As part of efforts to deepen funding to the agricultural sector, the Ghana Incentive-Based Risk Sharing System for Agricultural Lending (GIRSAL) is challenging banks to slash interest rates on loans to the sector, insisting that its guarantees now provide sufficient protection against default risks.
The Bank of Ghana (BoG) last week announced a significant milestone that it has granted approval to banks to accept GIRSAL’s guarantees as collateral for agric sector loans.
This new policy direction of the BoG forms part of the government’s broader initiative to de-risk the high-risk agriculture sector as the flagship 24-Hour Economy beckons.
At a Banking Roundtable on financing the government’s flagship 24-Hour Economy, GIRSAL emphasized that the institution’s credit guarantees are effectively equivalent to collateral. This means banks lending to agribusinesses can be indemnified in the event of defaults, thereby significantly reducing their risk exposure.
With this new policy direction, GIRSAL argues that it will be fair and prudent for the banks to reduce the lending rates it charge on agricultural loans. Due to the high-risk nature and the propensity for default, interest on agric loans is mostly over the roof.
Justifying the call on the banks to cut the lending rates, GIRSAL explained that lending rates are built on the Ghana Reference Rate (GRR) plus a margin that includes a “default risk” component. Since GIRSAL’s guarantee directly cushions lenders against defaults, the institution believes this risk premium should no longer weigh heavily in the pricing of agricultural loans.
“We are saying our guarantee can be used as collateral to support funding to the agriculture sector. We encourage you to continue to deepen lending to the agriculture sector. Our guarantees will support you to provide the necessary support so that in the event of defaults, GIRSAL will be ready to indemnify you or pay back the outstanding portion of the guarantee,” GIRSAL indicated.
It continued, “We believe our guarantee can also be used as a tool to reduce interest rates. I know interest computation is made up of the GRR and then the margin, and the margin has different components in it, and one of them is the default policy. So if our guarantee is to protect you against defaults, we encourage the banks to reduce the margin to reduce interest rates.”
Beyond risk-sharing, GIRSAL also emphasized its technical assistance and de-risking facility as another tool to boost confidence in agricultural lending. Through this program, the organization provides training for fund providers such as the Ghana Infrastructure Investment Fund (GIIF) and Ghana EXIM Bank to appraise agribusiness projects, while also preparing agribusinesses themselves to meet lending standards.
This new move could be a game-changer for agribusinesses, which often struggle with prohibitively high lending rates despite being the backbone of Ghana’s economy.
By reducing borrowing costs, banks would not only unlock growth in agriculture but also position themselves to benefit from the government’s 24-Hour Economy policy, which requires sustainable financing for round-the-clock production.
