AGI Ghana: 120% Collateral Requirement Hinders Business Credit

• Eric Defor of the AGI stated that Ghanaian businesses face significant difficulty securing bank loans despite improved financial sector liquidity and lower interest rates.
• A major obstacle is the high collateral requirement, with some lenders demanding security worth approximately 120% of the borrowed amount.
• Banks have increased liquidity due to government repayments under the Domestic Debt Exchange Programme (DDEP), but this has not translated into easier or more affordable credit access.
• Defor expressed concern that banks might be investing funds in government securities instead of lending to businesses and called for greater transparency.
• The AGI urges the government to address these stringent lending conditions in the upcoming 2027 Budget to support business expansion and investment.

He specifically pointed to instances where banks demand security valued at approximately 120% of the loan amount, describing this as a major impediment to accessing finance.

Despite a notable improvement in the financial sector's liquidity and a reduction in interest rates, businesses in Ghana continue to face significant hurdles in securing bank loans. Eric Defor, who chairs the Construction Sector of the Association of Ghana Industries (AGI), has voiced strong concerns regarding these persistent difficulties. He highlighted that stringent lending conditions, particularly the high collateral requirements imposed by financial institutions, remain a primary obstacle preventing companies from accessing the necessary capital for expansion and operational growth.

Mr. Defor specifically pointed to instances where banks demand security valued at approximately 120% of the loan amount, describing this as a major impediment to accessing finance. This Ghana 120% collateral requirement effectively shuts many businesses out of the credit market, even as the broader economic environment shows signs of recovery. His remarks, made during an appearance on the PM Express programme on Joy News, underscore a critical challenge for the nation's industrial sector.

The AGI representative acknowledged several positive economic interventions by the government, including adjustments to the Value Added Tax (VAT) structure, which have contributed to lowering production costs for businesses. He also commended the Bank of Ghana for its efforts in stabilizing key economic indicators through various strategic measures. However, he questioned whether the increased funds within the banking sector were effectively reaching businesses that require them for productive investments.

Mr. Defor noted that banks are currently flush with capital, largely due to the government's consistent repayment of obligations under the Domestic Debt Exchange Programme (DDEP), which has bolstered their financial standing. Yet, he cautioned that this improved liquidity does not automatically translate into easy or affordable access to credit for businesses, despite the decline in interest rates. The prevailing Ghana bank lending conditions, characterized by high collateral demands, continue to frustrate efforts to stimulate economic activity.

The requirement for substantial collateral, often reaching 120% of the desired loan, is a significant barrier that Mr. Defor emphasized. While he recognized that banks maintain a cautious stance due to the risks associated with Ghana's past financial crises, he argued that these stringent lending conditions prevent businesses from fully capitalizing on the improved economic climate. This situation creates a challenging environment for Ghana access to finance businesses, hindering their ability to invest and grow.

Furthermore, Eric Defor's collateral concerns extend to the potential misdirection of available funds. He expressed apprehension that some financial institutions might be channeling their liquidity into government securities rather than extending credit to the productive sectors of the economy. He called for greater transparency and reliable data to ascertain the actual flow of credit, especially given the Bank of Ghana's liquidity management operations, which also influence the funds available to commercial banks.

As the government prepares to present the 2027 Budget to Parliament, Mr. Defor urged policymakers to prioritize the constraints confronting businesses. He highlighted that while lower interest rates and reduced production costs offer some relief, their overall benefit remains limited if businesses cannot overcome the hurdle of stringent lending requirements. The AGI's call for attention underscores the need for targeted measures that can genuinely improve access to finance and foster investment in production.

The current Ghana bank lending conditions, particularly the high collateral demands, pose a significant challenge to the nation's economic development. Addressing these issues is crucial for ensuring that the benefits of improved economic stability translate into tangible growth and expansion opportunities for Ghanaian enterprises, ultimately supporting broader national economic objectives.

Lawyers advising businesses seeking credit in Ghana must anticipate and strategize around the prevalent high collateral demands, potentially exploring alternative financing structures or negotiating robust security packages. This situation also signals a challenging environment for business expansion and investment due diligence in Ghana due to restricted access to affordable credit.

Source: Original reporting via Myjoyonline.com