The DBG debate: Is there any Hope for Cheap Credits to Businesses

Government’s intent to establish a Development Bank Ghana (DBG) to help address the market failures in the credit markets, and thereby increase the availability of medium and long-term finance to enable Ghanaian businesses to facilitate economic transformation and job creation has since last year received mixed.

While key stakeholders believe that, there is not much compelling reason for the proposed bank as defined by its objects, others have nurtured strong convictions in support of the idea.

The Acting Director of the Financial Sector Division at Ministry of Finance believes that,  carefully designed ownership, governance and operational structures would ensure that the DBG successfully carried out its economic transformational mandate while remaining financially sustainable.

“We are aiming to establish DBG by end-2021 with an initial capitalization of around US$250million from the Government of Ghana (US$200million has been paid as at May 2021), while the World Bank also plans to support with US$250million,” Sampson Akligoh noted when speaking at a Development Dialogue organised by lnstitute of Statistical, Social and Economic Research (ISSER) on the topic: “National Development Banks and Sustainable Financing in Ghana” in Accra, last week.

According information in public domain already, the German Government through its development bank, (KfW), also planned to support with EUR 46. 5 million (Tier 2 capital), plus Technical Assistance (EUR 3 million) together with French government also planning through Agence France de Development with initial support through partnership on Guarantees and African Development Bank supporting with a US$40million grant.

In addition to the association with KfW, the design of DBG had benefited from deep and extensive study of development bank experiences worldwide through the World Bank, European Investment Bank, Agence France de Development (AFD), and the African Development Bank.

Government, based on the recommendation of a Task Force of experts, decided to establish DBG to help address the market failures in the Ghanaian credit markets, and thereby increase the availability of medium and long-term finance to enable Ghanaian businesses to facilitate economic transformation and job creation.

The primary Focus Areas of the Bank will be Agribusiness; with a focus on off-farm value-chain activities, Manufacturing, ICT, software, and allied services, including Business-Process Outsourcing, and Tourism and Homeownership Mortgage Finance.

Consequently, another proponent of the idea, Professor Joshua Abor, lecturer at University of Ghana Business School, believes the National Development Bank would create jobs to absorb groups from the labour market and serve as a critical tool in supporting proactive growth strategies. He said it would also mobilise private sector finance to fill the funding gap in order to achieve sustainable development goals.

Apparently, the Chief Executive Officer of the Private Enterprise Federation (PEF), Nana Osei Bonsu, has said that the current model the new development bank is set to operate with makes the bank more like a clearinghouse rather than live up to its mandate of efficiently addressing long-term financing needs of the private sector.

DBG as stated by authorities, will operate by providing credit lines to existing commercial banks at affordable rates, and the commercial banks will in turn on-lend to the private sector at rates cheaper than the prevailing lending rates.

This approach, according to Nana Osei Bonsu, will not guarantee credit to businesses at affordable rates as is being preached; because borrowers will still be subject to the same existing procedures of banks which have made credit difficult and expensive to access.

This model, he thinks, rather makes the development bank look more like a credit house that is set up just to distribute resources to other banks.

“You are empowering this development bank to also resource other banks. It’s not a clearinghouse. They are in the business to provide funding to the private sector. It is not only credit that requires a requisite financing scheme for the private sector” the businesses advocate expressed in a recent interview with an Accra based newspaper.

“When you go for credit, the banks are going to demand collateral; they are going to demand a whole lot of things that the private sector doesn’t have. The cost of credit based on our environment is going to be high, and is always high.

“What the private sector’s looking for is a long-term pool of funding at affordable cost. If you are going to set up a development bank to provide that, you’ll hit the nail right on the head. But if you are going to provide a credit system that is going to ask for collateral, going to ask for various tangible assets that the private sector doesn’t have, you are going to fail.”

For him, a better approach is to channel the US$500million seed funding meant for the development into private equity firms which are actually established to build up businesses so as to make them profitable.

“What happened to private equity? What happened to breaking the US$500million and resourcing it to five different private equities and asking them to create partnerships which will bring in another US$1billion? Why do we always want to go through the route of dissipating the little resources that we have? “I wouldn’t say it is a bad idea [to use commercial banks], but I think there are better ways of doing it.

The better way, as I said, is that you take the US$500million and ask private equity people to apply. Whoever qualifies, you give them the mandate to create partnership counterpart money of 50 percent.

“The US$500million will yield an additional US$250million. Then you say, ‘go and invest in private equity or venture capital. Those are the ones that build capacity and the technical competencies that our businesses don’t have. It is not the credit system.

Meanwhile, Dr Vera Fiador, a senior lecturer at the University of Ghana Business School’s Department of Finance, on her part said, some development banks in Ghana in the past failed due to factors such as financial sustainability, poor corporate governance, and weak regulation and supervision.

She advised that, if the new development bank is to reach its full potential, its institutional framework should be strengthened to ensure it does not suffer from undue political interference.

Also,  the CEO of the Agricultural Development Bank (ADB), Dr. John Mensah, speaking as a panelist at the event, said the bank was excited about the new development bank.

“We are hopeful of the benefits that will emerge from a collaboration between ADB and DBG in helping channel private investments into productive sectors, new technologies and help accelerate market efforts to achieve the sustainable development goals.”

By Adnan Adams Mohammed