Ghana’s Commercial Banks and even non-bank financial institutions have huge disinterest in providing smallholder farmer financing. Why is that?
Ghana’s smallholder farmer market size is estimated at 5 million members and this is a segment with one of the highest recurring financing needs . It beats our imagination why financial institutions tend to run away from core lending to this thriving sector. They even shy away from smallholder asset-based financing.
A general assessment we have come up with was that Ghana’s Financial Institutions are simply lazy with a mix of greed; expecting external actors to provide them 100% incentive cover before they commit to agri-lending.
They are in reality expecting Development Finance Institutions (DFIs), Development Institutions, and Government to provide them FREE de-risking guarantees before they venture into the smallholder farmer financing industry. Additionally, some of these Ghana’s financial institutions even expect international institutions with country-donor funds such as USAID, GIZ, SNV, World Bank, DFID, et al to provide them with unrequited CAPEX cover for their operations. Some local bankers even go to the extent of begging for external support to set up Agribusiness Finance Desks which is surprising looking at the high-flying stylish banking offices springing up lately in the capital city, Accra. How much does it cost to setup an Agribusiness Finance Desk / Department in a bank?
In past years, some donor-funded projects have been guilty of distorting the market with financing incentives ( remember stimulus packages? ) for agricultural value chain financing. However, these donor incentives went to banks ONLY interested in financing medium to large scale agribusinesses typically working with smallholder farmers in an existiing outgrower supply chain, excluding millions of smallholder farmers in Ghana. In brief, the financing went to big agribusinesses who hitherto could easily access these with the requisite collateralisation. These big agribusinesses and the participating banks even got free Technical Assistant grants on top of it!
Ghana’s banks tend to record high revenue and profit margins as reflected in their balance sheets. Unfortunately these commercial banks do not want to commit any portfolio for agri-lending until Government initiate the much talk-about Ghana Incentive-Based Risk Sharing for Agricultural Lending (GIRSAL) initiative. Even with the Ghana Commodity Exchange (GCX) and Warehouse Receipts Systems (WRS) in place, Ghana’s banks are yet to commit financing to the sector.
This is very disheartening and thus prime for disruption by Digital Financial Services (DFS) and Financial Technology Service Providers (Fintechs) targeted towards agriculture. Smallholder farmer financing gap is estimated at about US$ 200 billion globally, therefore DFS and Fintechs with solid products targeted towards smallholder farmer financing will be game-changers and will surely revolutionise the banking landscape in Ghana.
The request by some Ghanaian commercial banks for government support in setting up Special Purpose Vehicles (SPVs) to support agribusiness financing should not fly. Government should not be in the business of meddling in such since it creates unfair competitive advantage and distorts market dynamics.
PS/ Definition of Smallholder Farmer: The smallholder farmer market size in Ghana could be more than 5 million. However, the category of core interest are market-oriented smallholder farmers NOT smallholders farming to only feed their households.
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