Individual credit ratings could trim interest rates – Financial expert

A credit ratings system that assesses the creditworthiness of individuals, and can be accessed by all financial institutions, could be critical to solving the canker of high interest rates in Ghana, Akosua Oduma Oppong-Tawiah, Managing Director of Capital and More Microfinance, has said.

The idea is that once an individual has a good rating, the financial institutions should be able to offer them loans at lower than average rates of interest.

“We need a data base; we need to have a database in this country that collates people’s credit history. It is high time we came together and built our own centralised database and have an individual credit rating system,” she told the B&FT in an interview.

With such a ratings system – a sort of financial ID monitored and regulated by the Central Bank – an individual with a positive rating or good credit history should not be given loans at the same rate of interest as a first-time borrower or an individual with a bad rating, she said.

“Some people will be A+, A, A-, B+, B, B- and others. So, if you take your loan, you pay on time, you stick to the rules of the game, you finish and you are in the database as someone with good ratings, you are given a better rate the next time you want to borrow,” she explained.

“Those who are diligent and are sticking to the rules of the game can be rewarded in cheaper interest rates but as it stands now, since there isn’t a central database, people are still borrowing from one institution; they won’t pay but then they move to the next financial company, and they hurt all of us and hurt the industry as a whole,” she added.

Loan defaults tend to be high in the country, and critics often associate same with the high rates of interest.

The Central Bank reports that average lending to individuals and businesses peaked at 32percent per annum by November, 2016,with Non-Bank Financial Institutions, especially microfinance companies, lending at rates as high as 100percent per annum.

Non-Performing Loans (NPLs), on the other hand, peaked at 19.3percent in May 2016, before dropping to 17.4percent in December, 2016.

Mrs. Oppong-Tawiah believes a databse on the creditworthiness of individuals should help bring down interest rates because two major factors considered before interest rates are slapped on loans include the cost of funds and the risk profile of the borrower.

“For example, if a financial institution charges 5percent per month on a loan [which equates to 60percent per annum] about half of that could be the cost of funds but the other half is due to the risk profile of the borrower,” she said.

With GH¢35.5billion given out as loans or advances to individuals and businesses by December, 2016, NPLs, which stood at GH¢ 6.2billion, represented 17.4percent, with analysts noting that such a high NPL rate is a danger to the survival of the financial sector

Even with the rate on Treasury Bills dropping significantly from 22.80percent in April, 2016, to a low of 15.9percent in January, 2017, and inflation dropping from a highof 19.2percent in March, 2016 to 15.4percent in December, 2016, interest on loans have not dropped in a long time.

How about credit reference bureaus?

Asked to comment on the role of credit reference bureaus in the financial industry to help sift through bad borrowers from the good ones, Mrs. Oppong-Tawiah noted that though there are credit reference bureaus it is not mandatory for financial institutions to utilise them.

“How many people are in there in the credit reference bureau system? So, you still have borrowerswho are on the periphery of the financial system and are not being accounted for but if it is centralised like a database or a hub, then we can all log in,” she added.

“Therefore, without any record, you start from the scratch but as you take more loans the rate we give you should reduce irrespective of the bank you are taking the loan from.”

The US experience

The United States has a credit ratings system known as “credit score” which is a number representing the creditworthiness of a person.

Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers. Widespread use of credit scores has made credit more widely available and less expensive for many consumers.