Charging interest rates above 10% is fraudulent

A Financial and Economic Journalist, Kwabena Adu Koranteng, has described the imposition of the interest rate charges above 10% on loan granted to customers by banks as fraudulent.

He describes this move as fraudulent since the banks and the financial institutions know that about 90% of their customers wouldn’t be able to fully reimburse the loans and that they would have the opportunity to seize the items and properties they present as collateral when they default.

The high level of Ghana’s interest rates has continued to be a source of concern in the country. Even as some measure of macroeconomic stability has been achieved in the past and recently, interest rates have generally remained stubbornly high.

According to him, banks in Ghana impose interest rate charges between 22% and 30% on loans they grant customers based on their level of relationship. Some are charged less because they are loyal customers while others are charged high because they are perceived as high-risk customers. This comes at a time when the Bank of Ghana’s Prime rate, that’s the rate at which it lends to customers stands at 14%.

Demanding high-interest charges from customers makes it impossible for any business entity to make profit when it applies such funds into business ventures. Most businesses that apply for these loans default in the end and end up going into hiding. Other customers falsify documents and present them as collateral and when they default after getting the loans, the banks are unable to take control of the assets presented as collateral.

Mr Adu Koranteng related high rate of non-performing loans being experienced in the banking sector to the increasing rates of loan default. “We will continue to have high rate of non-performing loans and high loan defaulting rates in the system if the banks continue to charge high-interest rates.

No civilized financially, sane country in the world will charge an interest rate above 10%. Even in Cote’D Ivoire, the rate is a single digit, below 10%.

If we really want to solidify the private sector’s role as the engine of growth, then we need to do something about the high-interest charges. If we want to promote Small and Medium Scale Enterprises to cushion the economy, then we need to do something about it.The risk premium is higher because our regulatory institutions are week. we need to strengthen the institutions and make them efficient to reduce cost of doing business.

It is interesting to note that all the multinational banks operating in Ghana grant loans to multinational companies operating in the country as well as the government of Ghana at interest rates that are less than 4%.

Sometimes loans are granted to such companies at interest rates between 1% and 4%.

In Islamic banking, as I’m told, interest rates are not even charged on loans that Islamic banks grant their customers.