Interest rate gap creating investment gap

Stephen Kpogoh has the sort of problem most banks love. The owner/operator of "Japo Travel & Tours" is ready to expand his business. Kpogoh has been in the tour game for more than a decade and has steadily built his operation. Now, he's looking for a loan.

"I want to buy a bus, the greatest part of my cost is hotels and than car rentals" he says. Ideally the entrepreneur wants to purchase a 50 seat bus, but for now he thinks it"s more realistic to buy a used 30-33 seat bus.

Kpogoh says his books are in order, he has cash in the bank, and most importantly he owns a four bedroom house and some land he can use as collateral.

In most countries that sort of pedigree would result in a slam dunk loan. Instead Kpogoh says he doesn’t feel his bank, SG-SSB, is taking him seriously. "Every time I talk to them, they ask the same questions over and over again" he says, adding "they ask about collateral, I have a house."

So Kpogoh is considering a back-up plan, tapping a private investor and going smaller with a 15 seat bus. It’s not ideal, but it would be a start. Still he feels this plan will cost him several years worth of progress.

This sort of story isn’t unusual. Talk to any small business owner and they rarely mention any sort of support from the banking industry. That’s despite the NPP’s stated goal of revitalising the private sector.

And even if the banks did want to help, there is the not insignificant matter of the gigantic interest rate spread. The average bank will, at best, pay no more than nine-percent on its deposits. But, according to the Bank of Ghana, the average Base Rate (what is supposed to be the best rate the bank will loan money at) was just under 21-percent. And the average rate the banks would loan money for is higher still - just under 25-percent.

Those rates make it very difficult for small entrepreneurs, the life blood of many economies, to grow.

And it has left Ghana’s banks with one of the widest spreads in the world. According to a paper published by Augustine Gockel for the Trade and Investment Programme for Competitive Export Economy the interest rate spread peaked at over 30-percent in 2000, and has narrowed to 16-percent by 2004.

But, even that 16-percent figure is more than five times the average spread of developed nations, and of the emerging nations of Asia. It also comes in well above the figures for both Latin America, and Sub-Saharan Africa.

The extremely wide gap between what Ghanaian banks pay to borrow money (the deposit rate) and how much they make off that money (the lending rate) has made Ghanaian banks the most profitable in Africa.

Or, as one anonymous source with connections to the World Bank opined "the banks are making out like bandits".

And while Ghana’s banking sector doesn’t deny their profitability, they say there are legitimate reasons for the massive rate gap.

"A lot of people don’t understand about non-performing loans" says Simon Donnell, the director of Barclays Bank Ghana’s Treasury Department. Donnell says that in Ghana 13-14% of Barclays loans end up going bad, compared to just two-percent in the UK.

There are also systemic problems within Ghana that contribute to bank risk. It’s difficult to exercise legal remedies" says Donnell, "its difficult to foreclose on collateral".

Prince Kofi Amoabeng the CEO of Unique Trust Financial Services agrees that the lack of proper infrastructure puts Ghanaian banks at greater risk than in other nations. "Systems don’t work in Ghana, streets don’t have names, houses don’t have numbers, the courts do not deliver justice on time, with all these problems the banks face high write-offs" he explains.

But, a quick look at the latest available financial statements from several major Ghanaian owned banks shows this isn’t totally accurate. Among CAL Bank, Ghana Commercial Bank, SG-SSB and The Trust Bank, only two, CAL and The Trust increased their bad loan provisions on a year-over-year basis.. But, as a percentage of the bank’s assets the provisions were almost flat. Meanwhile, SG sharply cut its provisions, as did Ghana Commercial (although it was affected by large one-time items).

"It’s not true that non-performing loans are growing says Sam Mensah of the Ministry of Finance. He says the government is concerned about "rates [that] have remained stubbornly high" and he lays the blame on a lack of competition".

Amoabeng refutes the first claim. "From studying the financial statements of the banks I can say without doubt some banks have manipulated their provisions to bring them lower not higher… this problem is real", but he acknowledges the later complaint might have some validity. When asked if the big banks behave like an oligopoly he says "you cannot rule that out".

For his part Donnell denies that speculation. "We [the big banks] don’t meet to talk about interest rates." Instead he says Ghanaian customers are more concerned about service than with price. But, University of Ghana, Legon economics professor A D Amarquaye Laryea isn’t so sure "Anytime as an economist you see unusually high prices you think of monopoly power".

The findings of the TIPCEE paper might bear that hypothesis out. It discovered Ghanaian banks generally don’t compete on price, meaning they aren’t using their most basic tool to win more business.

The study also found that even though there are more Banks in the country than ever before, the actual number of branches has declined. Although Prof Goeckel stops short of claiming something funny is going on. "I wouldn’t use the word collusion."

Instead he says it is the relative small size of Ghanaian banks that causes the lack of competition and the high rates. He argues that until the market consolidates there won’t be enough large players with low enough costs to allow the average Ghanaian to truly benefit from lower rates.

At Barclays, Donnell says the banks are "getting better" at helping smaller organisations, and says his bank is moving away from "high-margin transactions" towards making money off of a "high volume of lower-margin" deals. A model more similar to that of the developed world’s financial institutions. But, he says such a switch takes time. By his count just ten-percent of Ghanaians use banks – and until those numbers climb, it will be difficult for the banks to drop rates.

But would he lend money to someone like Kpogoh? While Donnell hasn’t seen the tour operators finances he’s wary, even if the numbers look good: "If you sign an agreement with customers with positive cash flow, 70% will not pay on time".

His compatriot at Unique Trust agrees. "The attitude of Ghanaians is the problem, the discipline to stay focused to keep money safe is not there" he claims. And Amoanbeng says it is not uncommon for Ghanaians to borrow money from the bank for business purposes, and than spend "some or all of it" on something completely different. "It’s a cultural issue" he says "we need a paradigm shift".

Of course none of that helps Stephen Kpogoh. He was told SG-SSB would loan him ¢200 million – if he had that much in cash in his account. The bank would advance him the cash, but then hold 80-percent of HIS ¢200-million. Unsurprisingly Kpogoh rejected that idea. "If I had ¢200 million, why would I need to borrow it? They want to charge to loan me my own money."

The frustrated entrepreneur thinks SG-SSB is missing the point "It is only when the businesses do well, that the banks do well". Thinking about the four-bedroom house he’s willing to use to secure the loan he shakes his head, "I don’t understand why any bank wouldn’t want to give me money."

Link to The Statesman : Business : Interest rate gap creating investment gap