This study reviews the approach todevelopment finance adopted by Ghana and takes stock of thecurrent situation of development finance institutions(DFIs). The study then articulates a set of key principlesrelevant to Ghana reflecting international experience. Theintention is to provide the basis for dialogue on newapproaches to making Ghana’s policies and institutions moreconsistent with good practices in development finance. Thestudy does not venture into detailed assessment ofparticular institutions due to the unavailability ofrequired data for such an assessment. The paper primarilyfocuses on DFIs targeted toward the priority areas of micro,small and medium enterprises (MSMEs) and non-traditionalexports, which are relevant for access to finance and thefinancial inclusion agenda. Particular attention is paid totheir targeting, cost-effectiveness, market distortions, andgovernance. A review of international experience with DFIsfinds that cost-effectiveness tends to be greatest andmarket distortions lowest when development finance isprovided on a wholesale basis through commercial financialinstitutions that bear the risk and are empowered to makeloan decisions, based on well-defined and targetedeligibility criteria. Direct intervention by government inallocation and in setting interest rates tends to underminesustainability, impact, and willingness of beneficiaries torepay funds that they perceive as politically motivated.Ghana’s approach to development was state-led in thepost-Independence period through the mid-1960s, and highlyinterventionist during the 1970s and early 1980s, after abrief period of stabilization. Controls were graduallyremoved in the late 1980s, and financial policies wereliberalized. During the period 1985-2006, the government andthe Bank of Ghana (BoG) established a number of institutionsto promote and finance MSMEs and exports, especially inagricultural value chains. While the majority operatethrough private financial institutions, some of theseinstitutions provide finance directly, increasing the costand risks and reducing effectiveness. Although some of theseinstitutions managed or benefited from donor-supportedgovernment projects in the past, little such funding remainsavailable, especially for MSMEs, resulting in lowcost-effectiveness and sustainability for some DFIs. Severalinstitutions have come to depend largely on funds from theExport Trade, Agricultural and Industrial Development Fund(EDAIF), which is funded through a levy on imports. However,an interest rate cap of 12.5 percent is imposed on fundingprovided by EDAIF, which is well below market rates andtends to result in rent-seeking, long delays whileapplications are vetted, and lack of interest by commercialfinancial institutions whose earnings are constrained by theinterest rate cap.
PDF
download
878987797
028-85220240
