Banking Survey 2014: The Credit Story

Weak macroeconomic policies and structural issues account mainly for the high cost of bank credit, this year’s Annual Banking Survey has concluded.

In 2013 banks posted their best financial results yet despite challenging economic conditions. The results were impressive in all the key income segments and the industry continued to be dynamic on the technological front, deploying new channels to ease and enhance the delivery of banking services.

But the performance was also against the backdrop of a high interest-rate environment, fuelled by the large fiscal deficit, inflation and high yields on government bills. Most banks grew their loans and advances while at the same time investing heavily in lucrative government securities that were paying an average annual risk-free interest of 22 percent.

There’s no doubt credit is expensive in Ghana, with an average loan costing between 25-30 percent per annum. But for banks the cause of high interest rates is easily explained: it is the poor macroeconomic situation, characterised by expansionary fiscal policies relying on excessive government borrowing which, in a competitive lending market, pushes up the cost of capital.

It is not greedy banks but bad economic management that sends interest rates skyrocketing, senior bankers stated during the Ghana Economic Forum in March.

The cost of bank credit is a nightmare of start-ups and businesses seeking finance for fresh investment. Comparisons are often made between the interest rates in Ghana and peer-countries such as Kenya, where the average cost of bank credit is 17 percent.

At the Ghana Economic Forum and in interactions with banks participating in this year’s Business & Financial Times Annual Banking Survey, bankers were quizzed about why loan finance is so expensive in Ghana despite rising competition and the rapid expansion of the industry.

The consensus was that 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.

According to Frank Adu Jnr., Managing Director of CAL Bank who spoke to the B&FT in March, banks lend mostly from their customers’ fixed deposits, on which they pay a competitive interest that mirrors the returns on government paper.

These funds are then lent to customers at the T-bill/fixed-deposit rate plus a margin, effectively making the T-bill rate a benchmark for commercial lending rates.

The big devil, therefore, is the T-bill rate, currently above 24 percent and affected by inflation, the fiscal deficit and rate of government borrowing, the strength of the cedi and other factors controlled by government or the central bank.

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

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.

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.”

Reining-in borrowing and the budget deficit is thus a prerequisite for cheaper bank credit, which will facilitate industrial expansion and job-creation. The country’s deficit of 10.8 percent of GDP is above the level seen as reasonable and is crowding out private sector borrowers by raising interest rates.

High and rapidly-rising inflation also threatens interest-rate stability. Since September 2013 Ghana’s rate of inflation has jumped from below 10 percent to 14.5 percent, fuelled by the cancellation of petroleum and utility subsidies as well as the steep fall of the cedi.

Besides cost, the ease of access to credit – that is, the situation whereby it is easy for every citizen to get a loan or other type of personal finance – is a nagging issue within the financial sector. Banks reckon the major barrier is lack of a reliable, integrated ID and geographical address system.

This raises the risks associated with retail banking –the aspect of banking that deals with individuals and small or micro enterprises.

Banks believe they are well capitalised to finance individuals and small businesses, but they say the regulatory requirements and risk-management principles 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.

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. Where this trust is missing, banks hesitate to lend or do so at a premium to compensate for the risky nature of the transaction.

In the main, 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, the best approach for now, which many countries have successfully adopted, is to use specially-dedicated funds that are given out at much cheaper rates than bank credit.

This means boosting the resources of the Export Development and Agricultural Investment Fund (EDAIF) and streamlining the procedures for accessing the funds. More fundamentally, it means in some situations the state must directly intervene to facilitate financial intermediation for sectors shut out of the credit market because of their peculiar risks.