute about 90% of all jobs in Ghana, and contribute approximately 40% to the nation’s GDP. Yet the subsector is the least recipient of financing from financial institutions in the country, particularly the commercial banks.
According to World Bank, a careful study of the balance sheets of commercial banks in 2022 indicated a noticeable contraction of loans and advances to the private sector in general, and far less to the MSME subsector in particular.
The latest Bank of Ghana MPC report indicated that even though loans and advances of banks increased by 30.2% to GH¢70billion in 2022, credit to the private sector in particular (including MSMEs) contracted sharply by 14.5% in real terms compared to a 1.3% contraction in 2021.
BoG’s report further indicated that the increase in nominal value of banks’ credit portfolio was attributable to portfolio rebalancing and favourable revaluation effect on foreign currency denominated credits, apparently due to the cedi-appreciation in December 2022. Thus, the private sector (MSMEs) financing gap is ever-widening.
Moreso, African Development Bank (AfDB) in its report estimated MSME financing gap in Africa at US$421billion.
However, in Ghana, the IFC-World Bank estimates that the MSME financing gap stands at US$6.1billion – equivalent to 13% of the nation’s GDP in 2017.
World Bank in its report further communicated that Commercial banks in Ghana are, in general, deemed as commercially and operationally viable financial institutions that are better-placed to finance MSMEs, nevertheless, loans are not granted to MSMEs to finance their businesses.
“Commercial banks have huge stated capital, wider geographical coverage, robust IT infrastructure, sound governance practices and, above all, favourable public confidence. Yet commercial banks have the least when it comes to MSME credit portfolios as a proportion to their total assets.
“Several factors are cited to account for this, including but not limited to – high default rates, poor cashflow records, little interest income for MSME loans, inter alia. The combined effects of all these make the MSME subsector deficient, and of course incapable of growth. Yet the sector is deemed to be the backbone of the economy. What a weird paradox!”
World Bank Report
Initiatives Adopted By MFIs, DBGs To Close MSMEs Financing Gap
Meanwhile, the enormous contributions of MFIs in Ghana in limiting the MSMEs’ financing gap cannot be exempted. A psychometric approach – which deals with the use of structured questions to infer the morality and cashflow situations of the MSME borrower – is one most tested approaches used by most MFIs globally to disburse credit to MSMEs. But this comes with its own challenges.
The new Development Bank of Ghana’s (DBG) establishment is yet another good step in the right direction, seeking to mobilise long-term patient funds and technical assistance for effective participation of commercial banks in the MSME financing space.
The DBG has since signed on (4) four commercial banks in Ghana in partnership for this purpose. To complement this, the Bank of Ghana’s other financial institutions supervision department (OFISD) – which is directly responsible for the supervision of MFIs – has been strengthened in all its powers to be enabled in providing robust supervision for the MFIs in the disbursement of funds to MSMEs.
These notwithstanding, commercial banks are strongly encouraged by the Central Bank of Ghana to redirect funds to the private sector, particularly the MSMEs, in a bid to improve their stake in limiting financing gap. This could be done if they adopt similar but enhanced strategies from the MFIs (including psychometric financing).
Commercial Banks, as stated by BoG could further deploy the use of technology in the form of alternative data harvesting for this purpose. Again, partnership with Fintechs and Agri-techs companies aiming at improving financing to MSMEs is yet another recommended approach.
Limiting Ghana’s MSME financing gap will require active participation from both commercial banks and MFIs.
