The Ministry of Food and Agriculture is seeking a legislation that will make it compulsory for lenders to dedicate at least 20 percent of their loan portfolios to the agriculture sector.
The move is a bid to overcome banks’ reluctance to extend credit to agribusinesses, and was announced by the Minister of Food and Agriculture, Dr. Afriyie Owusu Akoto, who insisted that banks must use a share of their ‘supernormal profits’ to aid development of the agriculture sector.
The ministry, he disclosed, is currently awaiting approval from Cabinet to design the policy that will make it compulsory for banks to set aside a certain percentage of their loan books to finance the agriculture sector.
“Over the last decade, lending to agriculture by financial institutions averaged 3.5 percent. A proposal for legislation requiring commercial banks to increase loanable funds to agriculture has been sent to Cabinet. When approved, we will go to parliament with a bill to make a law that can compel banks in the country to, at least, earmark 20 percent of their loans into the agriculture sector,” he said.
He spoke during a business forum by the Association of Ghana Industries (AGI) in Accra, and said the move has become a necessity as banks continue to shy away from financing agribusinesses with the excuse that the sector is too risky.
The minister’s concerns are not in isolation. Earlier this month, data from the Development Bank Ghana (DBG) indicated that support from universal banks toward agribusiness finance remains insignificantly low at 4 percent.
This, according to the bank’s deputy Chief Executive Officer Michael Mensah-Baah, calls for action and maximum desire for financial institutions to intervene in the agriculture value chain financing so as to position the sector to thrive. “If you do not have the resources, it is very difficult to make commitments into the sector. Secondly, lack of understanding risks in the agricultural sector is making most banks shy away from making investments into the sector,” he said.
Meanwhile, many market watchers and industry players are of the view that most banks still consider agriculture-related businesses, particularly farming, as being too risky – and would rather finance businesses that are into imports or buying and selling.
This is despite the existence of the Ghana Incentive-based Risk-sharing System for Agricultural Lending (GIRSAL). GIRSAL works by de-risking agricultural financing for financial institutions through issuing agricultural credit guarantee instruments to enhance the total amount of credit for the agricultural and agribusiness sectors.
Though blessed with vast arable land, Ghana’s annual food and agriculture imports reached around US$1.9billion in 2021, as most farmers operate on a peasant-subsistence basis due to lack of credit to expand their operations. Food imports weigh heavily on the economy. For instance, it is one of the major drivers of the cedi’s persistent depreciation. This year alone, food inflation has been a major concern for Ghanaians; partly owing to the unstable global food and oil markets.
Against this backdrop, government sees legislation as the only way of getting banks to commit a significant share of their loan books to the sector that employs a majority of the country’s workforce. The policy, if approved by parliament, will help boost domestic food production and help the majority of smallholder farmers’ transition to large-scale production.
Commenting on the minister’s announcement, AGI president Dr. Humphrey Ayim-Darke said: “It is laudable, it is good; and we will support it fully to ensure that each commercial bank sets aside a certain percentage of their loan portfolio to support the agriculture sector”.
The forum was themed ‘Resuscitating Ghanaian Industries to Address the Current Economic Challenges, the Trend and the Way Forward’. Its aim was to discuss practical actions government is taking to support industrial development in these difficult times.
Source: Business and Financial Times