The Institute of Economic Affairs (IEA) is proposing the establishment of a special fund for small-scale and informal private enterprises.
This, it said, would ensure the availability of affordable credit to players in the industry, particularly the agriculture sector.
Speaking at a forum to present the findings of a survey conducted by the IEA on the level of financial intermediation and cost of credit, a Senior Fellow at the IEA, Dr John Kwakye, said the low access to credit for operators in the small and medium enterprises sector was worrying.
“Banks’ sectoral lending preferences and the low access to credit for the private sector and the agricultural sector in particular represent a market failure in the financial sector in the context of liberalisation,” he said, adding that the situation required remedial intervention.
In Ghana, most small and medium enterprises do not have access to credit, ostensibly, due to their perceived low credit worthiness and high borrowing risk.
Also, the low level of loan use may also be due to a culture of loan aversion as a result of the distaste for indebtedness.
Setting up a private fund, therefore, will mean that most businesses and the private sector, for that matter, will have increased access to credit and would not have to compete with the government to borrow from banks.
The proposal forms part of the policy recommendations by the IEA as findings from the survey showed that access to credit was still low.
The IEA also recommended the need to promote further physical growth of the financial sector in Ghana. Accordingly, it is advising that appropriate incentives should be introduced to encourage banks to establish branches in rural areas.
It is also suggesting that there is the need to restrain government borrowing by entrenching fiscal discipline.
“There is a need to ensure availability of affordable credit for small-scale and informal private enterprises and for the agricultural sector. This can be done by creating a special bank or fund, as well as instituting steps to limit potential government contingent liabilities,” Dr Kwakye explained.
Banks shun survey
Meanwhile, only six out of the 27 banks in the country responded to the study and the IEA also failed to state reasons for the turnout of events, as it maintained that the questionnaire was sent to all 27 banks.
The six banks, representing 22 per cent of the entire banking industry population, provided full responses which therefore formed the basis of the IEAs findings.
Allocation of credit to sectors
On the most preferred lending sector, banks surveyed chose the services sector, and their choice was influenced by the sector’s high profitability rate and its low level of risk.
“A snapshot of sectoral distribution of outstanding credit as of July 2013 confirms the banks’ view. Service dominates with 65 per cent, followed by industry with 31 per cent and then agriculture with a mere 4 per cent,” Dr Kwakye explained.
He said the respondents explained that they preferred to lend to the services sector because of the low risk, consequently a low loan default rate, and also good business prospects in the sector.
He said “banks regard their reluctance to lend to agriculture as being influenced by high risk in the sector and the low market potential of agricultural produce due to its reliance on the weather.”