Improving Credit Access in Ghana for Small Businesses
Located on the western coast of Africa, Ghana is a country of lowland hills, secluded beaches and historical colonial buildings. Named Africa’s most peaceful country by the Global Peace Index, Ghana is considered a leading African nation due to its status as the first country south of the Sahara to break free from colonial rule.
While Ghana has already taken major steps towards improving the country’s stability and proficiency, such as improving water sanitation and education, it still has a long way to go in terms of building up its economic stability to mirror those of other nations. One key method to improve the country’s economy is through strengthening farmers’ access to technology and making loans more accessible to small and medium-sized enterprises (SMEs), which are both happening through improving credit access in Ghana.
Strengthening credit access in Ghana would help alleviate poverty on a large scale, and this would be mostly due to how it would help farmers and business owners. In Ghana, agricultural production encompasses 23 percent of the country’s GDP, while SMEs make up approximately 50 percent, and having credit access is a vital component of making these industries run efficiently and smoothly.
In the agricultural industry, technology is an essential component of the Ghanaian culture and economy, and unfortunately, many farmers lack access to technologies that have the ability to make the agricultural system productive. In order for farmers to have access to such resources, they need to have access to credit.
In recent years, research has shown that improving credit access in Ghana will boost the country’s adoption of more productive technologies, which will lead to a rise in the country’s overall GDP. A study was done by Swiss Management Center that also found the combination of high cost of credit and unavailability of credit are Ghana’s main constraints on the Ghanaian economy.
Lack of credit access in Ghana is a major barrier to technology adoption, and in order for Ghana to reach a stable economy that incorporates food security and safety, Ghana must find a way to overcome this. In a policy brief conducted by the Global Hunger and Food Security Initiative at UC Davis, researchers identified two main concerns of credit access in Ghana:
- Index-insured loans are not as reliable as payouts and may not cover losses.
- While credit loans increase credit supply, these types of loans have an extremely low demand.
In this survey mentioned above, 73 percent of the sample borrowed money in 2014, while only 54 percent demonstrated a willingness to pay market value for their insured loans. This problem of insurance is quite profound in Ghana, as lower-income and lower-educated farmers are more inclined to take out uninsured loans to cover technologies and farming supplies, while banks would prefer insured loans in order to protect their portfolios and reduce the number of borrowers.
Likewise, banks do offer loans that are specifically made to meet the needs of small businesses. However, banks are often hesitant to lend to the SME sector, and this is largely due to credit history. Banks that lend to small businesses are only willing to do so at extremely high-interest rates, something that many companies are not willing to accept.
However, despite the conflicts of interest and benefits that are occurring within the credit access debate, Ghanaian policymakers are currently creating a plan that details a comprehensive strategy to improve credit access in Ghana, and the hope is that it will focus on improving the structure and stability of the country’s smaller businesses.
Both the Ghanaian agricultural and commercial industries have long ways to go until they are on a path of improvement rather than standstill, but Ghanaian lawmakers are determined to find a way to improve the country’s future credit availability.
– Alexandra Dennis