OPINION: Ghana’s phantom economy: My open letter to Ghanaians from Oxford
It is high-time we came to terms with the severity of the financial and economic crisis in which Ghana finds itself right now as highlighted by the banks’ collapse. This isn’t just a banking crisis and so collapsing banks and consolidating them would not fix it.
Banks are supposed to mobilize money or people’s savings and make it available to businesses and individuals as credit to turn around and make more money and whilst at it, grow their businesses and the economy. #ALevelEconomics #NotSureAboutSHS
Ideally, there shouldn’t therefore be too much of a difference between what a bank will pay you for keeping your money with them and what it charges on loans it gives out to borrowers. This is known as the spread. The large spread in Ghana where as Business News Editor at Joy FM, I used to harp on as a major complaint by bank customers was largely ignored. And the banks continued to offer next to nothing to the customers for the deposits they held in trust.
So when the microfinance and deposit-taking institutions (I’d refer to them as MFIs subsequently) such as the DKMs and God is Love came on the scene and were offering much higher returns, people checked their monies out of the banking system and sent it to these MFIs.
Before all that though, we had once experimented with the R5s and Pyrams, and I’d want to believe it was also as a result of this disenchantment with the banks’ low return on deposits. (I was too young to understand economics at the time. I was just a hungry boy, mainly interested in food).
There were also the EPACKs and others like it, which gave investors more attractive returns than the banks’ miserly 2-3% per annum kind of thing. Of course we can’t leave out the government, which was offering better rates on Treasury Bills through the Bank of Ghana.
Once depositors found how to make better return on their monies as compared to what the banks were offering them, cheap funds started becoming extinct. Why would I send keep my money in the bank and earn 2-3% or nothing when I could at least get T-bill rate or even better with the MFIs? #CommonSense
All this while, check out what the banks were charging on loans they give out, an average of 30 percent per annum. I’m deliberately going to stay away from the actual rates, because I’d have to also indicate the era, as in the dates, as the rates evolved over time. That’s Phd economics, which I don’t have.
Once cheap funds started becoming extinct and cheap loans were no longer available for businesses to borrow to turn around, people started to invest their surplus funds out of the supposedly better regulated banking system in the virtually free-for-all parallel system which had a mix of cooperative schemes, MFIs, savings and loans etc. It was so bad, that the banks started sending depositors funds there too, because they also wanted to cash-in.
There were those with access to cheap loans from banks or their workplaces who would take those loans at less than 5% percent per annum and invest in these schemes and get returns of AT LEAST 25%, because it was way higher for most people.
Why would any rational being risk starting a business with their money or other people’s monies when they could just invest it in a scheme, fold their hands and make AT LEAST 25%? It was therefore less profitable or financially rewarding to start a business venture.
That’s when money started being shifted around and the phantom economy began to boom and all the other things that have emerged with the collapse of the banks, occurred.
The collapse of the banks is just the beginning of the attempt to correct the system. It is very likely the Savings and Loans, microfinance companies, fund management schemes, insurance companies and pension funds may also follow. And it will come with casualties by way of job losses, mainly because they were not well-grounded businesses. The businesses established using such “wild funds” cannot stand the test of time because sound management and finance principles were ignored. Their managers defied all logic in running these businesses.
Unfortunately, if such businesses would interface with well-run organizations, which would take them seriously, only to realize in the past year or in the last few months, that goods and services they sold to such, would not be paid for.
If you find yourself as one of those who dealt with such businesses, start making provision for bad debts, if you haven’t written them off already.
Where we are now?
The Bank of Ghana is trying to correct a financial system, which has been allowed to distort over many years. A system where it has become normal that if one has surplus money on them, they have come to expect some good returns wherever they invest, otherwise they would keep it in a safe place, or change into dollars and leave in their dollar accounts. As I write, the US dollar is asking for five cedis to check into the Ghanaian financial system.
Back to the subject. The Bank of Ghana is talking about a policy rate of 17%, which as far as I’m concerned is a legislated rate, which just a limited amount of the money in circulation would respect. Yes, because a large chunk of the money in circulation is interested in the 100%-plus return being offered by Menzgold.
As a country, we have to at some point confront the fact that we have a phantom economy and shake things down, take in the casualties and start on a fresh note, because what we have now is clearly unsustainable.
Without access to cheap funds, no one would want to invest in the kind of business venture that would provide sustainable jobs and transform the Ghanaian economy.
I believe I’ve said enough. There’s enough to chew on.
The author doesn’t have a Phd in economics or finance. Most of the economics informing the piece was learnt at the GCE O and A Levels and rehashed at the university, but reinforced by observing the Ghanaian economy for years, at a point as a business news editor at Joy FM and relied upon by the BBC for business news analysis. The author hasn’t talked about how monies sucked out of the financial system has been dumped in luxury apartments and structures, that the people who had access to wild monies used to take up, but can’t anymore because of the collapse. Some of the wild monies were also going to recipients of finder’s fees or FF, which was also left out in the analysis.