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!