Captain (Rtd) Prince Kofi Amoabeng, CEO - UT Bank

When the sub-prime mortgage lending problem exploded into a full-blown global credit crunch in late 2008, Ghanaian bankers were understandably smug in comparing their situation to the predicament of their international counterparts. Their sense of self-satisfaction got even stronger the following year when it came to light that eight of neighbouring Nigeria's 24 universal banks were in deep financial trouble because of their imprudent lending.

This was for good reason. Generally, the conservative approach of Ghana's banks to lending has put them in good stead, a stance helped by government's typically vociferous appetite for short-term debt taken by issuing relatively riskless treasury instruments. However, while Ghana's banks do not have a credit crisis, they do have significant problems with regards to the proportion of loans they give that deteriorate into bad credit. It is instructive that the interest cost of provisioning against non-performing loans, on average for the entire banking industry in 2009 was about eight times what it was by the end of 2005. Indeed as at December 2010, 17.6% of the banks' total outstanding loans were classified as non-performing. It is also worth noting that a year earlier the figure was 16.2%. Even as the operating environment for business has improved, the loan repayment performance has worsened.

Most bankers point to the high provisioning cost as evidence that lending in Ghana is very risky, which is largely why the banks insist on high interest margins. Simply put, the net interest income the banks demand has to cover the loan losses they incur from bad borrowers, as well as cover their other operational costs as well as shareholders' expected returns on their investment.

Meanwhile, despite the travails they face of risking a higher quantum of non-performing loans, Ghana's banks are being persuaded to step up their lending to the private sector in the face of falling interest rates, narrower spreads and slower new borrowing by government.
Credit extended by the commercial banks recovered through the fourth quarter of 2010, with real growth of credit to the private sector ending the year at a 16-month high. Real annual credit by the universal banks to the private sector rose by 9% between September and December 2010 resulting in a real annual growth of 10.4% compared with a decline of 0.2% at the end of December 2009.

To be fair to the banks, many borrowers are simply unwilling to repay their loans although some are genuinely unable to, having misapplied the funds in the first place. While banks
insist on high interest margins above their declared base rate (the rate at which a bank supposedly lends to its most favoured customers) for most borrowers, because of the perceived
risk involved, they actually lend at rates significantly below
their base rates to borrowers they regard as safe bets, such as big corporations that are consistently profitable and have
cash flows that can be applied to meet their loan repayment obligations.

Potential borrowers however are not satisfied with this. "There is no justification for banks to charge high interest rates because of what they claim are high default rates," says Tony Oteng-Gyasi, Chief Executive Officer of Tropical Cables and Conductors and the immediate past president of the Association of Ghana Industries (AGI). "Yes, there are risks, but they are not nearly as high as the banks make it out. The problem is, bank risk assessment processes are poor. They need to do better risk assessment.”


Bank of Ghana Governor, Kwesi Bekoe Amissah-Arthur

“They do not do enough due diligence on the numbers presented in loan applications to determine whether the projections are realistic and even whether the strategies proposed can really work."

He should know. Mr. Oteng-Gyasi says he has practical experience about these shortcomings, having served on the board of a bank in the past.

However, the bankers agree that lending is just too tricky in Ghana. "Debt collection is very difficult in Ghana," says Prince Kofi Amoabeng, Chief Executive Officer of the UT Group. "For instance, the Ghana Police Service is reluctant to prosecute people who issue cheques that bounce and court processes to recoup debts take too long, sometimes up to five years."
The smaller the company generally, the more risky the loan, since small companies have small cash flows and are unable or unwilling to take on competent managers to handle their finances, marketing and other professional assignments. The problem is exacerbated by the fact that such small and ill-managed companies are predominant in Ghana's economy. "The small and medium sized enterprises sector is a dangerous sector to deal with because about 75% of them are in the informal sector," says Amoabeng.

"So banks need to learn the (SMEs) peculiar characteristics. SMEs present major challenges. They do not have proper addresses, they have poor quality management, they are secretive about their business and strategies and they do not plan. And if you do not do the loan at the precise time they need it, they will divert it into something else because that particular business opportunity has gone," said Amoabeng.

In reality, the Bank of Ghana has been doing a lot to reduce the structural risk that banks run in their lending. Credit reference bureaus are coming on stream and the Central Bank has also set up a collateral registry to prevent a borrower from using the same collateral to secure more than one loan, as well as to ease execution of collateral. At the centre of the effort is the Borrowers and Lenders Act, promoted by the Central Bank, which details the rights, responsibilities and obligations of both loan counterparties.
There is a view that some aspects of the legislation may need some tightening, in order to encourage borrowers to be more creditworthy in their loan repayment practices. Generally though, the banks are not showing much enthusiasm for the risk reduction institutions and services that are becoming available.
But as long as increased bank lending is accompanied by increased bad debts, Ghana's banks will continue to be reluctant lenders,
prompted by sheer necessity rather than real enthusiasm.