High Lending rates – The Banks Are Not To Blame

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High Lending rates – The Banks Are Not To Blame

Many of us must have read or heard about this novel called The Gods Are Not To Blame. It was a classical 1968 play and a 1971 novel by Ola Rotimi, a Nigerian Novelist.  An adaptation of the Greek classic Oedipus Rex, the story centers on Odewale, meaning  The Hunter has come home, who is lured into a false sense of security, only to somehow get caught up in a somewhat contagious trail of events.

The Gods Are Not To Blame does not necessarily mean the divinities of the Yoruba traditions; rather it alludes to national, political powers – those that dictate the pace of the world’s politics. The title he says implies that these political ‘figures’ should not be blamed or held responsible for our own failings.

For instance, the very distinction between the oppressing powers on the outside and the local population on the inside is, and was, just as untenable as the difference amongst the communities that the oppressors sought to exploit.

The title of that great novel captures the event of today Ghanaian banking system succinctly.

Traditionally, Banks are agent of economic growth and development. They perform two main functions.  Primary Functions:

(i) Accepting deposits and advancing loans.

And the Secondary functions:

(i) Agency functions, General functions and Developmental functions.

Bank’s Developmental Functions

I will duel a little more on their developmental role because that is our interest in this article.

Banks play a very significant role in the economic development of a country. Banks are like departmental store in financial activities. The financial resources with the banks if used effectively and efficiently can spur economic growth and strengthen financial system of the country through their intermediation role.

The desired Industrial development can only be achieved if entrepreneurs are provided with the needed funds to engage in profitable and productive ventures. The availability of funds can be made possible through banks. The banks help government to allocate resources to competing sectors of the economy in line with government economic policies and the banks’ profitability focus. Sectors like agriculture, service industry, mining, transportation and communication benefits in no small measure from the financial support renders by banks.  Usually, they act as engine of growth and lubricates the oil of economic activities.  In this way, all the sectors of the economy develop leading to a balanced growth in the economy.

When banks create credit it will have an effect on domestic prices, incomes, employment and capital accumulation. When banks perform their real functions in the economy, the money market becomes very active and the larger economic feels the direct impact of robust financial system.

Additionally, as financial intermediaries, banks allocate funds between surplus units and borrowers. Banks also provide pricing information regarding the cost of borrowing money. For example, information, such as prevailing mortgage rates on loans of various terms, helps home buyers shop for the best rates. Likewise, businesses can shop for best rates on commercial loans too.

This particular role is still under achieved in our country Ghana. Recently, bank of Ghana came up with new policy directive to all banks that they should publish their base rate in the papers for their customer and public at large to know what their ‘best’ rate is.

If you have been following the developments in the sector, you will notice that there is selective credit granting, some banks even have a blanket ban on loan disbursement. While others ask their customer to provide full cash back for the proposed facility before the bank can consider the credit request of the customer.

Surely, no economy can grow with this unconventional approach to banking business. Beyond the issue of credit granting and economic growth is a fundamental issue of lending rate, even where they decide to grant the credit, you may have to pay the interest through the nose.

Why it is so disheartening is because with multiplicity of banks in the country, we still struggle to know what role they are playing in supporting the development of the economy. Should this be the case in our 21 century banking in Ghana?

If you take a census of banks in the country, we have about 27 Commercial banks, uncountable rural banks, innumerable microfinance houses, savings and loans companies’ limitless, sizeable numbers of money lenders, not to talk of Mortgage Financial Institutions. Despite the multiplicity of these institutions which cannot be less than 500 companies put together in a country of less than 25 million people. We are still battling with the question, which way forward?

Recently, the Ministers in charge of Allied and Finance Institutions at the Presidency, Mr Fiifi Kwettey, stir up the hornet’s nest in respect of who should be blame for the high lending rate in the country.

The Honorable Minister, a brilliant and articulate young politician. Recently took a swipe on the banks for charging excessive rates to enable them make super normal profits given the least opportunity.

He said “The issue of high lending rates customers to be a major concern to many people and until it is addressing the economy would not make any head way and would keep going round in circles”.

Without holding any brief for the banks, I think the issues of lending rates have so many dimensions to get it reduced to a manageable level.  These are principal actors, Government through the regulator Bank of Ghana, depositors and the banks must engage in a workable solution to this long contentious issue of high lending rate in Ghana.

Treasury Bills Connection

Mr. Kwetey representing the government as a Minister in Charge of Allied and Finance Institutions must ensure that the Treasury bill rate which is the minimum expected return any rational investor expects on his investment should be controlled or substantially brought down from its current22 or 23% to a little above 12% as the starting point. If there is any meaningful impact is to be achieved in lending rate reduction campaign.  If the Treasury bill rates remains as we have it now, it is very difficult to expect any reasonable investor of excess fund to place it with banks below what a risk free rate return guarantees.

Why we agree that banks must assist the government to achieve its micro and macro-economic objectives it behooves on government to manage its expenditure more prudently and reduce it’s over dependence on treasury bills in meeting its funding gaps.

Treasury bills should be the last resort for government in funding its operations, but it looks like in Ghana the reverse is the case.

Treasury bills ranks next to taxes and levies in the order of importance to our government in the perking order of internally generated revenue besides cocoa fund and royalties from extractive industry. There is need for fiscal discipline and strong controls on areas of leakages in the system if we are willing to get out of this rat race of uncontrollable lending rate business we have today.

Financial ‘Galamsey’

Secondly, it is very difficult for government to checkmate this excessive interest rates reason being that the income derive by the government from the “super normal profit” borrowing the expression of my honorable minister Fiifi Kwetey, from these banks looks too juicy and irresistible for government to contemplate any clamp down or forcing the interest rate down. The higher the taxable income of banks the higher the taxes that enters the government covers. Who suffers the brunt?  It is the public most certainly, because the borrower without any recourse passes on the cost to its final consumer who incidentally has no choice but to pay and then waiting for a miracle of financial deliverance from any of the gods depending on the one he believes in.

Banks too must key into the vision of the administration to achieve a lasting solution. I think the people in Government should find out the reason why we have so many banks in the system just as we have many radio stations than most countries in Africa with even higher population figures than us?

The truth is that the profit margin here is extraordinarily too high. If you look at non-bank financial institution for instances their average interest rate ranges from 4% to 8% per month or 48% to 96% per annum. Where in the world can you get that kind of return on investments? They pay about 30 to 36% per annum to their depositors, leaving them with a margin of about 60% per annum.

The depositors are happy at getting 36% return on their perceived risky investment (placement), banks are also happy they are making above 50% return on each transaction.

That is why you see a lot of people scrambling for Micro Finance or Savings and Loans license because it is the surest way to prosperity after the demise of Sakawa business and Galamsey clampdown.

Government is also happy that all their banks are making super profit and paying handsome taxes. This is like ‘blood money’ kind of business being forced out of helpless Ghanaians and foreigners alike by all the players in the system. We call our economy a social communist state but it’s at the advance stage of pure capitalism.

Base rate/Lending rate calculation.

Recently, Bank of Ghana came up with a new policy directing all banks in the country to publish their base rate in the newspaper on a monthly basis for the general public to know what rate they should expect when they want to apply for loan. That brought about the issue of base rate or ‘best’ rate.

Has that changed anything? No.  The idea is brilliant but there is still more to be done by the regulatory to achieve a competitive interest rate regime in the country.

From the template sent to banks by BOG on how to calculate the base rate, there is little or nothing any bank can do to change the basis of computation.

The only variable within the control of the banks is their projected profits which must have been approved by their board even before the beginning of the year.

  1. Cash reserve requirement- Fixed by BOG.
  2. Capital adequacy rate  – Fixed by BOG.
  3. Corporate tax  – Fixed by GRA.
  4. Operating expenses – Actual position of the bank as at the date.
  5. Total assets  – Actual position of the bank as at the date.
  6. Others assets – Actual position of the bank as at the date.
  7. Genera provision – Fixed by BOG.
  8. Existing 91 day T/bill rate – Fixed by BOG.
  9. The expected return on Equity in the bank’s budget – As approved by the bank’s

How do you blame the banks for the high Interest Rate when 5 out of 9 basis of calculation are externally determined?  Three out of the remaining four which are within banks’ control are actual position of things based on the financial report rendered to BoG on monthly basis.

Partial Regulation

To help the economy, Bank of Ghana should fix the margin on loan which must be uniform for all banks after they have reduced the Treasury bills rate to a reasonable level not above 12%.

Secondly, there is the need for interest rate pegging for deposit sourcing by banks. This automatically discourages rent seeking investors who prefer to sit and place money with savings and loans and microfinance outfits or commercial banks at ridiculous rates. Sometimes these rates range between 28% to 36% per annum. This is the deal breaker. It will discourage lazy investors and force people to engage in productive investment rather than expecting banks to trade with their money and pay them handsome interest.

If BOG pegs deposit rate at 2% above Treasury bill rate and enforce it across board that no bank should take deposit above this ceiling. You will see the base rate tumbling down. There would increase economic activities both from the rent seekers who will now use their brain and energy to think of what they can produce that would return more than what the banks is proposing and banks will ready be willing to lend to people who have genuine business proposal for them to make reasonable profit to meet their shareholders expectation.

The Way Out

To come out of this logjam, the recovery step should start with the Government  should look at other alternatives to generate Income rather than depending solely much on Treasury Bills or Open Market Operations which supposed to be a regulatory tool of BoG to control the economy but has now become “cheapest” revenue source to the government.

Government attention must shift from Treasury Bills to other Income generating ventures as I suggested in one of my previous articles titled “Much ado about Euro dollar Bondage”.

If Government can reduce their penchant for raising fund through money market on weekly basis as they do currently make it a quarterly demand at a much more reduce volume.  The Treasury Bills Interest rate will go down.  The kind of competition we currently see between public and private sectors for the available money in the money market will ease the lending rate substantially.  If we succeed in having it below 14% you will see that most banks cost of funds/ base rate will dramatically drop to less than 17%.

Genuine Investor should be able to approach banks to borrow money below 20% interest rate for productive investment. Default rate will reduce because interest rate is within tolerable level for business to succeed and pay back the loan contracted.

Finally, economic growth we are all yearning for becomes reality and unemployment issues can be solved at the national level.

The era of super abnormal profit will disappear from banks. There will be elimination of lazy bankers who are only interested in lending to government through treasury bills since the return on treasury bills is far above their company required return if they should do the right thing.

Government expected taxes and levies will increase significantly because more investment are being birth daily as a result of accessibility to funding from banks at reasonable interest rate.

Finally, most ailing or dead companies will naturally come back to life and breadth a sign of relief as a result of fresh injection of ‘blood’ capital into the operations made available by banks.