At the recent BADEA’s 50th Anniversary celebration in Accra, Alfalahi Walid Mohammed Sultan Hareb, CEO of the UAE Trade Center, shed light on a critical issue affecting small and medium-sized enterprises (SMEs) in Ghana and across Africa. His remarks highlighted the challenges SMEs face due to high lending rates and the broader implications for the economy.

“I remember we got $37,000,000 from the government to finance SMEs in certain parts of Africa. We secured it at 2% to 3% interest rates,” Hareb recounted. “For us, we cannot give the money directly to the government. So, we need to use a bank to guarantee and also to disburse the funds to the SMEs.”

However, Hareb expressed his shock at the high interest rates imposed by local banks. “We were shocked that the bank wanted to take 6%. You know, we are bringing money at 3% to 4%, and the African bank wants to take 6%,” he said. “And then, you know what is more shocking? The rate of lending in Ghana, and I want to be corrected if I’m wrong, is 30% for SMEs.”

Hareb’s observations underscore a significant barrier to SME growth in Ghana. High lending rates, which can reach up to 30%, severely limit the ability of SMEs to access affordable credit. This situation is not unique to Ghana; similar challenges are observed in Nigeria and Kenya, where lending rates for SMEs are 30% and 22%, respectively.

“The problem is not the guy who’s bringing the money,” Hareb emphasized. “The problem is how you want to take 18% profit under the risk assessment. The banking system exaggerates the risk to extract more money. But then who suffers? You don’t have a proper SME system. And if you don’t have a proper SME system, the flow of money doesn’t move fast.”

Economic Implications

The high cost of borrowing for SMEs has far-reaching implications for Ghana’s economy. SMEs are often described as the backbone of the economy, driving innovation, employment, and economic growth. However, when these enterprises are burdened with exorbitant interest rates, their ability to thrive and contribute to the economy is significantly hampered.

High-interest rates can lead to increased operational costs, reduced profitability, and, in some cases, business closures. This, in turn, affects job creation and economic stability.

Moreover, the reluctance of banks to lend at lower rates due to perceived risks creates a vicious cycle.

The Way Forward

Addressing the issue of high lending rates requires a multifaceted approach. Policymakers need to work closely with financial institutions to develop risk assessment frameworks that accurately reflect the realities of SMEs. Additionally, there is a need for financial products tailored to the unique needs of SMEs, ensuring they can access credit at reasonable rates.

Hareb’s insights highlight the importance of creating a supportive financial ecosystem for SMEs. “There is money in the continent. There are lots of partners who will bring money to the continent. But you have a challenge in the banking system,” he noted. “What they do, they exaggerate the risk to extract more money. But then who suffers? You don’t have a proper SME system. And if you don’t have a proper SME system, the flow of money doesn’t move fast.”

In conclusion, addressing the high cost of borrowing for SMEs is essential for fostering a vibrant and resilient economy in Ghana. By creating an enabling environment for SMEs, Ghana can unlock the full potential of these enterprises, driving economic growth and development.