17.06.2022 Business Features

Ghana's National Development Bank: Adopting The Retail Business Lending Model

By Shamwil Abdul-Karim
Ghana's National Development Bank: Adopting The Retail Business Lending Model
17.06.2022 LISTEN

National Development Banks just like the Ghana’s Development Bank according to the World Bank (2018), is said to be any financial institution that is fully or partially owned or controlled by the national government and has been given an explicit mandate by law to reach socioeconomic goals in a particular region, sector or economy.

Developing countries over the past years have had difficulties accessing long term credit due to lack of credit infrastructure and proper systems in their economies contributing to the slow pace of development. As part of addressing this challenge, developing economies are beginning to embrace the need for establishing development banks to increase their lending rate to enable them meet developmental needs.

Ghana over the years established four (4) main National Development Banks namely; Bank for Housing and Construction, Ghana Cooperative Bank, National Investment Bank and Agricultural Development Bank. These banks appear to have failed in delivering on their mandate as a result of the universal licenses they hold and operate with, political interferences, poor corporate governance, high non-performing loans and generally, internal weaknesses.

In the year 2020, Ghana passed Development Finance Institutions Act, 2020 (ACT 1032) to establish a framework for the licensing, regulation and supervision of Development Finance Institutions within the country. The enactment of this law brought about the government establishing the new Development Bank of Ghana. The intention of Ghana government for establishing this is to complement the activities of already existing finance institutions.

It has become imperative for government to establish the Development Bank as a mitigation against the negative impact of the financial crisis on the economy brought by such happenings between 2008/2010 and the Covid-19 pandemic that occurred recently where Development Banks had to step in to provide funding and credit to private firms that were not able to access funds from private banks and the capital markets. A standard argument for the establishment and promotion of development banks is the fact that they can fill the gaps left by private financial institutions, which are often geared towards commercial activities. The main gap development banks usually fill is the insufficient finance for economic transformation. The economic transformation process typically requires large scale projects with long periods of maturation, which require long-term finance which has a high-risk implication of which commercial banks are not willing to undertake. For this reason, a development bank is designed and mandated to fill such gaps.

Development Banks are mostly funded by the World Bank, IMF and other sources such as the National Treasury. In October 2020, The World Bank Board of Executive Directors approved a 250 million US Dollar from the International Development Association (IDA) in support of establishing Development Bank of Ghana (DBG). This was aimed to increase access to longterm finance and boost job creation. In May 2021, the EIB approved a EUR 170 million in support of the establishment of the DBG. Similarly, in November 2021, the African Development Bank Group approved a $40 million grant through the African Development Fund to Ghana to further progress the establishment of the DBG. Lastly, in December 2021, a loan amount of 46.5 million euros by the German Government via KfW for the DBG. All these credit facilities are to cushion Ghana towards the establishment of a development bank for economic transformation and development.

The business lending model usually recommended to achieve these goals is the retail business lending model, where the Development Bank lends directly to the SMEs.

With the retail lending model, the cost of capital/interest rate is relatively low, and the Development Bank bears the credit risk.

The other lending model is the wholesale type where the Development Bank lends to the commercial or conventional banks to further lend to the SMEs. This is not considered to be the ideal lending model for the SMEs because the cost of capital or interest rate that these banks will lend to the SMEs will be very high. This will make finance inaccessible to the SMEs and it may even lead to crowding out of the private sector. Also, the banks will determine their own interest rates without efficiently allocating the funds to productive use.

Also, these selected banks already have existing non-performing loan portfolios with a lot of SMEs due to the high interest rates.

One of the mandates of the Development Bank is to reach socioeconomic goals and in doing that they lend to the SMEs who are very innovative with high growth potential at a lower interest rate and long term repayment terms.

It is therefore up to them to the management of the Development Bank to design and adopt strategies to recoup the the principal and the interest repayments.

The reality is that, SMEs are mostly into retail and manufacturing, and they contribute to about 85% job creation and they constitute about 90% of the businesses in Ghana.

The finance component is the major challenge of the survival of the SMEs because of high interest rates charged by the commercial banks, lack of collateral, no financial statements, insufficient financial resources, no business plans etc. If we truly understand these benefits and challenges then it would be good to design business lending models that will ease and make finance accessible to them.

The Development Bank will come in with reduced cost of contracting and information processing due to its development orientation. This means that the cost of transactions will be relatively lesser, compared to other financial service providers on the market. This will attract investors or partners to it, making capital available to address the financing gap. 

The provision of risk management instruments by the Development Banks will ensure that financial markets are able to better manage and assist investors in managing their risk. By so doing investors will be willing to invest in the market, thereby making capital available to support development, closing the financing gap.

Efficient payment systems can also be introduced by the Development Bank, together with new products and services, and the development of new and improved delivery systems, other than those already on the market. This will promote more activities on the financial market.

Development Banks, when successfully implemented can contribute to developing the SME sectors, industrial sectors, infrastructure development, financial inclusion, job creation, reducing inequality gaps, among others. The successful implementation can only be realised if the business lending model used is the retail type.

In this regard, I would proposed to the government to adopt the retail business lending model instead of the wholesale business lending model.

Shamwil Abdul-Karim
Msc Development Finance
MBA Strategic Marketing
MA Business Planning
BA in Development Studies
Project Management Professional

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