Ghana's Development Finance Institutions
This study reviews the approach to development finance adopted by Ghana and takes stock of the current situation of development finance institutions (DFIs). The study then articulates a set of key principles relevant to Ghana reflecting international experience. The intention is to provide the basis for dialogue on new approaches to making Ghana’s policies and institutions more consistent with good practices in development finance. The study does not venture into detailed assessment of particular institutions due to the unavailability of required data for such an assessment. The paper primarily focuses on DFIs targeted toward the priority areas of micro, small and medium enterprises (MSMEs) and non-traditional exports, which are relevant for access to finance and the financial inclusion agenda. Particular attention is paid to their targeting, cost-effectiveness, market distortions, and governance. A review of international experience with DFIs finds that cost-effectiveness tends to be greatest and market distortions lowest when development finance is provided on a wholesale basis through commercial financial institutions that bear the risk and are empowered to make loan decisions, based on well-defined and targeted eligibility criteria. Direct intervention by government in allocation and in setting interest rates tends to undermine sustainability, impact, and willingness of beneficiaries to repay funds that they perceive as politically motivated. Ghana’s approach to development was state-led in the post-Independence period through the mid-1960s, and highly interventionist during the 1970s and early 1980s, after a brief period of stabilization. Controls were gradually removed in the late 1980s, and financial policies were liberalized. During the period 1985-2006, the government and the Bank of Ghana (BoG) established a number of institutions to promote and finance MSMEs and exports, especially in agricultural value chains. While the majority operate through private financial institutions, some of these institutions provide finance directly, increasing the cost and risks and reducing effectiveness. Although some of these institutions managed or benefited from donor-supported government projects in the past, little such funding remains available, especially for MSMEs, resulting in low cost-effectiveness and sustainability for some DFIs. Several institutions have come to depend largely on funds from the Export Trade, Agricultural and Industrial Development Fund (EDAIF), which is funded through a levy on imports. However, an interest rate cap of 12.5 percent is imposed on funding provided by EDAIF, which is well below market rates and tends to result in rent-seeking, long delays while applications are vetted, and lack of interest by commercial financial institutions whose earnings are constrained by the interest rate cap.
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| Format: | Report biblioteca |
| Language: | English |
| Published: |
World Bank, Washington, DC
2016-10
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| Subjects: | SME FINANCE, MICROFINANCE, DEVELOPMENT FINANCE, DEVELOPMENT BANKS, EXPORT FINANCE, INFRASTRUCTURE INVESTMENT, INSTITUTIONS, |
| Online Access: | http://documents.worldbank.org/curated/en/863391533059000127/Ghanas-development-finance-institutions-review-of-current-status-and-principles-for-reform https://hdl.handle.net/10986/30215 |
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| Summary: | This study reviews the approach to
development finance adopted by Ghana and takes stock of the
current situation of development finance institutions
(DFIs). The study then articulates a set of key principles
relevant to Ghana reflecting international experience. The
intention is to provide the basis for dialogue on new
approaches to making Ghana’s policies and institutions more
consistent with good practices in development finance. The
study does not venture into detailed assessment of
particular institutions due to the unavailability of
required data for such an assessment. The paper primarily
focuses on DFIs targeted toward the priority areas of micro,
small and medium enterprises (MSMEs) and non-traditional
exports, which are relevant for access to finance and the
financial inclusion agenda. Particular attention is paid to
their targeting, cost-effectiveness, market distortions, and
governance. A review of international experience with DFIs
finds that cost-effectiveness tends to be greatest and
market distortions lowest when development finance is
provided on a wholesale basis through commercial financial
institutions that bear the risk and are empowered to make
loan decisions, based on well-defined and targeted
eligibility criteria. Direct intervention by government in
allocation and in setting interest rates tends to undermine
sustainability, impact, and willingness of beneficiaries to
repay funds that they perceive as politically motivated.
Ghana’s approach to development was state-led in the
post-Independence period through the mid-1960s, and highly
interventionist during the 1970s and early 1980s, after a
brief period of stabilization. Controls were gradually
removed in the late 1980s, and financial policies were
liberalized. During the period 1985-2006, the government and
the Bank of Ghana (BoG) established a number of institutions
to promote and finance MSMEs and exports, especially in
agricultural value chains. While the majority operate
through private financial institutions, some of these
institutions provide finance directly, increasing the cost
and risks and reducing effectiveness. Although some of these
institutions managed or benefited from donor-supported
government projects in the past, little such funding remains
available, especially for MSMEs, resulting in low
cost-effectiveness and sustainability for some DFIs. Several
institutions have come to depend largely on funds from the
Export Trade, Agricultural and Industrial Development Fund
(EDAIF), which is funded through a levy on imports. However,
an interest rate cap of 12.5 percent is imposed on funding
provided by EDAIF, which is well below market rates and
tends to result in rent-seeking, long delays while
applications are vetted, and lack of interest by commercial
financial institutions whose earnings are constrained by the
interest rate cap. |
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