Ghana must address weaknesses across small and medium-sized enterprise (SME) value chains if banks are to significantly expand lending to businesses, the Ghana Association of Banks (GAB) has said.
GAB President John Awuah said the challenge of expanding SME finance goes beyond banks and borrowers, with weaknesses in the wider business environment increasing the risks attached to lending.
He made the remarks during a roundtable discussion at the Chartered Institute of Bankers Ghana (CIB Ghana) Post-MPC Policy Seminar, followed by The High Street Journal.
Awuah pointed to agriculture as an example, saying businesses can receive financing and increase production but still struggle to repay loans when the systems needed to move their products to consumers do not work effectively.
He cited cases where farmers have produced large quantities of crops but have been unable to sell or store them properly, resulting in losses and ultimately affecting their ability to repay bank loans.
“You cannot have a situation where a bank gives a farmer one million Ghana cities … and the farm produce gets rotten. And then there’s default,” he said.
According to Awuah, this means the risk banks assess should not be limited to the individual SME. The broader systems supporting the business must also be reliable enough to allow the borrower to turn financing into revenue.
“So we need to improve the risk profile, not of the SME, but in the systemic profile of the risk,” he said.
He identified weaknesses in areas such as commodity trading and agricultural storage as examples of infrastructure that can affect the performance of bank-financed businesses.
Awuah specifically criticised the functioning of the commodity exchange and warehousing receipt system, arguing that weaknesses in these mechanisms leave businesses and lenders exposed when agricultural output cannot be efficiently stored or sold.
“We have commodity exchange, which to me for all intents and purposes is dysfunctional. Warehousing receipts doesn’t work in this country. So we have systems that don’t work,” he said.
He said banks already have the incentive to lend to businesses because lending to the private sector can generate higher returns than placing funds in relatively lower-yielding government or central bank instruments.
However, the return must be weighed against the possibility that a borrower will default and the bank will lose part or all of the principal.
Awuah explained that the impact of non-performing loans goes beyond lost interest income because banks are ultimately putting depositors’ funds at risk when they extend credit.
He said this risk becomes particularly important when banks have similar exposure to the same categories of businesses, creating concentration risks across the financial sector.
For SMEs, he argued that improving the connections between production, storage, distribution and markets would give banks greater confidence to extend financing without exposing themselves to risks created by failures elsewhere in the value chain.
He stressed that expanding SME lending remains important because of the sector’s contribution to Ghana’s economy.
“If you lose the fight on lending to the SME, we’ve lost the economic fight,” Awuah said.
He acknowledged that banks are already providing financing and running programmes targeted at SMEs, but said more could be done to deepen the flow of credit to the sector.
“Banks are lending to SMEs,” he said, adding that “a lot more can be done to deepen interest in that.”
