Towards Developing Trade Credit Policies in the Ghanaian Construction Industry: An Analysis of Constraints

The excessively expensive and inaccessibility to bank finance by many contractors for financing the construction industry among other factors explains the underdeveloped nature of the construction industry in Ghana. Trade credits which have been recognized in extant literature as both a substitute and complement to bank financing is also experiencing a market failure; yet, little to nothing is known about the constraints faced by supplier in extending trade credits to their contractors. This may lead to a weak reliance on findings from other economies for policy trade credit formulation. Nonetheless, contradictions about the cost of trade credit compared with bank finance and its position in the pecking order indicate that country-specific evidence is imperative. By adopting the Relative Importance Index (RII) aided by Principal Component Analysis (PCA) in analysing data collected from 75 SME construction merchants within the Kumasi metropolis of Ghana, the study concludes that three interwoven principal components: (1) Asymmetric Information (2) Weak Legal Environment and (3) Weak Macroeconomic Variables are the constraints to trade credit supply in Ghana. Asymmetric information is characterised by poor accounting standards and little education on trade credit; while the difficulty in enforcing the terms of trade credit contracts expand creditors’ risk constituting a weak legal environment. The high cost of financing materials acquisition underscored by high interest rates prices-out many buyers, which disincentivises the offering of trade credit. Theoretically, three trade credit models including the Agency Model, Financial/Liquidity Theory and the Marketing Theory are applicable in explaining the low levels of trade credit financing in Ghana. Practically, the paper provides a basis for budding appropriate trade credit policies and market in Ghana. Future research could concentrate on developing a framework for trade credit contracts in Ghana as well as developing mechanisms to overcome information asymmetry. We could further look at assessing the potential role of trade credit in the development of the Ghanaian construction industry, and how the establishment of a construction industry regulatory agency could promote the development of trade credit options. Keywords: Legal Environment, Trade Credit, Contract Enforcement, Constraints, Asymmetric Information

Towards Innovative Housing Financing in Ghana: An Evidence-Based From South Africa’s Pension Housing Financing System

It is onerous for low- and middle-income earners in most developing economies to satisfy the five (5) Cs lending criteria: character, capacity, capital, collateral and conditions. Consequently, about 80% - 90% of Ghanaians cannot afford a mortgage to purchase the cheapest developer-built unit. Key to the affordability problem is inadequate sources of long-term funds and the high cost of the available formal housing financing sources; i.e. mortgage. The concept of pension housing financing in South Africa provides evidence as a potential innovative solution to the above challenges in Ghana. Hence, through a review of extant literature based on axiological philosophy argues for the similar use of pension assets for ‘direct’ mortgage and micro housing financing in Ghana. In theory, pension loans and pension-secured loans could provide a better asset-liability matching for housing financing based on the Preferred Habitats Hypothesis; a potential solution to the long-term scarcity of mortgage funds, maturity gap problem and liquidity risk, which currently accounts partly for the substantial risk premiums on mortgage loans. Thus, eighty-five (85%) of SSNIT members have about 25-30 years to retirement. The paper starts a debate for the implementation of section 103 (2) of the National Pensions Act of Ghana, 2008 (Act 776), which provides the legal impetus for the collateralization of pension benefits as security in replacement of the adverse traditional brick and mortar collateral regime in accessing mortgage finance. Future studies could identify ways by which section 103 (2) could be implemented. Prior to that, testing the proposed hypotheses is vital. KEYWORDS: Ghana, Housing Financing, Innovative Financing, Mortgage, Pension Loa

The relative importance of mortgage pricing determinants in mortgage affordability in Ghana

Purpose The purpose of this study is to explore the mortgage affordability problem in Ghana, an issue that has been associated inter alia with high mortgage rates, which results from the high cost of capital, an unstable macroeconomy and unfavourable borrowers’ characteristics. Concurrent improvements in both the macroeconomy and borrowers’ characteristics have rendered the identification of the most problematic mortgage pricing determinant difficult, consequently making the targeting of policy interventions problematic. Design/methodology/approach This research sought to resolve this aforementioned difficulty by providing empirical evidence on the relative importance of mortgage pricing determinants. A data set of mortgage rates of selected Ghanaian banking financial institutions from 2003 to 2013 was examined and analysed by applying Fisher’s model of interest rates and an ex post analysis of the standard regression coefficients. Findings The risk premium factor emerged as the most important determinant in Ghana compared with the inflation premium and the real risk-free rate, although all are statistically significant and strongly correlated with mortgage rates. Originality/value This study provides an insight on the relative importance of mortgage pricing determinates and subsequent macro-economic guidance to support policy interventions which could reduce mortgage rates/enhance mortgage affordability. The paper specifically aims to engender wider debate and provide guidance to the Ghanaian Government and/or private enterprises that seek to provide affordable mortgages. Further research is proposed which could explore ways of reducing mortgage rates as a means of engendering social equality and adopt innovative international best practice that has already been tried and tested in countries such as South Africa and the USA

The relative importance of mortgage pricing determinants in mortgage affordability in Ghana: An ex post attribution

Purpose: The purpose of this study is to explore the mortgage affordability problem in Ghana, an issue that has been associated inter alia with high mortgage rates, which results from the high cost of capital, an unstable macroeconomy and unfavourable borrowers’ characteristics. Concurrent improvements in both the macroeconomy and borrowers’ characteristics have rendered the identification of the most problematic mortgage pricing determinant difficult, consequently making the targeting of policy interventions problematic. Design/methodology/approach: This research sought to resolve this aforementioned difficulty by providing empirical evidence on the relative importance of mortgage pricing determinants. A data set of mortgage rates of selected Ghanaian banking financial institutions from 2003 to 2013 was examined and analysed by applying Fisher’s model of interest rates and an ex post analysis of the standard regression coefficients. Findings: The risk premium factor emerged as the most important determinant in Ghana compared with the inflation premium and the real risk-free rate, although all are statistically significant and strongly correlated with mortgage rates. Originality/value: This study provides an insight on the relative importance of mortgage pricing determinates and subsequent macro-economic guidance to support policy interventions which could reduce mortgage rates/enhance mortgage affordability. The paper specifically aims to engender wider debate and provide guidance to the Ghanaian Government and/or private enterprises that seek to provide affordable mortgages. Further research is proposed which could explore ways of reducing mortgage rates as a means of engendering social equality and adopt innovative international best practice that has already been tried and tested in countries such as South Africa and the USA

An assessment of mortgage loan default propensity in Ghana

Purpose Credit market development requires appropriate credit assessment and default policies. This paper aims to examine the impact of household characteristics on mortgage default, using survey data collected from Ghanaian financial institutions. Design/methodology/approach Data were gathered using semi-structured questionnaires from customers of five universal banks in Ghana. A logistic regression was used to model the determinants of credit default propensity. Findings Contrary to established knowledge, the study shows that females are more likely to default on credit than their male counterparts. This is even more likely if the female is older, unmarried, divorced and financially illiterate and has lower educational attainments. These factors are associated with lower earning capacity, which increases default tendencies. The findings confirm that price instability (typified by excessive movements in inflation and exchange rates in addition to low national savings rate) are adversely linked to credit defaults. Borrower’s perception of constraints to credit access (such as collateral requirements, interest rate and loan size) influence credit default. Banks should be encouraged to invest in the financial literacy skills development of their customers to mitigate credit default tendencies. Social implications The study is of practical value to credit officers and the development of the credit market in Ghana. A novel model is presented for assessing credit applications and developing credit default policies. Originality/value The research findings have not only expanded the frontiers of literature but also empirically examined the determinants of credit default propensity, which provides a basis for developing and improving credit default policy in the credit market.Scopu

Pension reforms, risk transfer and housing finance innovations

Weak housing creditor protection, accentuated by weak landed property rights and underdeveloped credit information systems constitute major constraints to housing finance development in many developing countries. Improving housing creditor protection require further institutional development and financial innovation. As a trigger of financial innovation, regulation has spawned pension reforms leading to the global shift from defined benefit to defined contribution pension schemes, which has created new opportunities to improve housing creditor protection and thus engender housing finance innovations. This paper considers how pension assets—accumulated benefits and associated personal, employment and contribution information—has provided a basis for collateralized lending and an additional avenue for credit information system development. The paper proposes a pension asset-backed creditor protection model that utilizes defined contribution pension assets to improve housing credit allocation, and thus, housing finance development. Pension assets represent alternative or complementary collateral assets for securing a housing credit (mortgage). And as depositories of information, the information content of pension assets and institutions could also be used alternatively and complementarily to assess the capacity, character and contribution (equity) of potential borrowers in the credit underwriting process. Future applied research may consider how the proposed model could be integrated in existing credit underwriting systems and the operational challenges that could emerge