Rules, regulations, laws, policies and norms — the enabling environment — define the parameters of markets and shape the incentives that guide behavior within the market system. In Ghana, the Feed the Future Enabling Environment for Food Security (FTF-EEFS) project conducted a diagnostic to identify opportunities for enabling environment reforms. Using USAID’s premier agricultural enabling environment diagnostic tool, Agricultural Commercial, Legal and Institutional Reform (AgCLIR), the FTF-EEFS team identified key challenges to and proposed solutions for Ghana’s agricultural enabling environment. This post will zero in on private sector finance recommendations.

The Credit Challenge

In Ghana’s agriculture sector, barriers to finance limit agricultural sector growth. Agriculture represents a significant economic sector — an estimated 22 percent of GDP in Ghana is fueled by high value commodities such as cocoa, yet only 4 percent of all lending goes to the agricultural sector. High interest rates — with the benchmark rate at nearly 26 percent in 2017 — places the cost of traditional debt financing through formal financial institutions out of reach for most farmers.

Significant gaps in Ghana’s legal framework for securing finance limited access to collateral-based credit in Ghana. Outdated insolvency rules. While formally titled land is readily recognized as collateral by lenders, 80 percent of rural land exists in customary title. Driven by poor enforcement rates, customary land is heavily discounted as collateral for lending institutions, discounting nearly 85 percent of the value of the land. A poorly integrated secured transactions regime and outdated insolvency laws create further challenges for traditional bank financing. 

Yet, in spite of these barriers to traditional bank finance in Ghana’s agricultural sector, new developments in digital financial services may disrupt the traditional banking model and effectively expand access to finance to Ghana’s less integrated, rural areas. Taking into account the potential for development in Ghana’s rural areas, an effort to decrease the cost of accessing finance becomes especially important for achieving real growth in the agricultural sector.

The Way Forward

Based on these findings, the FTF-EEFS identified the following solutions for overcoming current challenges to credit access in Ghana:

1. To foster financial inclusion, engage the Bank of Ghana, Ministry of Finance, Ghana Microfinance Institutions Network, Ghana Association of Bankers, the credit bureaus, and other industry associations to gauge stakeholder interests and concerns regarding e-money platform data for purposes of credit reporting.
2. In conjunction with Ghana’s financial inclusion policy, conduct a review of banking regulations to identify the potential of mobile network operators with operations in Ghana to connect with their regional payment platforms to offer cross-border mobile wallet services. If a market is demonstrated, undertake a policy reform to enabling foreign exchange through mobile platforms and build capacity for livestock service centers in northern Ghana.

In regard to the former recommendation, Ghana is well-placed to capitalize on explosive growth in mobile payment services, point of sale and cash-in cash-out stations to decrease the cost of accessing finance in rural Ghana. This approach can also boost women’s access to credit, as the data generated via vendor and utility payments presents a unique opportunity to foster credit history for women, a constraint in accessing finance particularly for women in rural Ghana.

The latter recommendation offers an opportunity to foster improved organization through service providers. For example, there is potential to harness the considerable, largely informal regional livestock trade that traverses northern Ghana in pursuit of higher-value end markets in Kumasi and Accra along a central transit corridor.

Engaging these transactions through digital service providers creates two important wins. First, doing so lowers risk, as the trade currently occurs primarily in cash in high volumes, exposing players to potential theft. Second, without seeking to overregulate the informal livestock trade, mobile wallet payment systems offer a potential solution for bridging relationships between traditional communities in northern Ghana and foreign livestock traders currently strained due to an increasing livestock volume coinciding with increasing community demands on land. Here, an opportunity for increasing the safety and protection of funds coincides with easing tensions on land use in rural northern Ghana.

A strong precedent for mobile payment systems exists in Ghana, which has experienced a sustained spike in usage over the past five years. Expanding this style of support to the livestock sector and developing a regional e-money payment platform is a key area for stakeholders in Ghana to explore to expand access to credit in Ghana’s agriculture sector.

For more information on the Ghana’s enabling environment challenges and solutions, please see the FTF-EEFS’ AgCLIR Ghana Summary and Recommendations or the AgCLIR Ghana full report.