SMEs want lending rates further down despite marginal decline

Photo: , Gideon Dendzo, CEO of Giddins Shoes, left and CEO of Zacky Foods Processing, Suleman Zakiya, right

Despite the marginal decline in lending rates in the past few months, small businesses – especially startups, have bemoaned why the cost of borrowing remains high at a time they need capital to inject into their operations.

The Statistical Bulletin report June 2020 published by the Bank of Ghana shows that average lending rates have declined to 21.95 percent in the aforementioned month after remaining in the region of 23 percent or slightly above that for almost a year and half. The first time the rate moved below 23 percent since December 2018 was in April this year when it fell to 22.38 percent.

This, the CEO of Zacky Foods Processing – a startup business in Accra, Suleman Zakiya, says is unacceptable and will only choke any young business which goes in for such a loan at that killer interest rate.

“As for me, I don’t think if you are a startup business, it is worth going for a loan at such an interest rate. You will end up running at a loss because it is very unlikely for you to make a profit that will cover the principal and the interest on the loan. All that you will gain will eventually go back to the bank you took the loan from in the form of interest paid,” she said in an interview with the B&FT.

Another startup entrepreneur, Gideon Dendzo, CEO of Giddins Shoes, also located in Accra, shared a similar sentiment, saying, the rate should come down to at most 15 percent and businesses must be given, at least, six months’ moratorium before they start paying back so as to allow time for the money to be put into productive use.

“Most of my friends who were also into entrepreneurship have stopped operating because of lack of funds to operate, especially in this pandemic period. They are no longer able to afford the cost of operations. So if lending rates can fall between the region of 10-15 percent, I think small businesses will be able to afford and payback in time.

Then, after the loan has been given, there should be at least six months’ moratorium by which time the money the business invested will have been yielding some returns to pay back,” he told the B&FT in an interview.

The Bank of Ghana in March reduced the policy rate by 150 basis points to 14.5 percent and encouraged banks to drop lending rates by 200 basis points for businesses. With regards to this, the SMEs argue that the pandemic-induced challenges should have triggered some sympathy from financial institutions to even go beyond the regulator’s suggestion for them to reduce lending rates by 2 percentage points.

But commenting on this same topic in an earlier interview with the B&FT, banking consultant Dr. Richmond Atuahene said such calls are unlikely to be answered any time soon, as the global pandemic has also impacted heavily on the financial sector, thereby, raising their operational expenses.

“Try to look at the situation very well and see whether the banks have actually dropped their lending rates by 2 percent. It [the 150 basis points cut in policy rate] cannot reflect immediately because of the operational cost that has gone up due to the pandemic. And when the operational cost goes up, the banks will not like to reduce their lending rates, otherwise, their interest income will reduce and it cannot cover their operational cost.

Secondly, their non-performing will also go up. And once the non-performing goes up, the interest income will come down. So it is not possible for banks to absorb all those expenses now,” he said.

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