Thursday, 5 April 2018

Can We Really Live On Our Monthly Salaries?

In this economy where good jobs are scarce, you've finally got one (congratulations), but your monthly income tends to run out even before you receive the paycheck. Well, this is not a problem exclusive to the average Ghanaian. Six in ten Americans don't have $500 in savings, (though the average American will most likely have a better retirement because of e.g. reverse mortgage etc, a subject for another day) which means more than half of Americans cannot absorb a $500 emergency bill. In the UK, we're looking at four in ten (someone is low-key doing the Math and going like "but Tab, $500 is GHS 2,205 today and that's not some easy money" ... I agree). The point is, if those in countries where the average income is $857 a WEEK can't absorb up to 14.6% of their salaries for emergencies, then you know you're screwed if you live and work in a country where the minimum daily wage is less than $2.5 (two point five dollars, NOT twenty five).

The good news is, irrespective of your monthly income (and this is not coming from a person of privilege), there is always some steps you can take to gain absolute control over your finances. I wish I knew those steps, or I wish anyone knew those steps, but I know for certain, that the first step is to know where your money goes through tracking your expenses. If you don't have an idea of where your monthly income goes, you stand little to no chance of knowing how to gain this control you desperately need over your money. Your other option will be to increase your income streams; side hustles, freelancing online, teaching private classes, etc. but truth be told, it's far more complicated than how financial advisers make it seem. So let's talk about what we can control.

The most important reoccurring expenditures most of us have are food, rent, ECG/GWCL and transportation. Most of us don't buy clothes and shoes every month, so let's put that aside (RT if you buy clo ... you know what? nvm). To keep this post short, I'll single out rent and generalize the other expenditures. If you're someone who pays rent, have you ever considered the possibility that you might be spending more than you should on rent? I've had a good argument for renting in the past, and it's a good time to share with you just how best to know if you're making a mistake with your choice of apartment because of how much it costs.

When I had time to freelance on last year, I was scripting for a real estate YouTuber and one of the topics was "how much house can I afford?" Most financial experts (Time Money included) advised not more than 28% of income be pushed into mortgage repayment (and that's after making 20% deposit). If we are to transfer the same idea here, I'll say we have no business spending more than 20% of our income on rent. 28-30% on mortgage is fine, because you'll own the house when you're done with repayment, but you cannot spend more than GHS 200 on rent if you earn GHS 1,000 monthly, not under our current standard of living. Sacrificing more than 20% of your income on rent is not worth it and you'll feel the effect now and in the long run.

Finally, our attitude as Ghanaians towards mental health issues mean people with CBD (compulsive buying disorders) don't even know they have a problem. Those privileged enough to have the mental toughness and discipline to have control over their finances tend to shame those who don't. If you can admit right now that you can't save not because you earn too low, but because you spend on things that you shouldn't be spending on, then please seek help. If you don't have the means to afford professional help, start by making a monthly budget, a shopping list, and download an app that can help you track your expenses. Make the commitment to stick to these for a start and make progress from there, but ultimately, seek help. 7Cups might connect you to some professionals online to help you ... give that a shot if you still need to talk to someone.

Monday, 12 March 2018

Why Loans in Ghana Are Expensive & Inaccessible To All

Commercial banks basically have two types of assets: loans and securities. It is in the interest of banks to give out loans, but for high rate of nonperforming loans, among other reasons. That's not to say that the opposite is true; it's not like I'm assuming that banks in Ghana prefer to push their working capital into securities because those are more attractive (trust that I'll investigate and any interesting findings will be published). That also doesn't mean I'm low-key saying returns on securities in Ghana is unattractive ... aarrgghh ... see stress! Let's focus on the subject. So, banks gain revenue from the difference between the loan interests paid by lenders and what they pay to depositors as interests on deposits. With good loans, businesses are able to expand their production capacities and individuals are able to live a much better life, and on a macro level, that propels economic growth. So why are loans in Ghana expensive and inaccessible to all?

As we speak, the Monetary Policy Rate (the rate at which BoG regulates short and medium-term borrowing, also the rate at which banks trade with BoG and other banks) is 20%. That is so high, which means the BoG's target is to discourage borrowing in order to keep inflation under control; remember that when banks see growth in lending, that affects inflation positively. On this rate, the bank will add default insurance, projected protection against inflation and some other interesting ones specific to each bank. By the time they're done, you'll be lucky to get 25%. National Investment Bank (NIB) has a lending rate of 32% for construction companies and personal loans. SME's are riskier, so they get hammered with 36%. Stanbic Bank is quite flexible when it comes to loans. They do what they term as "performance based" lending, where they assess each individual and determine the rate the person deserves.

Anytime you speak to the top dogs in the banking industry, they'll tell you that their greatest fear when it comes to lending is the high rate of nonperforming loans, which seems to be growing annually. Take NIB for example; historical data has informed them that SME's are riskier, so they pay higher borrowing costs. You'd think that it'll be in the interest of Government and the BoG to make some special arrangements for businesses to borrow at a much cheaper rate, but that will also be obstinate over time, because most companies are technically decorated sole proprietorship and the BoG knows that. An arrangement like that can potentially trigger the collapse of the banking industry so ... ɔtwe bɛbrɛ, ɔbɔmofo nso bɛbrɛ (an Akuapim proverb which means "the antelope will toil, so will the hunter").

Another reason why loans are expensive in Ghana has to do with the value of the collateral securities that the banks request when they're giving out secured loans. This is the part I find very interesting. In some countries, their economy simultaneously grows and declines with their real estate industry; if the economy is good, people generally buy properties and when it declines, the value of properties also fall because people are unable to afford them. In Ghana, it always seems a declining economy precludes our real estate industry. Freehold properties are not expected to depreciate in value, no matter how deplorable the economy becomes. Even if people cannot afford freehold properties, their prices continue to appreciate. It makes selling these properties to recover loans a very challenging task for banks. On the other hand, the borrower who presents a good property to apply for a secured loan doesn't get any preferential interest rate.

The final reason I'll talk about is one that is rarely discussed; moral hazard and adverse selection. Credit/lending markets can't function properly if information about borrowers is inadequate; this information can be one that helps banks to assess borrowers’ intentions to deliberately default, or if it's profitable to lend to such people when they seek personal loans. Then for business loans, banks must be able to assess the nature of business people intend to use business loans for and if that business will generate enough to repay the loan. This is a problem commercial banks in Ghana face when analyzing the credit worthiness of an individual or business. Most of the time, they get discouraged because aside the information that the customer or business will provide, there's no other way to get access to crucial information that will make lending easy.

M'ano ɛsi!