The banking sector in Ghana is failing to provide adequate financial support to critical industries such as agriculture and manufacturing, according to a recent study. Over the past 25 years, lending to these sectors has plummeted, raising concerns about the country’s economic growth and transformation.
From 1999 to 2023, the share of total bank credit allocated to agricultural enterprises fell by about 65%, while lending to manufacturing decreased by approximately 56%. In 1999, around 25% of total bank lending was directed towards manufacturing, but by 2023, this figure had dropped to only 11%. This decline in support for key productive sectors is alarming, as both agriculture and manufacturing are essential for generating sustainable employment and fostering economic development.
The findings come from research conducted by an economist specializing in the political economy of finance and development in Africa. The study highlights that insufficient bank lending to agriculture and manufacturing hampers the creation of substantial jobs, pushing many Ghanaians into informal trade, primarily dealing in foreign goods.
Financial Landscape and Economic Implications
Bank lending in Ghana is crucial for funding operational expenses and enabling business expansion. However, the current trends indicate a misallocation of financial resources. On average, over the last 25 years, only 5.8% of total bank credit has been directed towards agriculture, compared to an average of 20.7% for the services sector and 17.3% for commerce and finance. This disparity raises questions about the priorities within the banking system and its implications for the broader economy.
The decline in lending to agriculture and manufacturing can be attributed to two main factors: the foreign ownership of many banks and ineffective monetary policy. Approximately 50% of banks in Ghana are foreign-owned, leading to a more risk-averse approach that often overlooks small and medium-sized enterprises (SMEs). Additionally, the Bank of Ghana’s focus on inflation-targeting as a means of ensuring monetary stability has resulted in elevated interest rates, deterring private sector borrowing and encouraging investments in government securities instead.
The study suggests that Ghana’s inflation is primarily driven by structural factors, such as production and transport costs, rather than issues related to money supply. As a result, the emphasis on inflation control appears to be a misplaced priority, neglecting the central bank’s essential role in supporting overall economic development through credit policies.
Recommendations for Revitalizing Lending Practices
Looking back at historical practices, the Bank of Ghana previously played an active role in directing credit to priority sectors, particularly during the early 1980s. This involved the implementation of credit ceilings, interest rate adjustments, and mandatory lending ratios to ensure financial support for agriculture and industry. The article advocates for a reevaluation of financial policies to reinstate similar measures that promote lending to productive sectors.
The recommendations include a renewed focus on indigenous participation in the banking system and revitalizing development banks such as the Agricultural Development Bank and the National Investment Bank. Such a shift could help enhance access to credit for agriculture and manufacturing, ultimately supporting the country’s economic growth.
This research was conducted as part of the Africa Multiple Cluster of Excellence at the University of Bayreuth, funded by the Deutsche Forschungsgemeinschaft (DFG) under Germany’s Excellence Strategy. The findings underline the urgent need for a strategic approach to financial policy that prioritizes productive credit flows, ensuring a more robust and sustainable economic future for Ghana.
