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Ghana: How to finance the industrial revolution

By David Whitehouse
Posted on Thursday, 19 September 2019 14:52, updated on Tuesday, 8 October 2019 14:49

Ghana's President Nana Akufo-Addo is seen during the opening day of the International Labour Organization's annual labour conference in Geneva, Switzerland June 10, 2019. REUTERS/Denis Balibouse

Ghana’s government launched the ‘One District One Factory’ (1D1F) policy in 2017 to spur industrial development, but many of the country’s banks are not ready to deliver the dream of a modern industrialised economy.

The banking sector stumbled into a crisis in 2017 and 2018 due to a combination of economic challenges and poor management. In January, the central bank completed a restructuring of the financial sector that raised capital requirements and cut the number of banks to 23.

Ghana’s strongest banks are lending to companies setting up factories, but there remains a big financing gap.

The 1D1F programme aims to establish at least one factory or industrial business in each of the country’s 216 districts by 2021.

  • Trade and industry minister Alan Kyerematen said in May that 57 factories had been set up since the 1D1F launch and are now operational. Private companies are developing the projects, which the government is supporting through tax breaks and other incentives.

Prince Moses Ofori-Atta, communications adviser at Ghana’s ministry of finance, argues that the banking sector has the potential to steer growth in the industrial sector if banks are prudent.

  • The government, he says, has made “significant strides in ensuring that Ghanaian banks are in a strong position” to provide long-term finance. The central bank spent about $2.3bn on bond issuances as part of the financial sector restructuring.

Ghanaian economist Emmanuel Anyidoho says the problems are too deep-rooted to be solved quickly. He points to banks’ reliance on financing the government rather than the real economy. There has been a prolonged period of budget deficits and deficit financing, underpinned by treasury bill issuance by the Bank of Ghana.

  • The bills have high interest rates, currently around 15%. Commercial banks are keen to buy them at that rate, Anyidoho says, meaning that banks are reluctant to lend to the private sector – a classic case of ‘crowding out’.
  • The government has “provided a disincentive to the banks,” he says.

High default rates on industrial loans are a further obstacle, Anyidoho says. The country’s credit rating agency has a weak “commercial addressing system”, which means it is unable to monitor borrowers adequately.

  • The problems are compounded by government debts to contractors, who are the banks’ largest clients. “The level of lending at the moment cannot be said to be adequate or sustainable,” he adds.
  • Ofori-Atta at the finance ministry says that higher capital adequacy ratios will lead to credit growth and support private-sector development, but he agrees that high costs of funds, operating costs and default risk remain significant challenges for banks.

The main banking players in Ghana include Ecobank, GCB, Barclays, Standard Chartered and Société Générale.

Lucy Quainoo, a member of the board of advisers at the Chamber of Agribusiness Ghana, says that banks are, to a large extent, shouldering the burden of financing industrial policy.

  • She points to problems like the limited supply of medium- to long-term credit financing – meaning between three and 10 years –for industry.

Oxford Business Group has estimated that Ghana needs to raise $1.5bn if district factories and industrial zones are to generate export revenue.

Elikem Kuenyehia, Ghana chairman for law firm ENSafrica, says that banks have not been as responsive as the government expected.

  • More than 30 banks were at the flagship launch of 1D1F, he says, but only five signed up to actively take part.
  • The stressed environment of bank restructuring made it harder for banks to commit to the industrial agenda, he points out, with most having to focus on capital raising and strengthening liquidity.

GCB, Ghana’s largest bank in terms of assets, said it will commit ¢1bn ($194m) to 1D1F projects and set up an internal unit focused on the programme. Two factories it has financed – a timber processor and a paper goods company – are already operational in Eastern Region.

  • The second-largest commitment came from the Ghanaian operations of Nigeria’s United Bank for Africa, totalling ¢880m.
  • The government estimated the local banking sector’s willingness to finance factories at ¢4.4bn.

Industry borrowing requirements are mostly long-term, while the funding base of most banks in Ghana is short- to medium-term, Kuenyehia says.

  • This mismatch “affects their willingness to be bullish in exposure to industry,” he says.
  • Kuenyehia adds that poor credit risk assessment by banks has led to high rates of non-­performing loans. He expects greater participation from the banks following the restructuring, as improved corporate governance practices are likely to reduce this risk.

Partial government subsidies on the interest to be paid on 1D1F loans – announced in March 2019 – will help, he explains. Deputy industry minister Robert ­Ahomka-Lindsay has said that the government will cover up to 10% of the interest due on loans for 1D1F projects.

What may make a big impact in Ghana’s industrialisation is help from Beijing.

  • Ghana is important to Beijing because of its natural resources, and, from a negligible base, China has rapidly become Ghana’s largest trading partner. Bilateral trade between the two countries was worth $6.7bn in 2017.
  • In that year, Ghana signed a $10bn memorandum of understanding with the China Development Bank to develop its bauxite industry, with China also offering $2bn to finance the expansion of Ghana’s agricultural industry and offering financing of up to 85% of the total for 1D1F projects.

The facility will be offered to banks at low interest rates for the banks to then make the loans, Kuenyehia says.

Ghana’s government hopes that Chinese demand for exported commodities will bring in $2.5bn of annual revenue.


This article first appeared in the TAR108 print edition of The Africa Report, in July 2019.

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