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The Ghana Association of Banks (GAB) has called for stronger measures to reduce the risks within Ghana’s business environment to enable banks to expand lending to small and medium-sized enterprises (SMEs).
GAB President John Awuah said banks are prepared to provide more financing to SMEs, but weaknesses in areas such as storage, distribution and market access can undermine businesses’ ability to repay loans.
Speaking at a roundtable discussion during the Chartered Institute of Bankers Ghana (CIB Ghana) Post-MPC Policy Seminar, Mr Awuah said the focus should not be limited to encouraging banks to increase SME lending.
He argued that the broader risks affecting businesses must also be addressed.
“Before we start talking about lending to SMEs, we need to ensure that the credit chain is properly enclosed,” Mr Awuah said.
Using agriculture as an example, he explained that farmers could secure financing, increase production and still struggle to repay their loans when adequate systems for storing and marketing their produce are unavailable.
He cited instances of farmers being left with large quantities of unsold produce, including tomatoes, which can result in significant financial losses.
Mr Awuah warned that such situations could leave banks exposed after financing increased production without adequate mechanisms to ensure that the resulting produce reaches viable markets.
“You cannot have a situation where a bank gives a farmer one million Ghana cedis… all of a sudden can do 10 acres. And that’s 10 acres and the farm produce gets rotten. And then there’s default,” he said.
He therefore called for measures to strengthen the systems linking production, storage, distribution and markets.
“We need to improve the risk profile, not of the SME, but in the systemic profile of the risk,” he said.
Mr Awuah also questioned the effectiveness of some mechanisms intended to support agricultural financing, including the commodity exchange and warehouse receipt systems.
NPL risk remains a concern
The GAB President’s comments come as efforts continue to reduce the banking sector’s non-performing loan (NPL) ratio while expanding credit to businesses and the wider economy.
He cautioned that a decline in the NPL ratio should not automatically be interpreted as evidence of improved repayment behaviour.
According to him, the ratio could decline if the overall loan book grows faster than the stock of non-performing loans.
He said policymakers and banks must therefore assess whether the underlying credit performance and repayment culture of borrowers are actually improving.
“The question we should be asking is, does it necessarily mean that repayment culture or credit performance culture has improved?” he said.
Mr Awuah stressed that high levels of non-performing loans pose significant risks to banks because lenders could lose the principal amount advanced, rather than only the interest expected from loans.
“If two, just two of those loans go bad, you are not just losing the interest, you are losing the principal amount,” he said.
He explained that these risks influence how banks deploy their available liquidity, as lenders must assess the likelihood of repayment when deciding which sectors and businesses to finance.
“It is not by design that banks channel their liquidity into a certain sector. There is a balance of risk,” he said.
GAB seeks stronger credit architecture
Mr Awuah also called for improvements in Ghana’s credit architecture to enable banks to better assess borrowers based on their credit histories and risk profiles.
He said stronger credit information would help lenders determine how much financing a borrower can reasonably access and the appropriate cost of that credit.
The GAB President maintained that banks are already supporting SMEs through dedicated programmes but argued that more financing could be made available if the wider business environment becomes less risky.
“If you lose the fight on lending to the SME, we’ve lost the economic fight,” he said.
He noted that SMEs represent a significant portion of businesses in Ghana, making access to sustainable financing important for economic activity and growth.
“Banks are lending to SMEs,” Mr Awuah said, adding that there is still considerable scope to deepen banks’ interest in SME financing by addressing the risks within the broader economic system.