Why your loan costs so much

The poor macroeconomic situation, not greedy banks, is responsible for the high cost of credit, senior bankers declared at the Ghana Economic Forum (GEF) on Tuesday.

In one of the main highlights of the forum, the bankers were quizzed about why loan finance is so expensive in Ghana despite an increase in the number of banks and the rapid expansion of the industry.

The lending rate of banks, which is more than 25 percent on average, is a nightmare for start-ups and businesses seeking finance for fresh investment. Comparisons are often made between the cost of capital in Ghana and peer-countries such as Kenya, where the average cost of bank credit is 17 percent.

In a response that was both sharp and insightful, Frank Adu Jnr., Managing Director of CAL Bank, said banks don’t determine the level of interest rates in the economy; rather, the rates reflect the macroeconomic environment and the nature of fiscal and monetary policies.

Banks have more fixed deposits than current accounts, he said, and the interest that is paid on fixed deposits mirrors the government’s Treasury bill rates, which is why to avoid lending at a loss, banks give loans at the T-bill rate plus a margin.

The big devil, he reasoned, is the T-bill rate -- currently above 20 percent and affected by inflation, the fiscal deficit, the strength of the cedi, and other factors controlled by government and the central bank.

“That is why collectively we must pressure the politicians to manage the economy properly to reduce interest rates, because lower interest rates are better for all of us,” he said.

Banks prefer low interest rates, he added, “because the spread between, say, a 10 percent fixed-deposit rate and a 15 percent lending rate is 5 percentage points, whereas the spread between a 22 percent fixed-deposit rate and a 26 percent lending rate is 4 percentage points.”

Low interest rates are also associated with a low default rate, which is the goal of every lender, he said.

Another respected banker, Asare Akuffo who manages HFC Bank, echoed the views of Mr. Adu; stressing that “if T-bill rates are high, we cannot lend lower than that”.

On the subject of how to “democratise finance” -- that is, make it easier for every citizen to get a loan or other types of personal finance -- Mr. Adu said the major barrier is lack of a reliable, integrated ID and geographical address system.

He blamed this hurdle for raising the risk of retail banking, which is the aspect of banking that deals with individuals and small or micro enterprises.

Ghanaian banks, according to him, are well capitalised to finance individuals and SMEs, but the principles of risk management and regulatory requirements have made KYC or “knowing-your-customer” obligatory for every lender. Yet this is where most borrowers falter, having no definite personal address or an ID built into a sophisticated system that enables their whereabouts to be easily determined.

Mr. Akuffo said unlike microfinance companies, which can deploy agents to collect repayments from borrowers daily or weekly; traditional banking operates with a different model and relies on trust between the borrower and lender.

He said banks have been adjusting to the special needs of the informal economy through the deployment of new technologies and payment systems such as ezwich and mobile banking. But this development must be assisted by government and people in the informal sector, who through better management and record-keeping can attract more finance from banks.

On the tricky issue of agricultural financing, Mr. Akuffo said the best approach, which many countries have successfully adopted, is to use specially-dedicated funds.

He, therefore, called for a boost to EDAIF’s (Export Development and Agricultural Investment Fund) resources and a possible reduction in its cost of funds to benefit more SMEs.

By Leslie Dwight Mensah | B&FT Online | Ghana