In Ghana, bank lending has sharply declined in crucial sectors such as agriculture and manufacturing, raising concerns over economic growth. A recent study reveals that between 1999 and 2023, the share of total bank credit allocated to these sectors fell significantly—by approximately 65% for agriculture and 56% for manufacturing. This trend poses challenges for the country’s economic transformation and job creation in these essential industries.
Over the years, bank lending has served as a primary source of funding for businesses in Ghana, aiding operational costs and investment in growth. The need for affordable and accessible financial credit is critical for ensuring the sustainability of economic activities across various sectors. Yet, the findings from the study indicate that lending practices have not favored productive sectors adequately.
Declining Credit Allocation to Key Industries
The research highlights that, on average, only 5.8% of total bank credit has been directed towards agriculture, while manufacturing has received an average of 14.6% over the last 25 years. In stark contrast, the services sector has commanded a larger share, averaging 20.7%, with commerce and finance receiving 17.3%. The lack of sufficient credit in agriculture and manufacturing has hindered the creation of well-paying and sustainable jobs, forcing many Ghanaians into informal trading of foreign goods.
Two primary factors account for the reduced credit flow to these sectors. First, the dominance of foreign banks, which make up around 50% of Ghana’s banking sector, has led to increased risk aversion. These institutions tend to shy away from lending to small and medium-sized enterprises (SMEs), which are vital for economic growth. Second, the Bank of Ghana’s stringent monetary policies, focused excessively on inflation-targeting, have raised interest rates and borrowing costs. This discourages private sector loans while diverting bank investments into government securities.
Rethinking Financial Policy for Economic Growth
The implications of this study are significant, as both agriculture and manufacturing play critical roles in fostering sustainable economic growth. Agriculture is the second largest employer in Ghana, following the services sector, and is vital for providing raw materials necessary for manufacturing. The current financial landscape, however, does not support the necessary credit flows to stimulate growth in these sectors.
The Bank of Ghana’s current approach has strayed from its original mandate, as outlined in the Bank of Ghana (Amendment) Act 2016. This act emphasizes the central bank’s role in supporting government economic policy and facilitating an efficient banking and credit system. Historically, prior to the financial reforms of the 1980s and 1990s, the Bank of Ghana effectively directed credit to priority sectors using tools like credit ceilings and mandatory lending ratios.
To address the current credit constraints, a comprehensive reassessment of financial policies is essential. A return to some level of credit policies, along with encouraging local participation in the banking sector and revitalizing development banks such as the Agricultural Development Bank and the National Investment Bank, could foster a more balanced economic structure.
This research was conducted as part of the Africa Multiple Cluster of Excellence at the University of Bayreuth and is funded by the Deutsche Forschungsgemeinschaft (DFG) under Germany’s Excellence Strategy. The findings underscore the need for a strategic approach to bank lending in Ghana to facilitate growth in essential sectors that drive the economy.
