Less than 10 % of lending in Ghana is directed toward farmers, a remarkable figure, given that more than one-third of the country’s economy and over half of its people derive their incomes from agriculture.
[1]
There are several factors contributing to the poor state of credit for agriculture. Ghana’s financial markets are highly fragmented and exhibit the following characteristics: (1) borrowers and lenders cannot carry out efficient transactions; (2) lenders cannot protect themselves against local credit risks by easily diversifying their loans; (3) capital savings and investment do not readily balance between surplus and deficit regions; and (4) the cost of capital to equally creditworthy borrowers is highly variable. Taken together, these characteristics contribute to increasing the costs of capital and, consequently, decreasing the availability of long-term investment capital.
Access to credit is vital to agricultural-sector development, as agriculture finance underpins the sector’s performance. Ghana’s laws allow bank and non-bank financial institutions, with very few restrictions, to:
· Accept pledges of livestock and equipment as collateral
· Allow purchase of livestock or equipment on credit
· Finance trade fixtures such as storage bins, pumps, compressors, etc.
· Finance standing crops as preferred collateral
· Provide a security interest that can attach to rotating inventory or to proceeds of collateral
· Lend on the strength of a signature (credit cards).
Notwithstanding this generally sound legal framework, Ghana’s financial institutions are averse to agriculture lending for many reasons. The primary reason cited is the difficulty of securing a transaction. At each stage of a secured transaction, risks are found:
Creation of collateral is expensive, cumbersome. and does not encompass instruments to cover transactions of primary economic importance.[2]
· Perfection
[3] of collateral is uncertain because the claims against security interests of lenders and creditors or sellers are difficult to rank.
· Enforcement of financial contracts hinders rather than facilitates foreclosure or repossession. This is often crucial in the case of agricultural property, because many types of inventory are highly perishable, machinery depreciates quickly, and accounts receivable have a life of only 30 days.
Moreover, in agricultural finance, risk-related losses tend to be systemic – risk of default, price risk, weather – and interlinked, while lending costs tend to be particular to borrowers – transaction costs, due diligence costs, and supervision. This disparity between the systemic nature of risk-related losses and high lending costs is a further disincentive for individual banks to lend to agricultural borrowers. Insurance markets can effectively aggregate and redistribute risk-related costs; but, unfortunately, such insurance covering the agricultural sector is generally not available in Ghana.
The AgCLIR indicator scores for Getting Credit are the lowest among the subject matter areas covered in this report. In all aspects – legal framework, implementing institutions, supporting institutions, and social dynamics – the AgCLIR scores are generally negative. This chapter points out exceptions to the problems along with opportunities for reform, and further presents a lengthy list of recommendations to improve the country’s performance in this area.
[1]This figure derives from informal estimates provided by lenders during the course of this diagnostic, Bank of Ghana estimates, and unpublished donor estimates.
[2] Instruments that enable credit transactions provide certainty of an asset’s ownership, against which credit can be extended, and for the collateral to be disposed of if repayment cannot be made. A registry system verifies an asset’s ownership. A lien is one example of an instrument that facilitates credit, as it provides public notice of a security interest in an asset. Failure to perfect a security interest risks “avoidance” (loss) of the security interest in bankruptcy or subordination of it to the claims of third parties. Another such instrument would be a promissory note where a secured party can purchase a promissory note in a securitization transaction and leave the note with the seller for servicing, and the secured party’s rights in the promissory notes will be protected in the seller's bankruptcy. Such instruments lower the risk of loss to a party in a transaction.
[3]Perfection of collateral is: The process by which a secured party protects its security interests in collateral against the claims of third parties who may look to the same collateral to satisfy the debtor's obligations to them.
