Will Ghana shoot itself in the foot through new investment act?

In Ghana, small and medium enterprises form 92% of all companies and contribute 70% to GDP but their biggest constraint has been access to finance. A number of measures taken by the government have helped to ease this situation but a new act, argues Elikem Nutifafa Kuenyehia*, could reverse all the gains made so far.


In Ghana, small and medium enterprises form 92% of all companies and contribute 70% to GDP but their biggest constraint has been access to finance. A number of measures taken by the government have helped to ease this situation but a new act, argues Elikem Nutifafa Kuenyehia*, could reverse all the gains made so far.

While researching for a book on entrepreneurship over a five-year period, most Ghanaian entrepreneurs running micro, small and medium-scale enterprises 

(MSMEs) I interviewed cited access to capital as their biggest constraint. 

MSME entrepreneurs regularly have to pass up on several opportunities that are a natural corollary of a stable economy, a significant oil find and an increased demand for goods and services by a growing middle class and foreign investors.

There is a near absence of capital to finance early stage MSMEs in Ghana. The funding pool provided by personal savings, friends and family, angel investors and venture capital is insignificant relative to demand. The majority of banks, unable to properly evaluate and price credit to these businesses, treat them as an amorphous set and demand collateral regardless of industry or whether the entrepreneur has proven his concept. 

Even an MSME with a history of both revenue and profit will struggle to obtain an overdraft without providing unencumbered real property as collateral. In the unlikely event that such a business is able to obtain an overdraft, a rate less than an APR of 30% would be considered a bargain. 

Yet MSMEs make up 92% of all businesses in Ghana and contribute over 70% of GDP. Conscious of this, Parliament in 2004 established the Venture Capital Trust Fund (the ‘Fund’) and has subsequently provided incentives for Venture Capital Financing (VCF) Companies. These are companies whose sole object is to assist small and medium enterprises (SMEs) to develop through equity and quasi-equity investments and/or business and managerial expertise. 

SMEs are defined as businesses employing 100 people or less with assets (excluding land and buildings) of $1m or less.

The Fund is set up as a fund of funds, and it invests indirectly in SMEs by investing in VCF companies. VCF companies and their investors are entitled to generous tax incentives, including exemption from dividend and corporate taxes for 10 years whether or not the VCF companies also seek funding from the Fund. Investors can offset their investments in VCF companies against income to reduce tax liability. 

After operating for almost 10 years, the Fund has invested over $12.5m in 180 companies. In addition, it has paired up angel investors with SMEs seeking funding through its Ghana Angel Investor Network. 

Given how illiquid the Ghana Stock Exchange (GSE) is, the Fund and the GSE have collaborated to set up the Ghana Alternative Market (GAX). This is a separate public market, parallel to the main market, and acts first as an avenue for VCF companies and angel investors to exit investee companies and more generally to provide a channel for SMEs with high growth potential to raise patient capital through the GSE. 

The requirements for GAX are less demanding than those for the main market. In addition, provision has been made for a fund to initially cover listing expenses of these companies. 


Missing the wood for the trees
However, it now seems that the proposed new Ghana Investment Promotion Centre Act (which replaces the 1994 Act) and which is now awaiting Presidential assent, could undermine the work done by the Fund, VCF companies and the GSE. 

The new Act increases the minimum capital requirements for companies wholly owned by foreigners from $50,000 to $200,000, for companies owned jointly by Ghanaians and foreigners from $10,000 to $50,000 and for trading companies from $300,000 to $1m. As was the case under the previous law, the minimum capital must be brought into Ghana as cash, equipment or, in the case of trading companies, as goods.

Parliament justified the increases in minimum capital as a means to end unfair competition between foreign investors and Ghanaians. In doing so, the body seems to have ignored the rationale for reducing capital requirements from higher thresholds in the original 1985 Investment Code ($100,000 for wholly owned foreign companies and $60,000 for joint ventures with Ghanaians) which the 1994 Act replaced. 

The rationale, articulated at the time the original Investment Code was replaced with the previous Act in 1994 was to encourage joint ventures between foreign investors and SMEs who may require useful but expensive technologies which they could not afford.

It appears that Ghana’s Parliament is killing a fly with a sledgehammer and has missed the wood for the trees. The real issue is ensuring compliance with the law by foreigners who flout it. An increase in capital requirements would not ensure compliance but would deter legitimate foreign organisations from investing in Ghana to the detriment of Ghanaian MSMEs facing capital constraints. Parliament should have taken a broader view of the contribution MSMEs currently make and the even bigger potential contribution they could make given the framework now established by the venture capital incentive regime and GAX. 

With unemployment at historic highs, any legitimate investor should be welcomed with open arms irrespective of the size of initial capital. This is especially so as anecdotal evidence suggests that the typical foreign direct investor is himself an MSME entrepreneur who comes to Ghana initially because of personal, family or ancestral connections or as a tourist. Such investors typically invest between $10,000 and $300,000, with the greater majority on the lower side. In many cases, the enterprises grow beyond the initial capitalisation.

Unlike the situation 10 years ago, the same SME investor looking for a stable African country could invest for equally impressive returns in countries without minimum capital requirements such as Sierra Leone, Rwanda, Mozambique, Liberia and Zambia.

What Ghana requires to properly align its current economic and political credentials with its aspiration to achieve upper middle-class status is an investment regime that is nationality-indiscriminate and size-indifferent.

An immediate benefit of this approach, given the platform that GAX offers, would see more MSMEs list and trade their shares. One reason why the GSE remains illiquid is cultural – the notion of opening up companies to the general public is a concept alien to the vast majority of Ghanaian entrepreneurs, who typically also superintend companies with nonexistent or questionable corporate governance practices. 

Given that the majority of investment into Ghana is from Western countries with well-developed capital markets, my suggested approach will ultimately import the values of these countries as they relate to public capital markets and corporate governance and create a critical mass of entrepreneurs. Until Ghana is able create such a critical mass of entrepreneurs, its aspiration to achieve upper middle class status will remain a pipe dream.    


*Elikem Nutifafa Kuenyehia is the managing partner of Oxford & Beaumont in Accra and London and a lecturer in entrepreneurship at the Ghana School of Management and Public Administration. His book Kuenyehia on Entrepreneurship has been described as a ground-breaking resource on Ghanaian entrepreneurship.

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