Insurance in Ghana
3.1. This Chapter begins with a review of the current status of the provision of rural and agricultural finance in Ghana followed by an assessment of the Ghanaian insurance market and the supply of, and demand for, agricultural crop insurance in 2010. The aim of
this chapter is to try to address several key questions including 1) is lack of access to production credit a key constraint to Ghanaian farmers and if so 2) what are the main reasons for the lack of credit and 3) could crop insurance play any role in improving farmers’ access to production credit and 4) is crop insurance a priority for Ghana’s farmers?
Access to Rural Finance in Ghana
Formal and Informal Financial Sectors
3.2. The main segments of the Ghanaian financial system are presented in Tables 3.1.
and 3.2.19 In 2010, the formal banking sector is comprised of 26 universal commercial banks including 2 national development banks, the Agricultural Development Bank, ADB and the National Investment Bank, NIB20. In 2008 the commercial banks’ assets amounted to GHS 10.7 billion (US$ 8.9 billion) or about 91% of the total assets of the financial sector in Ghana21. This is followed by the specialized banks and non-bank financial institutions (NBFI’s) of which the Rural and Community Banks (RCB’s) are the most important rural lending institution accounting for about 4% of total financial assets of the banking sector. In 2007, there were 125 RCBs with over 525 outlets and in 2009 this number had risen to 135 (Table 3.2.). The semi-formal financial organizations include Credit Unions with 380 registered outlets in 2007 (over 500 in 2009) and 40 Financial NGOs (FNGOs). The lowest tier in the informal sector including Susu collectors (who collect savings from their clients on a daily basis and then return these savings at the end of the month) and traditional moneylenders.
Table 3.1. Ghana: Segments of Financial System by Degrees of Formality
Tier Definition Institutions Principal Clients
Formal banks Commercial & development
banks Large businesses Government Specialized banks and non-bank financial institutions (NBFIs) } Licensed by
} central bank Rural banks
Post Bank
Savings & loan companies Deposit-taking microfinance
banks / institutions
Large rural enterprises Salaried workers Small & medium
enterprises Semi-formal Legally registered, but not
licensed as financial institution by central bank
Credit unions Microfinance NGOs
Microenterprises Entrepreneurial poor Informal Not legally registered at national
level (though may belong to a registered association)
Savings (susu) collectors Savings & credit associations,
susu groups; Moneylenders
Self-employed Poor
Source: Steel (2008)
19
This section draws upon Steel, W.F., (2008) Extending Financial Systems to the Poor: What Strategies for Ghana? This is one of the most comprehensive articles on Ghana’s Rural and Microfinance systems.
20
See Annex 3.1 for full list of commercial banks
21
3.3. In recent years there has been a major growth in the number of legally registered Rural and Microfinance Institutions (RMFIs) that serve rural households, micro, small and
medium enterprises (MSMEs) and poor in Ghana (Table 3.2). Between 2000 and 2006 the number of RMFIs nearly doubled and although these institutions only account for about 7% of the total assets of the Ghanaian financial system, they account for over half of the total service points available throughout the country, and likely the majority of clients (Steel 2008). In contract, the ADB which is the largest commercial bank lending to agriculture had 51 branch outlets in 2009.
Table 3.2. Growth in Number of Registered RMFIs, 2000-2007
No. in 2000 No. in 2007
Rural and Community Banksa/ 114 125
Savings and Loan Companies 8 16
Credit Unions 225 380
Financial NGOs b/ 8 40
Total 355 601
Source: Steel 2008
a/ Over 525 total outlets (including agencies) in 2007.
b/ In 2000, estimated number maintaining separate financial records for their microfinance programs. In 2007, the number reporting financial data to GHAMFIN
Outreach
3.4. In conjunction with the major growth in the number of RMFIs there has been even
greater growth in their total outreach in terms of number of clients, deposits mobilised and loans provided. Between 2001 and 2006 the number of clients increased by 22% per year, and
deposits and loans grew at about 20% to 30% per annum in real terms. The number of clients reached by the RMFIs rose from 1.3 million in 2001 to 3.5 million in 2006 and the RMFIs extended loans to 0.6 million clients with total deposits of US$ 378 million (old cedi 3,633 billion) and total loans valued at US$ 226 million (old cedi 2,028 billion) (Table 3.3.). As such the RMFIs reach about 15% of the total population of Ghana, compared to about 10% for the commercial banking sector, and mobilise over quarter of the total deposits of the financial system (Steel 2008).
Table 3.3. Outreach of Ghana’s Rural and Micro Finance Institutions, 2006
Number of Depositors (‘000) Number of Borrowers (‘000) Deposits Mobilized (Old Cedis; billions) Loan Portfolio (Old Cedis; billions)
Savings & Loan Companies 430 76 398 371
Credit Unions 199 100 585 395
Rural & Community Banks 2,493 358 2,265 1,151
NGOs n.a. 96 n.a. 111
GCSCA Susu Collectors 301 n.a. 385 n.a.
Total 3,423 630 3,633 2,028
Source: Steel 2008 quoting GHAMFIN estimates (adjusted for underreporting)
Sources of Agricultural Finance
3.5. The above figures show that there has been major growth in the outreach of the RMFI sector in recent years, but it is not possible to report whether this growth has applied equally to agricultural credit both in the form of seasonal or working credit and investment
capital. It is very difficult to report lending patterns to agriculture because it appears that information is retained by each segment at the individual branch level and is not consolidated or reported on an annual basis. The sections below contain a review of available information.
3.6. In Ghana the agricultural sector suffers from very low and declining access to commercial bank finance as evidenced by the fact that although this sector accounts for nearly 35% of GDP and 60% of employment it only receives about 4% of total commercial bank lending (IFAD 2008, USAID 2008). According to Bank of Ghana data, over the past
decade the volume of commercial bank lending to agriculture has fallen from a peak of 16.8% of total bank lending in 2001 to a low of 4.2% in 2008. In contrast about one third of all lending goes to the Commerce and Finance Sectors and the Service sector has seen its share of lending increase over the past decade from about 9% of total bank loans to 24.5% in 2008(see Annex 3.1.). To a major extent agriculture has been starved of funding because of its poor loan repayment performance and perception of being a high risk sector (discussed further below).
3.7. Historically the ADB played a leading role in supporting the agricultural sector with as much as 85% of the market, but in recent years it has reduced its lending to agriculture on account on poor performance and it now may account for about 60% of all agricultural financing. Information on ADB’s lending is very restricted but suggests that
ADB’s agricultural loans (for crops, forestry, livestock and fisheries) increased from GHS 53.4 million in 2006 to GHS 102.3 million in 2009: in 2006 the agricultural loan portfolio performed very poorly with 50% of loans classified as non-performing, although this had improved by 2009 with 33% of loans non-performing. Given ADB’s mandate to be commercially viable and its past bad experience with agricultural credit, the development bank has in recent years substantially diversified its portfolio, with agricultural loans reduced from 65% in 2002 to under 30% of its total loan portfolio in 2006, and probably to about 60% of all agricultural financing (IFAD 2008). The same report notes that the average size of ADB loans for working capital (12 months, range US$ 20,000-400,000) and for investment in equipment (3/5 years, range US$0.7 to 2.0 million), and that these very large loan sizes coupled with the fact that only 23 of its 51 branches are in rural areas, indicates that it works at the upper end of the market i.e. with the larger agric-business enterprises.
3.8. The National Investment Bank, NIB, currently has about 20% of the agricultural
finance market. According to IFAD (2008) in 2008 NIB loans accounted for about 20% of
the agricultural market or a similar share to all other banks other than ADB (ADB 60%, NIB 20%, other banks 20%). The same report notes that NIB has more experience working with a value chain approach in four commodities including cashew nuts, shea nuts, oil palm and rubber and that it works actively with the RCB’s and is also interested in lending to fruits (mangos) and vegetables. The Prudential Bank and Ghana Commercial Bank also lend to agriculture but no details on their scale of lending are available.
3.9. Although the RCBs and Credit Unions have a major rural branch network and outreach it appears that their involvement in agricultural credit provision is currently low
On the basis of discussions with the Ghana Cooperative Credit Union Association (CUA), it understood that the membership of the Credit Unions is mainly employment-based, middle income clients and that currently they do not lend directly to agriculture. In the case of the individual RCBs it appears that individual RCBs are not required to report their lending by sector or category to the ARB Apex Bank Limited (Apex Bank) which was not able to advise on the scale of its members lending to agriculture. However, according to IFAD 2008, only about 10% of RCBs’ loan portfolios go directly to agriculture. The MIDA 2009 study reported that interviewed rural banks appeared to be risk averse and were more interested in trade and commerce than financing agriculture. There are, however, examples where the RCBs are involved in and lending to successful value chain and or Outgrower schemes for agricultural commodities ranging from pineapples, mango and maize (see Annex 3.2 SPEED data).
3.10. It is not possible to report on the extent of the FNGOs lending to agriculture in Ghana. FNGOs often prefer lending to services and trade rather than to primary agriculture as
these are generally less vulnerable to yield and price risks compared to rain-fed primary agriculture.
Performance of Agricultural Lending
3.11. In Ghana there is a wide range of performance history of various sectors in terms of bank borrowings and the loan repayment rates for agriculture have traditionally been very poor. A World Bank 2009 analysis of commercial bank lending by sector showed that
the poorest performing sector was agriculture, forestry and fishing with 23.1% of loans classified as non-performing. According the ADB’s own figures, in 2006, 50% of their agricultural loans were non-performing and although the recovery rates have subsequently been improved in 2009, 33% of their loans were still non-performing. In the 1990s many of the RCBs suffered from poor financial management, weak supervision and a high proportion of non-performing loans. Since then there have been concerted efforts, especially under the Rural Financial Services Project22 (RFSP) project to strengthen the management of the RCBs and to improve their financial performance. Steel 2008 reports performance data from the 2004 GHAMFIN study of a sample of RMFIs in Ghana and which shows that the FNGOs and RCBs had the best loan repayment rates of 99% and 92% respectively, but for government sponsored micro-credit programs repayment rates were poor (61%), while savings and loan institutions had the worst repayment rates (56%) (see Annex 3.1. for further details).
3.12. Sectors with poor loan performance such as agriculture face higher interest rates and limited supply of credit. The World Bank 2009 study showed that in July 2008 the
average base interest rates for loans to individuals offered by the four largest banks was 23.2%, or substantially lower than rates for sectors with poor loan repayment rates including most notably agriculture with average bank interest rates of 28.25% at the same date. The study also showed that larger firms have markedly better access to capital than SME’s and microenterprises. There was also some evidence that for agriculture the lack of access to rural finance and the high interest rates was directly related to the poor recovery rates and perception by the banks that this sector was very risky (World Bank 2009)23.
Constraints to Access to Rural Finance – Farm Level evidence
3.13. Several studies have shown that formal financial services in Ghana currently only reach a very small fraction or about 10% of the rural population (e.g. IFAD 2009, Panin
2009). A recent study was commissioned by GTZ/MOFA in 2009 and conducted with a random sample of 200 Cocoa farmers in two selected districts of Wassa Amanfie West and Assin North respectively in Central and Western Regions which are leading cocoa producing areas of Ghana accounting for more than 50% of total cocoa output. The selected areas benefitted from both government and donor funding aimed at poverty alleviation, and rehabilitation and sustainability of cocoa farming activities, through the GTZ-supported “IMPACT” (Mars Partnership for African Cocoa Communities for Tomorrow) project. The farmers had on average 9.3 acres of cocoa and nearly half of them also grew other food, vegetable and tree crops.
22
The RFSP (2002 to 2008) was implemented with support from GOG, IFAD, AfDB and IDA. The aims of RFSP were to promote growth, to reduce poverty and to improve access to rural finance especially or the rural poor. This was achieved by supporting improvements in the quality, variety and efficiency of services rendered by the RMFIs by way of capacity building through training, adoption of best practices and providing technical support (IFAD 2008).
23
World Bank (2009). Ghana Investment Climate Assessment: Accelerating Private Sector Growth:
Draft Report. Financial and Private Sector Development, AFTP, Country Department AFCW1, Africa Region. 15 April 2009. The World Bank Washington D.C.
3.14. The 2009 study showed that in spite of donor and government activity, the majority
of cocoa farmers do not have access to formal credit: only 7% of all cocoa farmers reported receiving a formal loan through a bank of cooperative (credit union) in the past three years, and only one in three farmers (32.5%) received credit through informal sources, in this
case commonly through friends or from cocoa clerks who typically pre-finance the cocoa farmer against the repayment with his harvest. Overall 60.5% of cocoa farmers did not access any credit in the past three years (Table 3.4.) (Panin and Asante 2009)24.
Table 3.4. 2009 Survey of Cocoa Farmers receiving Loans by Lending Source, Western and Central Regions
Item
All Cocoa Farmers Receiving and Not Receiving Credit, last
3 years
Cocoa Farmers Receiving Credit in
last 3 years
Sample size (No Households) 200 79
HHs receiving credit last 3 years (%) 39.50% 100%
Source of Loans:
Formal Financial Institutions: 7.0% 17.7%
Banks 5.5% 13.9%
Cooperative Groups 1.5% 3.8%
Informal Sources: 32.5% 82.3%
Friends 17.5% 44.3%
Cocoa purchasing clerks 13.5% 34.2%
Relatives 1.5% 3.8%
Source: Panin and Asante 2009
3.15. Reasons given by non-borrowing farmers for not applying for formal loans included 1) the delays by the banks in processing their applications, 2) the high interest rates
charged by banks and 3) the inability to satisfy collateral demands by the banks. This lattermost problem was cited by many farmers under the current IIPACC crop insurance feasibility study – as much land in Ghana is communal land which is allocated on medium to long term leases to members of the community, individual farmers do not have their own title to the land and cannot use the land as collateral against which to borrow credit from the banks. Alternative ways of securitizing loans are obviously needed in Ghana, and traditional crop insurance or weather index crop insurance may offer a potential solution to this problem (USAID 2008; World Bank 2009, IFAD 2008, MIDA 2009).
3.16. The GTZ/MOFA 2009 study with cocoa farmers found that there was a very high
potential demand for credit All respondents indicated their willingness to borrow to finance
their crop investments and in this case were willing to accept extremely high average rates of interest for credit varying from 36.2% in Wassa Amanfie West and a slightly lower average rate of 29.2% in Assin North. This compares with average rates currently charged by the rural banks of about 22% to 26%.
3.17. The same study also asked farmers to rank their key production constraints. The
findings are reproduced below. All farmers identified the lack of adequate credit institutions in their communities as their number one problem, followed by low prices for output, poor agricultural extension services including inadequate input delivery systems and inadequate output marketing and storage facilities (Table 3.5).
24
Panin, A. and Dr A. Asante (2009). “Financing Options and Financial Management for Cocoa
Farming and other Income Generating Activities (IGA) in Cocoa Producing Regions: Final Report”. GTZ/MOFA Consultancy Report, November 2009.
Table 3.5. Farmers’ Receptions of Major constraints to Crop Production Type of Problem
(N = 200 sampled HHs) Not a problem Serious problem
Inadequate credit institutions 0.0% 100.0%
Low sales prices for farm produce 5.5% 94.5%
Poor agricultural services 6.0% 94.0%
Inadequate input delivery system 17.0% 83.0%
Inadequate marketing and storage facilities 28.0% 72.0%
Source: Panin and Asante 2009
3.18. The conclusions of the GTZ/MOFA 2009 study centred on the need for government
and donors to encourage the spread of RCBs and FNGOs, to provide training for these
financial institutions and to provide the rural banks with special funds to solely support farmers and SMEs to enable them to acquire farm inputs, processing equipments and machinery to raise capacity production. Parallel to this, farmers and SME’s should be encouraged to form group-organisations Farmer Based Associations (FBAs) and SMEs entrepreneurs’ Associations (SMEAs) and assisted with training in business skills, financial literacy and to ensure appropriate management of their investment opportunities.
Conclusions on Access to Agricultural Credit
3.19. The lack of any form of consolidated reporting of agricultural credit provision by source makers it very difficult to assess the extent of lending to different crop sectors. The
available reporting suggests, however, that lack of access to seasonal production credit is a major constraint for many farmers in Ghana.
3.20. There is considerable interest in Ghana on the role that crop weather index insurance could play in increasing access to agricultural credit for smallholders who lack
land title and other forms of collateral which is acceptable to the banks losses (USAID 2008, MIDA 2009, World Bank 2009). Agricultural insurance can also reduce the lending institution’s risk exposure to climate induced catastrophe crop failure and inability of farmers to repay their loans. The lending institutions could therefore purchase CWII to protect their own agricultural loan portfolios again catastrophe losses. The role of agricultural insurance in leveraging Ghanaian farmer’s access to agricultural credit is an important theme in the remainder of this report.
Supply and Demand of Agricultural Insurance in Ghana
The Insurance Market
3.21. The Ghanaian insurance industry is very competitive with a large number of companies. In 2010 the insurance industry is comprised of: 21 non-life insurance companies;
17 life companies; 36 insurance broking companies; 2 reinsurance companies; 1 reinsurance broker and 1 loss adjuster. The market is mainly a private commercial company market and is open to foreign competition with several South African and Nigerian owned companies and most recently in 2010, the German Insurer Allianz has opened a new subsidiary in Ghana (Allianz Insurance Ghana). There is one public sector insurer, the State Insurance Corporation (SIC) which was partly privatised in 2007. There are two locally licensed reinsurers, Ghana
Reinsurance Company Ltd (GhanaRe) which is 100% state owned and MainstreamRe (see Annex 3.3. for further details of Ghanaian insurance market).
3.22. The insurance industry is regulated and supervised by the National Insurance Commission, NIC, in accordance with the provisions of the Insurance Act of 2006 (Act 724).
NIC is funded by the local insurance and reinsurance industries. Its basic functions are to monitor and supervise the insurance industry and it is responsible for the registration of new