Financing, commercialisation of Ghana’s agriculture: An analysis

Financing, commercialisation of Ghana’s agriculture: An analysis
Source: SAMUEL AMISSAH | (BSc Agriculture, MBA in Strategic Mgt & Consulting, Cert in FNFM) | Email:
Date: 17-02-2018 Time: 08:02:38:am


Ghana’s Agriculture has been subsistence since independence and basically depends on the weather.According to MOFA (2010), Agriculture is predominantly on a smallholder basis in Ghana and the main system of farming is traditional, with hoe and cutlass as the main farming tools.

It further states that about 90% of farm holdings are less than 2 hectares in size, although there are some large farms and plantations, particularly for rubber, oil palm and coconut and to a lesser extent, rice, maize and pineapples. It explains that there is little-mechanised farming, but bullock farming is practiced in some places, especially in the North.

This is possibly the reason for our inability to produce enough to feed the nation in the midst of rising population.For instance, in 2010, Ghana imported about 320,152metric tonnes of Rice and 315,838metric tonnes of Wheat at a value of $200.88million and $117.1million respectively. In that same year, Ghana imported 125,327 metric tonnes of livestock and poultry products and 199,799 metric tonnes of fish (MOFA 2010).This poses a threat to Ghana’s food security and also puts pressure on the national purse. There is, therefore, the need for public-private partnership to address the issue.

The government must first of all show leadership and commitment by prioritising Agriculture in its budgetary allocations and create the enabling environment for the private sector to operate. For example, if the central bank reduces the rate at which it lends to domestic banks and Micro Finance Institutions (MFIs), they can also lend to their customers at a very low rate, including farmers.More importantly, the government must provide some incentives such as low bank rate for domestic banks that are prepared to finance agriculture. This will encourage a lot of banks and MFIs to invest in the Agricultural sector.

Before proceeding further, there is the need to have a look at the concept of Agricultural Financing. AgriculturalFinancing concerns the provision of financial services ranging from short, medium and long-term loans, to leasing, crop and livestock insurance, covering the entire agricultural value chain namely, input supply, production and distribution, wholesaling, processing and marketing. Usually, the term is used interchangeably with rural financing, which comprises the provision of a full range financial services including loans, savings, insurance, and payment and money transfer services for use in rural areas by household and enterprises. Thus, rural financing encompasses agricultural financing( article will primarily focus on agricultural financing as a necessary element for commercialisation of Ghana’s Agriculture.

Agriculture’s Contribution to Ghana’s Economy

It is an undeniable fact that Ghana is an agricultural country. According to MOFA (2010), out of a Total Land Area (TLA) of 23,853,900 hectares, Agricultural Land Area (ALA) is 13,628,179 hectares representing 57.1%.Agriculture’s contribution to the overall economic growth and development of Ghana as a nation cannot be overemphasised. McKay and Aryeetey (2004), indicates that Agriculture has been the backbone of Ghana's economy in the entire post-independence history. The World Factbook (2016) also asserts that Agriculture which is the backbone of Ghana’s economy, accounts for about 21.5% of the country’s GDP, employing 56% of the labour force. Again, it is estimated that the Agricultural sector generates more than 55% of Ghana’s foreign exchange ( Agricultural sector is also expected to play a critical role in the achievement of the fundamental objective of the Sustainable DevelopmentGoals One and two; to end poverty in all its forms everywhere, and end hunger, achieve food security and improved nutrition and promote sustainable agriculture.

Ghana’s Agriculture is neglected

Despite the significant contribution of Agriculture to the Ghanaian economy, the sector does not receive adequate financial support. In fact, little credit facilities are available to the sector. Percentage credit provided by the Deposit Money Banks (DMBs) to agriculture has been on a persistent decline compared to the volume of credit to the non-agricultural sectors of the economy (ISSER, 2003). Again, according to MOFA (2010), allocation of credit to agriculture from the formal financial institutions has been on the decline since 1998; it fell from levels close to 20% that prevailed prior to the financial sector reforms of the late 1980s and since 2000, allocation to agriculture has been below 10%, falling to just above 6% in 2006. In Ghana, most banks and MFIs are reluctant to finance agriculture because of the fear that the loans may go into default. In other words, Ghanaian banks and MFIs perceive agriculture as a risky business and hence shy away from investing in the sector. It is therefore not surprising that most financial institutions in Ghana do not have tailor-made products and services that benefit agriculture, which indicates their unwillingness to finance the sector.

In fact Ghana’s agricultural sector continues to be neglected and relegated to the background by banks and MFIs. Kwakye (2012) asserts that out of 26 banks interviewed in Ghana, all of them, representing 100%, were not willing to finance agriculture, and 67% attributed their reluctance to lend to the agricultural sector to default risk. Furthermore, according to Bank of Ghana’s sectoral credit distribution of outstanding credit in 2013, the agricultural sector had a mere 4% credit as compared to the services and industry sectors which had 65% and 31% respectively. This clearly shows that the sector does not receive adequate attention from financial institutions in Ghana.

The need to finance Ghana’s Agriculture

Having access to credit is a critical component in the growth and modernization of agricultural activities. According to Baker and Holcomb (1964), increased the productivity of farm resources comes from innovations that originate in the farm supply sector. But one cannot rule out the fact that high capital investment is required to finance these innovations which have the potential of promoting agricultural modernisation. Obviously, these financial requirements cannot easily and adequately be provided by the informal credit sector such as individual money lenders, family members, and friends. The net surplus of subsistence farmers from both on-farm and off-farm activities is also inadequate for the needed agricultural transition or growth. As a result, most of these farmers grow crops and rear animals on smaller scales due to their financial constraints (Asieduand Fosu, 2008). Agriculture is highly input-intensive and agricultural products are used extensively by a number of agro-based firms in Ghana and as such a reduction in credit to the sector may have the potential of affecting both upstream and downstream firms (Asiedu and Fosu, 2008). The importance of institutional credit as a source of finance to agriculture can therefore not be overemphasized (Fosu, 1998). Thus, the persistent decline in credit to agriculture by Deposit Money Banks (DMBs) and its trend must be checked to curtail any long-run adverse effects on the economy (see Asiedu and Fosu, 2008)

According to The World Bank (2015), the need for investing in agriculture is increasing due to a rising global population and changing dietary preferences of the growing middle class in emerging markets toward higher value foods (e.g. dairy, meats, fish, fruits, vegetables, etc.). It goes further to state that , according to estimates, demand for food will increase by 70% by 2050, and at least $80 billion annually in investments will be needed to meet this demand, most of which is expected to come from the private sector. Banking sectors in developing countries lend a much smaller share of their loan portfolios to agriculture compared to agriculture’s share of GDP (The World Bank, 2015). It states again, that this limits investment in agriculture by both farmers and agro-enterprises, which demonstrates that the barrier to lending is not due to a lack of liquidity in the banking sectors, but rather a lack of willingness to expand lending to agriculture.  Even when available, much of the agriculture funding tends to be informal and short-term, precluding longer-term investments. This informal funding only partially covers the financial needs of farmers and small agribusinesses, and usually at a high cost (The World Bank, 2015)

 Commercialisation of Ghana’s Agriculture

Commercialisation of Agriculture means that we need to produce more agricultural products for sale in the market rather than merely for household consumption. But for us to achieve full marketization of agricultural products there is the need to have production surplus over-consumption. Again, there is the need to create a market for these products to allow demand and supply to operate and enable farmers to have value for money. Subsequently, there must be conscious and deliberate effort to invest in Agriculture to expand and increase our production and then move away from subsistence agriculture. Obviously, commercialization of Agriculture in Ghana cannot be the responsibility of the government alone. Of course, the government needs to create the enabling environment that supports private sector participation. Aside of that, the private sector has a crucial role to play in this call by investing in Agriculture and that is why the banks and MFIs need to support the agricultural sector, at least, as part of their Corporate Social Responsibility.

According to MOFA (2010), out of total agricultural land area of 13,628,179 hectares, only 7,846,551 hectares (57.6%) are under cultivation leaving 5,781,628 hectares (42.4%)uncultivated.It further states that only 30,269 (0.2%) of the agricultural land area is under irrigation. This clearly shows that there is huge potential in the agricultural sector that needs to be explored. The banks and MFIs must develop agricultural friendly and tailor-made products and services that fit into the entire agricultural value chain to help expand the sector. It is sad that after 60 years of independence, Ghana’s   agriculture is still rainfed and mostly subsistence. There is, therefore, an urgent need for banks and MFIs to provide financial support to farmers to enter into irrigational farming to increase crop yield, increase their income and improve their livelihood. This will also help stabilise the cash flow of the farmer and reduce the seasonality associated with agriculture in Ghana.

Business Process Re-engineering (BPR)

The banks and MFIs in Ghana need to have a second look at the features of their products and services, and then develop tailor-made ones that will suit the average farmer or actors in the agricultural value chain. Financial institutions must design financial products and repayment schedules that meet specific needs of farmers taking into consideration their capacity to repay at a competitive interest rate to cover the cost and provide a profit margin.There should be complete change from collateral lending to value chain lending to minimise default risk since smallholder farmers are unable to provide collateral for their loans.

Also, there is the need for an effective Business Process Re-engineering (BPR)with regards to loan appraisals and approval procedures. Very often, agricultural loan applicants are appraised just like any other customer without taking into consideration the seasonality of production. As a result, even when the loan is approved, disbursement often delays which affect business operation and therefore contributes to loan diversion and default. One area that also needs critical attention is the background of officers who handle Agricultural loan products and services at the bank. Sometimes officers with no background in Agriculture are made to manage Agricultural loan portfolios. Consequently, these officers appraise agricultural loans without knowing, understanding and appreciating the agronomic practices of farming, and hence they are unable to provide technical advice when necessary. Also, they are usually unable to ask the relevant questions in the appraisal process to obtain adequate information from the farmer, which are necessary for the approval or otherwise of the loan.It is important therefore for banks and MFIs to employ Agriculturists, who are trained experts in Agriculture, provide them with basic training in credit management and put them in charge of Agricultural loans. This will help improve the quality of Agricultural loan portfolios at the bank. Above all, both Junior and senior staff of the banks and MFIs must be oriented on agriculture so that proper and timely decisions are made during loan approval committee meetings.

Innovative Approach to Agricultural Financing

Most Ghanaian banks and MFIs shy away from financing agriculture sometimes, because of default risk from bad weather, diseases and pest infestation as well as crop failure. Aside from that, they also refuse to extend credit to farmers and other agricultural value chain actors because of their inability to provide collateral. Though it is required and important to secure every loan disbursed, financial institutions can develop more innovative means of financing smallholder farmers considering their inability to provide collateral. One of such innovations is Agricultural Value Chain Finance (AVCF).

According to the African Development Bank (AfDB) 2013, Agricultural Value Chain Finance is the flowof funds to and among the various links within the Agricultural Value Chain in terms of financial services and products and support services that flow to and/or through a Value Chain to address and alleviate constraints, and fulfil the needs of those involved in that chain, be it a need for finance, a need to secure sales, procure products, reduce risk and/or improve efficiency within the chain and thereby enhance the growth of the chain (Fries, 2007). It states further that Value Chain Finance is a comprehensive approach which looks beyond the direct borrower to their linkages in order to best structure financing according to those needs (AfDB, 2012).

Out of this innovation could emerge a lot of models which could be implemented to minimise default risk. For example, a bank can develop a scheme where smallholder farmers or Farmer Based Organisations (FBOs)are linked to an agro inputs supplier and a buyer, such that the bank pays the inputs supplier after supplying inputs to the farmers based on their needs and request.The farmers may also be given some amount of money to carter for labour cost. The cost of inputs supplied and the money disbursed to carter for labour cost are put together as the total loan given to the farmers for which they are made to sign a group guarantee to make their liability joint and several. The buyer also buys the produce from the farmers and pays them directly into their account at the bank so that loan repayments are deducted accordingly.This will ensure that loans are used for the intended purpose thereby reducing loan diversion and default.The diagram below is an illustration of the AVCF model described above.

This model has been tried and tested and has proven to be very effective. The model could be used for Agro inputs credit or cash credit or both and even Agricultural SME financing.

Another AVCF model that could be of interest is the warehouse receipt system.This model may require a Public Private Partnership (PPP) approach for successful implementation, though the private sector alone could implement it equally well. The model requires a properly built warehouse with all the necessary equipment such as weighing scales, pallets, tarpaulins, refrigerators etc. Here an inputs supplier is identified to supply inputs to the farmer groups for which the bank pays for the cost after evidence of supply has been delivered to the bank. The input cost then becomes a loan to the farmer groups and a group guarantee is signed accordingly. A potential buyer is also identified to purchase farmers’ produce. The farmer groups orFBOs are assisted to convey their produce to the warehouse for storage. At the warehouse, the produce is then packaged to meet recommended standards and treated to avoid spoilage and quality deterioration. Cold refrigeration is provided for the produce at the warehouse where necessary especially vegetables or fruits. The farmers are then given receipts. According to DCED (2012), the receipt is a certification of legal ownership of the produce that is stored in the warehouse and is of a specified quality and condition, such that when the commodity is sold, the buyer can have the comfort, without physical inspection, that the product they have purchased will be available to them when required, in the condition outlined on the warehouse receipt. Accounts are opened for the farmers into which the buyer pays the produce bought from the warehouse so that repayments are deducted directly as may be agreed.Irrespective of the AVCF model being used, it is important to determine the farmers’ capacity and willingness to repay through proper and effective appraisal to avoid a situation where farmers may be over or underfinanced, and also to minimise default.


Agricultural financing is fundamental to the Commercialisation and growth of Ghana’s Agriculture. Hence, there is the need for adequate credit allocation to the sector by both government and the private sector. The government must prioritise Agriculture in its budgetary allocation to demonstrate its commitment to the sector. Moreover, the banks and MFIs must also give Agriculture equal credit allocation just like the other sectors of the economy.Again, the banks and MFIs must develop farmer-centred and tailor-made Agricultural loan products and services that suit farmers as well as the other actors of the Agricultural Value Chain (AVC). There is the need for banks and MFIs to adopt Agricultural Value Chain Finance (AVCF) as one of the innovative ways of financing Agriculture, to help minimise default risk and improve the quality of Agricultural loan portfolios. Finally, banks and MFIs must incorporate financial literacy training into their Agricultural finance programs to educate Agricultural Value Chain actors, including farmers, on important topics like savings, budgeting and cash flow management.



1 Kwakye J.K. (2012). Financial Intermediation and the Cost of Credit in Ghana, Institute of Economic Affairs, Accra – Ghana, 20-22

2  Asiedu E. & Fosu K.Y. (2008).Importance of Agricultural Credit in Ghana’s Credit Sector: A Logit Model Analysis, 2-3

3 The World Bank. (2015). Agricultural Finance (Retrieved 24th November, 2016)

4 MOFA. (2010). Medium Term Agriculture Investment Plan (Retrieved 24th November, 2016)

5 Ghana Statistical Service (various issues). Quarterly Digest of Statistics. (GSS) Accra, Ghana.  ISSER. The State of the Ghanaian Economy. Institute of Statistical, Social and Economic Research (ISSER), University of Ghana, Legon, Accra, Ghana.

6 Aryeetey et al. (1991). Economic Reforms in Ghana, James Currey, Weali Publishing Services,    Africa World Press, Trenton NJ, USA

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