Ghana’s Liquidity Paradox: Why capital is not reaching productive businesses

Ghana's financial system has an abundance of liquidity, with banks keen on lending and investors seeking attractive returns. Yet, many businesses are unable to access the capital needed to expand, acquire equipment, and create jobs. The issue lies not in the absence of money, but in the lack of proper structures to allocate and distribute available capital to productive businesses.

Liquidity refers to the availability of funds within the financial system, whereas productive capital is the funding that reaches a viable business in the appropriate form, at an affordable cost, and for a period suitable to the business's needs. Businesses require different types of capital depending on their stage and purpose - short-term working capital, medium-term debt for machinery, equity for growing enterprises, or commercial paper and corporate bonds for established companies.

While banks are eager to lend, they must adhere to stringent credit, profitability, capital, and regulatory requirements. They must assess whether borrowers can repay, if the proposed investment is commercially viable, and if associated risks can be managed. This is why banks may be actively seeking lending opportunities, but businesses simultaneously struggle with inadequate access to credit.

Many enterprises face challenges in absorbing credit due to high operating costs, uncertain demand, unreliable financial records, weak governance structures, inadequate collateral, and exposure to economic shocks. These factors prevent businesses from becoming credit-worthy, even when they have viable products and committed founders.

Additionally, the enabling environment plays a crucial role. Reliable electricity, efficient logistics, predictable taxation, stable regulation, prompt payment for government contracts, and a well-functioning dispute resolution system are necessary for businesses to produce competitively. Increasing the supply of credit alone may not be sufficient if the operating environment does not allow companies to generate sufficient cash flow to service their facilities.