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Banking Industry and Effective Development of AfCFTA

The African Continental Free Trade Area (AfCFTA) Agreement remains one of the flagship projects of the first ten-year implementation plan (2014 – 2023) under the Agenda 2063 of the African Union (AU); which is dubbed, The Africa We Want. The implementation of AfCFTA is expected to focus essentially on reduction in non-tariffs and tariff barriers, trade facilitation and investment drive, among other pertinent factors that could enhance Africa’s competitiveness in the global business environment.

Full implementation of AfCFTA is analogous with the creation of continent-wide market; which would require determined efforts to reduce all trade costs and barriers. Governments of member-countries have been tasked to design policies that would enhance readiness of their respective workforces to take advantage of new opportunities. However, realisation of these economic objectives could suffer setbacks if negotiations on protocols and annexes are protracted by member-countries.  

Industry’s Role and Contribution

There is no gainsaying the role of banks in effective development of the Ghanaian economy; and by extension, growth of the African economy cannot be overemphasised. One of the integral functions of banks within the Ghanaian and other economies across Africa remains financial intermediation for businesses. That is, providing the requisite capital to facilitate establishment of businesses of all sizes – small-, medium- and large-sized businesses – to stimulate the economy towards accelerated development and growth. Further, banks could play enabling role in key sectors such as manufacturing, health, agriculture, oil and gas, education, energy, telecommunications; and infrastructure, among other major sectors.

Quite expectedly, AfCFTA acknowledges the role of banks in the broader scheme of its policy implementation; and the intervening role of banks in key sectors of member-countries’ economies.

Further, AfCFTA perceives financial institutions, including banks as anchoring its policy implementation on trade financing. Indeed, there is ample evidence to suggest banks provide the requisite financial assistance towards promotion of intra-economic activities, including production of goods; and provision of essential services to consumers.

Additionally, banks actively engage and provide the necessary financial support to businesses to facilitate trade promotion at the inter-country or intra-continental level.

Banks are highly leveraged institutions; and are in the business of leveraging other institutions or businesses. To assure consistency and effectiveness, banks have taken proactive steps to improve on certain key operational deficiencies to ensure strong value-addition to their financial intermediation role. For instance, deficiencies inherent in supervisory policies in key areas such as restrictions on insider activities and capital standards; inept management of credit risk and poor credit decisions have witnessed improvements in recent periods. However, it is worth-stressing the latter deficiencies are often occasioned by governments and political influence on credit allocations.

The efficiency that often characterises the operations of market-based economies is facilitated by the provision of credit. Businesses may leverage their operations due to wide-range of economically meaningful reasons. For instance, debt may be required to facilitate investments in capital and income-generating assets; and to sustain and smooth-out production patterns over considerable time periods.

Consistent with the Basel III framework for internationally active banks; and Bank of Ghana’s policies and directives, Ghanaian banks maintain the pedestal on regular assessment of their fitness and propriety, risk management, internal controls and audit; and behavioural standards on governance. These monitoring measures help banks to ensure the high leverage inherent in their business models is carefully and prudently managed.


Effectiveness of Ghanaian banks in the preceding role is often slowed; or impeded by factors such as institutional failures. Notable among these include the perceived slow pace at which the judicial system adjudicates recovery cases; and the challenges that banks succumb to at the Lands Commission when dealing with issues related to land administration. Others include the slow pace and in many instances, unnecessary demands by the Environmental Protection Agency (EPA); and bureaucratic process of the national immigration system, among others.

Further, lack of effective co-ordination and integration of data among banks in Africa has been identified as the major setback to intra-African trade; and not trade financing itself (Sebahizi as cited in UPSA, 2021). Due to the absence of centralised financial system, it is quite challenging for banks in Africa to obtain reliable information on foreign investors who apply for credit to transact business outside their home countries. However, well-rehearsed AfCFTA financial regulations would increase access to capital; and facilitate movement of capital within the business community.  

Measures towards Risk Mitigation

It is instructive for businesses to be abreast of the underlying principles that could assure expeditious and incident-free completion of originated loan applications. In many cases, material differences in bank loan requirements and documentations submitted by businesses often affect approvals.

Equally worrying is the poor credit culture of Ghanaian businesses that draw their strength from the inefficiencies inherent in the institutional structures to default without known consequences. In times of stress, the fixed servicing obligations that debt imposes on businesses may not be recovered by cash flows generated by the businesses’ assets.

Fluctuations in derived revenues; or better still the need to write-down the value of some business assets is likely to create a gap in debt servicing ability. The foregoing may be met by writing off some of the interests of equity holders in order to meet debt servicing obligations. In extreme cases, all the interests of equity holders may be wiped-out; and the implied businesses may become insolvent. This development often leads to higher than acceptable non-performing loans (NPLs) values on the books of affected banks.

In essence, there is a threshold beyond which adding more debt, comparative to the riskiness of cash flow generated by the business assets becomes inefficient and potentially dangerous. Within the financial literature, this trade-off is often described as the trade-off between bankruptcy costs and tax advantages of debts (Ingves, 2014). It is imperative for businesses to be mindful of these financial setbacks; and the attendant consequences on their businesses, lending institutions; and key stakeholders such as depositors, creditors and owners, among others.

Unfortunately, weak internal business structures and stunted investment in those structures may reduce the risk appetite needed to rigorously harness the benefits of AfCFTA. The foregoing notwithstanding, Ghanaian banks through concerted efforts, could implement policies that would maximise potential gains of AfCFTA; while minimising potentially inherent risks.   

Central Bank’s Role

Strong commitment of Ghanaian banks to AfCFTA initiatives implies the award of more loans; and the assumption of more risk. These financial developments may call for strong mitigation measures such as review of minimum capital and leverage or gearing ratio requirements to increase the liquidity of banks; and to ensure the banks are well-positioned to adequately meet the financial (loan) needs of businesses and (AfCFTA) prospects.

Ample evidence points to the fact that strong safety nets are necessary to protect banks against macroeconomic shocks that could cause a surge in variability of certain key indicators such as interest rates, inflation, exchange rates, capital flows and loan defaults, among others. Poorly designed safety nets may lead to excessive risk-taking; and instability within the banking and broader economic framework, vice versa.           

The perverse effects of poorly designed safety nets have occasionally characterised fiscal and monetary policy implementation regimes in advanced, emerging and developing economies. To assure positive outcomes, Ghanaian banks clamour for safety nets that seek to promote stability in the banking system; and stability within the broader economy.

Nonetheless, success of the foregoing is predicated on carefully designed scope and operation of the applied safety nets. The preceding statement corroborates a belief commonly held among some finance experts that the level of economic development of a country has significant relationship with the extent to which its financial infrastructure is strongly developed.

Banks ensure efficient allocation of deposits and savings for investment at the lowest possible cost. They perform this critical role by ensuring borrowed funds from other businesses; and surplus funds invested by households are loaned to those who wish to borrow. However, in an attempt to maximise the benefits from credit intermediation, banks end up being highly leveraged. To compensate for the potential risk of banks providing the requisite funding to leverage AfCFTA, it is imperative for the central bank to review its regulatory measures including minimum requirements for funding large exposures, liquidity, leverage and bank capital. These measures have the potential to increase the availability of loanable funds to AfCFTA businesses; and other businesses within the economy.

Recommended Measures

In view of the enormous risk likely to be assumed by banks in their quest to leverage AfCFTA to ensure its successful implementation within the country and across the continent, the following recommendations are proffered.

First, banks must build capacity in research to have better appreciation of business needs of borrowers; and to design bespoke products to meet those needs. Well-executed research and development programmes could reduce lending and investments’ excesses; and help banks to maintain non-performing loans at appreciable levels.

Second, the Bank of Ghana must ensure its policy related to appropriate bank risk monitoring is effectively applied; while providing protection for banks characterised by highly efficient and effective operations, but may be financially reeling on the heels of defaulting loan payments through support for AfCFTA businesses.

Third, the risk-adjusted returns on loans must be high to justify the capital required by banks to approve those loans. More investors may be needed in the banking industry to shore up respective capitals to meet recurring financial needs of existing customers; and AfCFTA prospects. Funding for some loans generally requires more capital while others require less. However, the aggregate mix of debt and capital must equal; or exceed the leverage limit to ensure the implied banks persistently remain solvent; and above regulatory requirements.

Fourth, the ongoing digital initiatives and integrations should be structured; and strategically implemented in ways that would contribute immensely to de-risking of the business environment; improve the existing banks-businesses’ relations and loan approvals to create opportunities for business expansions and employment.

Fifth, successful implementation of AfCFTA policy on trade financing is contingent on effective collaboration among banks; and the availability of centralised financial system. To this end, the Technical Directorate of AfCFTA is urged to walk the talk by expediting the process of financial data integration at the continental level to facilitate the credit intermediation process of banks; and to ensure rapid integration of the various financial markets through effective collaboration.

At the national level, the proposed Credit Rating System being championed by the Ministry of Finance (MoF) is envisaged to facilitate banks’ efforts aimed at aligning risk profile of businesses with loan structures and covenants. It is hoped the efficiency and effectiveness that would characterise the proposed credit rating system would enhance its universal acceptance among banks at the implementation stage.

Sixth, in order to boost trade in loss-leading sectors of the economy (that is, sectors currently considered economically less attractive to investors and businesses), stewards of the Ghanaian economy through the central bank are urged to provide adequate safety nets and policies that would incentivise banks to provide the necessary funding for businesses in those sectors; while these businesses take proactive steps to improve on their operations, financial records and risk management strategies, among other pertinent considerations that would assure the resounding success of their activities; and to be transformed from loss-leading to profit-making ventures.

Seventh, existing businesses and AfCFTA prospects must be open to alternative financial structures that help to define the needed balance between debt and patient capital. Indeed, the execution of this strategy might call for business combinations to build the required skill and scale in operations; and be fund-ready.

Eighth, the government through the relevant sector-ministries (such as the Ministry of Employment and Labour Relations; and Ministry of Trade and Industry), departments and agencies could design and implement policies that would hone the skill of entrepreneurs to ensure their effective integration into the AfCFTA initiatives; and to take full advantage of the inherent new opportunities. It is worth-stressing, monitoring and measurement of impacts on the workforce – skilled and unskilled; men and women – across various sectors are vital to the success of AfCFTA. 

Finally, the recent policy-initiatives of the Securities and Exchange Commission (SEC) should not only deepen the interactions between investors and institutions on the capital market, but also ensure strategic availability of other funding mechanisms for businesses. The policies should practically inch stakeholders very close to addressing the issue of fining mismatch; and lack of access to long-term funds.


Banks are encouraged to allocate enough resources including time, towards research and development (R&D); to facilitate identification of optimal level leverage that is strategic to strike meaningful balance between debt and equity financing. It remains imperative for contemporary banks to perceive investment in research as an important need for their sustained operations; accelerated development and growth; and global competitiveness.     

The birth of AfCFTA presents Ghanaian banks with the unique opportunity to expand their business operations and clientele-base; facilitate credit for businesses through intermediation; contribute meaningfully towards reduction in unemployment through direct employment and job-creation opportunities for start-ups; and to accelerate development and growth of the financial sector; while driving economic growth at the national, regional and global levels.

Author’s Note

The above write-up featured in Tuesday, April 4, 2023’s Edition of the Business and Financial Times (B&FT). www.thebftonline.com

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