Ghana’s banking sector is facing criticism for significantly reducing lending to vital industries such as agriculture and manufacturing. A recent study reveals that over the past 25 years, the share of bank credit allocated to these sectors has dramatically declined, which could hinder the country’s economic growth and job creation.
From 1999 to 2023, lending to the agricultural sector dropped by approximately 65%, while manufacturing saw a reduction of around 56%. In 1999, manufacturing received about 25% of total bank lending, but by 2023, this figure plummeted to just 11%. The study, conducted by an economist with expertise in the political economy of finance in Africa, highlights the critical need for accessible and affordable credit to support Ghana’s economic transformation.
The importance of agriculture and manufacturing in Ghana cannot be overstated. Agriculture is the second-largest employer, following the services sector, and is essential for supplying raw materials to boost manufacturing. The lack of adequate financial support for these sectors is forcing many Ghanaians into informal trading, limiting their opportunities for stable and well-paid employment.
Decline in Bank Lending to Key Sectors
The research disaggregated data on bank credit across various sectors, revealing a troubling trend. On average, from 1999 to 2023, 14.6% of total bank credit went to manufacturing, while agriculture received only 5.8%. In comparison, the services sector averaged 20.7% of bank credit, and commerce and finance accounted for 17.3%.
The decline in lending to agriculture and manufacturing can be attributed to two primary factors. First, the foreign ownership of Ghana’s banking sector—approximately 50% of banks are foreign-owned—leads to a more risk-averse lending approach. These banks often hesitate to lend to small and medium-sized enterprises (SMEs), which are crucial for economic development.
Second, the Bank of Ghana’s focus on maintaining monetary stability through inflation-targeting has resulted in higher interest rates, increasing borrowing costs for businesses. This strategy has discouraged private sector borrowing, while banks prefer to invest in government securities instead. The inflation in Ghana is largely driven by structural issues, including production and transport costs, rather than an oversupply of money in circulation.
Recommendations for Policy Reform
The findings of this research underscore the urgent need for a reevaluation of Ghana’s financial policies. The Bank of Ghana (Amendment) Act 2016 mandates the central bank to support government economic policy and ensure an efficient banking system. Historically, the Bank of Ghana played a pivotal role in directing credit to priority sectors using measures such as credit ceilings and mandatory lending ratios.
To address the current challenges, it is crucial to reintroduce policies that prioritize lending to agriculture and manufacturing. This could include revitalizing development banks, such as the Agricultural Development Bank and the National Investment Bank, while also encouraging local participation in the banking sector. By fostering an environment where productive credit flows to essential industries, Ghana can create sustainable economic growth and better job opportunities for its citizens.
This article is based on research conducted within the Africa Multiple Cluster of Excellence at the University of Bayreuth, funded by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) under Germany’s Excellence Strategy – EXC 2052/1 – 390713894.
