The tightening of credit for indigenous enterprise

The latest data on credit conditions released by the Bank of Ghana reveals that over the 12 month period up to February 2019, Ghana’s banks have been giving an increasing proportion of their loan portfolios to foreign owned enterprises as compared with that given to indigenously owned enterprises.

To be sure, indigenous enterprise still holds a much large share of bank credit outstanding than foreign enterprise but this is only to be expected considering the relative sizes of each segment of corporate Ghana. This situation is also in part because indigenous enterprises are capital deficient compared to their foreign owned counterparts and thus require more credit to carry out their business activities.

The increasing proportion of bank credit being given to foreign rather than indigenous enterprises can easily be ascribed to the recent consolidation in Ghana’s banking industry which has resulted from the forced liquidation of several insolvent indigenous banks and the failure of some others to meet the new GHc400 million minimum capital requirement set by the BoG. Afterall this was widely expected and indeed formed the crux of the argument for indigenous banks being given preferential treatment by their regulator and government itself. True to the conventional wisdom, indigenous banks now have a smaller market share than hitherto and consequently, indigenous private enterprise is getting a smaller share of the banking industry’s overall credit.

However, while the conventional wisdom is correct in its results it is not quite so in the causes of those results. Simply put, the reluctance of banks to lend to indigenous enterprise is not because of their indigenous identity, which foreign banks hold against them; it is because indigenous enterprises on average, clearly have a much higher loan repayment default rate than their foreign owned counterparts and indeed account for a much larger proportion of the banks non-performing loans, relative to their overall indebtedness than the foreign owned enterprises do.

While banking industry commentators and economic analysts have the luxury of being able to demand affirmative action by banks in Ghana towards the financing needs of indigenous enterprise – as a means of accelerating the country’s economic growth and development and enhancing local living standards – the banks themselves have no such luxury. They are required to take credit decisions that ensure the safety of depositors funds and the optimization of shareholders investments and in Ghana today, the performance data indicates that both objectives are better achieved by lending to foreign owned enterprises rather than indigenously owned enterprises.

It is instructive that both types of enterprises operate in exactly the same business operating environment. This means that the difference in loan default rate emanates from either differences in management quality, differences in commitment to repay loans, or both.

Here, differing ownership and start up capital structures between indigenous and foreign owned enterprises are very instructive. The typical foreign owned enterprise comprises partners who put up most of their start up capital in the form of equity and who largely employ professionals in key positions. The typical indigenous enterprise on the other hand is family owned, relies inordinately on loan financing which in Ghana is prohibitively expensive, because entrepreneurs do not want partners and indeed go on to appoint family members to key positions even though they often are unfit.

This illustrates the fact that indigenous enterprises need to improve their corporate governance quality rather than just sit back and complain that foreign owned banks in particular discriminate against them. It is instructive that well managed indigenous enterprises that are not overleveraged get the loan financing they need. The rest should learn from them.

If they do not they will be left behind and even their complaints will no longer be held when they topple over the abyss due to inadequate financing to stay in business.