This age-old debate of blaming bankers for the ‘ills’ of society or any economic hardship is an interesting one and will ever continue as bankers would forever apply the secret code of information asymmetry.
The ‘experts’ as they are called in the Ghanaian’s discourse, mostly have no clue on the pricing of loans or credit in the real world. As economists will say, ceteris paribus, but in the real world, ceteris paribus does not work.
As a banking practitioner, I have come to this stark realization that “Dy/Dx” or ceteris paribus is only good in academic simplification of concepts but in the real world, we are dealing with something more than the “Dy/Dx”.
For the curious minds, let me break the “banking secret code” and deal with ‘another Dy/Dx misconception versus the reality’.
To price credit in general or globally and in Ghana specifically, the following elements do come to play;
- The Cost of Funds – the big-ticket deposits in Ghana do come from institutional investors, insurers, asset and fund managers, and not from the central bank. It would interest you to know that, these professional money managers are always looking for a premium rate over and above the government or treasury bill rate (currently between 12.4946% to 16.1358% [Tender 1764 – Issued on September 20, 2021).
Hence, anyone is in error to think that, the bankers are taking funds from the Central Bank of Ghana, and at the monetary policy rate of 13.5%, for on lending. It would even interest you to know that, the Central Bank always prevents an arbitrage of taking money (normally for short term liquidity management and turn around to buy treasuries from the same central bank at 16% [ see BoG liquidity guidelines for COVID relief to Banks ad SDIs, issued in 2020 and also the Window Two: Symmetric Corridor for late operations for Open Market Operations discussed under the Monetary Policy Framework on the BoG’s website)]
Also no prudent banker (worth this title) would ever use short term liquidity management funding from a central bank to create loans, even though banking thrives on mismatch of deposits and loans. If any bank does take ‘hot’ money and applies it to loan creation, it would fail as an institution – The Northern Rock bank of the UK failure in the 2008 financial crisis as a result of this usage of ‘hot’ money.
In this vein, there is a disconnect from the reality as the professional supply-side of funds would be looking for a minimum of 18% pa for their investments or funds under management. Ask the largest fund manager in Ghana (SSNIT) or any other fund manager and you would appreciate this first point of a treasury bill rate-plus risk premium, being sought for the funds under management.
- The Cost of Primary Cash Reserves – In Ghana, there is a 6-8% primary cash reserve requirement for every deposit taken by the SDIs or banks respectively [MPC Report issued in May 2020]. This cost of primary cash reserves or liquidity premium translates into 1.14-1.56% for a 6%-8% for a deposit priced at 18% respectively from a professional fund manager. This cost must be and would be priced into any credit facility created by banks or SDIs in Ghana.
- The Cost of Operation– This is the cost of operating a bank or and an SDI – the staff cost, the premises cost, the equipment cost, the other operating cost must be recovered from the loans created by financial institutions. The big costs for most banks or SDIs are Staff cost and Technology (tech).
The reasons for these being ‘big’ are – if the staff take ‘risk’, which the business of banking, they must be rewarded or compensated accordingly or they would be committing or be prone to engaging in ‘fraud’. Man must eat. T
ech cost – the core banking software/applications, the Automated Teller Machines (ATMs), the mobile-app must be state-of-the-art and these do not come any cheap. On the average an efficient bank would be aiming at between 10-12% spread over the cost of funds in Ghana to break even or turn profits as banks and SDIs are not charities. There is breakeven loan rate.
- The Cost of default, expected losses (EL) and cost of recovery – this is where the rubber meets the road. There is high incidence of default rate in Ghana, is the elephant in the room, most of the ‘experts’ are ignoring. As at my last check, in Ghana, the Non-Performing Loans (NPLs) ratio is averaging 14% – July 2021 BoG statistics. This lamely or literally means, for every cedi given out by a bank or an SDI, 14 pesewas would likely ‘not return to the bank or SDi’.
Someone must pay for this!!! This must be recovered in new pricing of credit. The lower a Non-Performing Loans (NPl) ratio or rate, the cheaper the cost of credit. However, this is not the case in Sikaman, where certain (some) businesses and individuals sometimes think that bank loans are “free”.
Check with the Telcos, as there is high level of MOMO loan defaulters. I must admittedly say, the NPL ratios may vary from institution to institution, but the average ratio reported serves always as a guide for pricing. Also, the lengthy legal recovery framework (4-6 years on the average from trial to execution in the commercial courts in Ghana) and the attended legal cost must be paid for through risk-based pricing. For a newly established bank, this cost could just be 1%, the general provision charge as advised by the Bank of Ghana.
- The “other” risk premium– this premium depends on the economic boom or gloom of the country, the various sectorial performance or prospects and probability of defaults. For individuals, their credit history, their earnings and the probability of default come to play.
These probabilities of defaults are based on the moving average of a minimum of 60 months data points. It is not a single or static figure and thus varies based on the state of an economy, the sectorial break down and performance or the improved net worth of an individual, the current pay -cheque, the past credit history.
For Corporates, a similar assess using the Moody’s risk framework may be applied to determine the credit worthiness or otherwise. This is an added layer on pricing credit in general, as it varies. The SDI space is a ‘sub-Prime’ segment (for most SMEs) and thus the risk premium is high compared to the Multinational space.
From the above analysis – the cost of funds, the liquidity cost, the operating spreads, the cost of defaults, the other risk premium (18%+1.1%+10%+14%+??, equals 43.1%+??), our ‘experts’ must therefore understand or appreciate that, the bankers and the SDIs are ‘reasonable’ with the current asking price for credit for 20-30% unless we being mischievous.
My thoughts to the discourse.