Ghana's Development Finance Institutions : Review of Current Status and Principles for Reform
This study reviews the approach to development finance adopted by Ghana and takes stock of the current situation of development finance institutions (DFIs). The study then articulates a set of key principles relevant to Ghana reflecting internation...
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| Format: | Report |
| Language: | English |
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World Bank, Washington, DC
2018
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| Online Access: | http://documents.worldbank.org/curated/en/863391533059000127/Ghanas-development-finance-institutions-review-of-current-status-and-principles-for-reform http://hdl.handle.net/10986/30215 |
| Summary: | This study reviews the approach to
development finance adopted by Ghana and takes stock of the
current situation of development finance institutions
(DFIs). The study then articulates a set of key principles
relevant to Ghana reflecting international experience. The
intention is to provide the basis for dialogue on new
approaches to making Ghana’s policies and institutions more
consistent with good practices in development finance. The
study does not venture into detailed assessment of
particular institutions due to the unavailability of
required data for such an assessment. The paper primarily
focuses on DFIs targeted toward the priority areas of micro,
small and medium enterprises (MSMEs) and non-traditional
exports, which are relevant for access to finance and the
financial inclusion agenda. Particular attention is paid to
their targeting, cost-effectiveness, market distortions, and
governance. A review of international experience with DFIs
finds that cost-effectiveness tends to be greatest and
market distortions lowest when development finance is
provided on a wholesale basis through commercial financial
institutions that bear the risk and are empowered to make
loan decisions, based on well-defined and targeted
eligibility criteria. Direct intervention by government in
allocation and in setting interest rates tends to undermine
sustainability, impact, and willingness of beneficiaries to
repay funds that they perceive as politically motivated.
Ghana’s approach to development was state-led in the
post-Independence period through the mid-1960s, and highly
interventionist during the 1970s and early 1980s, after a
brief period of stabilization. Controls were gradually
removed in the late 1980s, and financial policies were
liberalized. During the period 1985-2006, the government and
the Bank of Ghana (BoG) established a number of institutions
to promote and finance MSMEs and exports, especially in
agricultural value chains. While the majority operate
through private financial institutions, some of these
institutions provide finance directly, increasing the cost
and risks and reducing effectiveness. Although some of these
institutions managed or benefited from donor-supported
government projects in the past, little such funding remains
available, especially for MSMEs, resulting in low
cost-effectiveness and sustainability for some DFIs. Several
institutions have come to depend largely on funds from the
Export 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 funding
provided by EDAIF, which is well below market rates and
tends to result in rent-seeking, long delays while
applications are vetted, and lack of interest by commercial
financial institutions whose earnings are constrained by the
interest rate cap. |
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