At a forum on financial literacy where I was one of the speakers, I was amazed at the look of incredulity on the faces of some participants when I stated that banks are not philanthropic organisations to indiscriminately dole out credit to every loan applicant. I thought that was obvious but I could have been stoned to death as I discovered later.
Matters came to a head when I dropped a joke that banks are not established for poor people. This was in reference to a questioner with very pregnant expectation of how and why banks MUST finance start- up businesses. That appeared to have been too much of an expensive joke for my audience, most of whom were youth expecting to find what they considered to be cheap sources for financing start- up businesses in Ghana.
Corporate social responsibility is integral to the business philosophy of many banks. But when a questioner asked me (innocently or mischievously) why banks do not liberally grant credit to poor people to demonstrate their social obligation, I quietly prayed for divine intervention, lest I fumbled with my response!
I could see from the now melancholic faces before me that my assurances to explain other non-bank sources of financing failed to ameliorate their disappointment, but some truths are hard to accept and must not be embellished with fantasies.
Obviously, state institutions like MASLOC, tinged with political colourations, are available to help. The snag is that their assistance is usually seen as “thank you offers” for political foot-soldiers when their party wins power. Expectations of loan repayment can at best be 30% or lower. Ultimately, all of us as taxpayers end up paying for the massive defaults. The same funds could have been given to the banks to properly manage and nurture the culture of loan repayment among borrowers.
This writer acknowledges with profound respect the remarkable progress chalked by The Teachers’ Fund. The unique characteristic of this outfit is anchored on a regular stream of inflows which permit seamless investments in specific projects to generate profits. Contributors to the scheme could expect sub commercial loan interest as a result. Branching into mainstream banking on its own feet would rather present a different challenge altogether.
The difficulties faced by some financial institutions which previously operated with reasonable profits in the savings and loans sector but which quickly obtained universal banking licenses should convince all about the peculiarities of banking business which do not permit sentimentalism or recklessness in the credit delivery chain.
The desire of GUTA and GREDA to establish their own universal or development bank to ostensibly afford members “reasonable and regular credit” must be seen with measured skepticism, particularly in the absence of clearly defined sources of sustainable deposits or long term funding.
Even commercial banks dependent largely on owners’ equity, customer deposits, subordinated debt and retained profits cannot grant loans below their cost of funding, the true magnitude of which is not known to many with fantastic dreams of liberal credits at lower interest rates.
Commercial banks will ordinarily help business loan applicants who have proposals which could be vouched to be profitable enough to make ample returns for the business owner. Ultimately, the loan applicant should be able to make repayments in line with prior covenants agreed between the bank and its counterparty.
Unbridled optimism of the loan applicant about the prospects inherent in a project should not sway the banker from appropriately charging for the embedded risk, especially in start- up operations.
Areas that permit some flexibility for the banker in the approve or decline decision usually have to do with the assessment of the risk categorization of the business being financed. Most importantly, the competence and integrity of the persons/directors sponsoring the loan application are assessed. This may be gleaned from past records or other verifiable references.
The risk/ return dynamic is almost invariably at play. The final cost/interest charged to the applicant will reflect this in addition to other non-financial factors like the bank’s desire to win the applicant from a competitor or simply being associated with a sector with promise of growth. Thus, even for the same amount of loan and tenor, Applicant A may be charged differently from Applicant B, not so much based on raw discrimination but on purely qualitative factors which ultimately translate into economic factors beneficial to the bank.
Any bank employee who has been through the rudiments of credit management will appreciate that emotions play very little role in the processes towards credit evaluation for the approve or decline decision to be made. Indeed, a bank official who assesses a credit request purely on an emotional attachment to the applicant and an inordinate desire to help the applicant out of financial distress is a risk to their employer.
In a summarized form, the decision to approve or decline a loan application, whether for a consumer or commercial purpose is predicated on an assessment of the likelihood of repayment of the principal and interest within the expiry of the loan. The desire to enter a particular sector or expand the bank’s loan portfolio is predicated on its risk appetite, capital adequacy, cost of capital, and an assessment of the business climate generally.
Responding to credit creation therefore has nothing to do with being seen to be helping the poor or marginalized in the society. Banks are like any profit- oriented businesses which must not be cajoled into risky ventures likely to imperil the fortunes of the capital providers or being a source of systemic risk in the economy.
A bank will fund a business only when there is demonstrable commitment of the applicant himself to risk his own capital, hence the tradition of banks not funding more than hundred percent of the entrepreneur’s own equity through loans. The availability of suitable collateral is a secondary consideration, based mainly on stability in value and ease of realization, inter alia.
A government determined to encourage entrepreneurship or foster the rapid growth of start-up businesses has the option of creating a fund that will be granted to the banks for on-lending to specific groups by the banks in line with the government’s populist agenda.
Venture capital funding readily comes to mind here. Start-up businesses could avail themselves of equity financing subject to defined corporate governance methodologies in the management of firms so capitalized.
Other pension funds, investment and insurance companies may also help with loans or equity, just as the formal stock exchange could help in the listed and unlisted securities market. In a few cases, donor agencies intent on assisting defined vulnerable groups also help with targeted funding.
The stark truth is that start-up businesses across many economies fail to flourish to expectation. This is not necessarily specific to Ghana but could be exacerbated by the peculiar operating environment, including regulation, taxes, incentives and the general business climate prevailing at a particular time.
It would therefore appear to this writer that it is unfair to simply ask banks and financial institutions to be lax with credit creation because of perceived high unemployment or other populist considerations. Banks would respond favourably with credit creation provided prospects for economic growth are visible. They will not consciously sit on excess liquidity since this does not generate profits for capital providers.
Ordinarily, there is a positive relationship between economic growth and bank credit in Ghana. The expansion of credit to the private sector is essential for economic growth. However, this does not mean that all banks should ignore time tested determinants of credit creation simply because of a government’s call to spur start-up operations irrespective of perceived risks.
Some mistakenly consider financial inclusion to be liberal extension of credit to marginalized groups. Efforts could be geared towards this, provided the government can be trusted with guarantees for these perceived vulnerable groups so that repayment is not impaired.
Trade credit as a source of financing for start-ups
An important source of financing for start-ups that most entrepreneurs tend to ignore is trade credit.
Trade credit is the practice of obtaining merchandise from a seller without paying the full value upfront. Another term is open account, especially in international trade transactions. An honest importer is supplied goods up to a certain value periodically.
The importer takes delivery and makes payment after selling all or a specific quantity of the merchandise at a later date. This practice could be cyclical and pertain to local business counterparts as well. It must be clarified, though, that this source is contingent on a large dose of credibility or integrity of the beneficiary of such credit, values that regrettably, tend to be in short supply.
I know of an SME business woman who has benefitted from this practice for over thirty years, taking assorted merchandise from one shop at Okaishie even up to GHs. 20,000.00 in Accra without the shop owner even knowing where this trade credit beneficiary lives or operate her shop in Accra.
The beneficiary thus, obtains interest free credit without stringent maturity terms associated with bank lending. It is instructive to note though, that this is a veritable source of financing for start-ups and SME operators in various sectors, from building materials to fast moving consumer goods dealers.
Obviously not all counterparties can avail themselves of this facility in view of the sheer lack of integrity and responsibility among many traders. The alternative for start ups is to pool resources from friends and family either through equity or sub-market interest rate lending. It is near suicidal to start off big with commercial bank lending in view of the costs and risks inherent in fresh business operations.
Banks cannot lend other depositors’ monies to a client in this fashion and should not be made to look bad in the sight of start-up business operators.
Cultivating the culture of loan repayment.
The Central Bank must be commended for starting the series on financial literacy, particularly the scourge of dud cheques which goes a long way to defeat the practice of using less cash in business transactions in this country.
Another salient area which should be addressed is cultivating the culture of loan repayment. Uncertainties abound in every business endeavour. It is appropriate, however, to contact one’s financial institution for rescheduling of loan repayment, rather than just refusing to pay back loans. Loans in default constitute a huge cost to the banks and imperil their profitability.
The notion that when a loan has been written off, the defaulter is left off the hook must be debunked. The borrower still has an obligation to pay back the loan even after a 100% write off, lest the bank reserves the right to realise any collateral security held.
It is also important to note that the high probability of loan repayment will encourage the banks to extend credit which will possibly inure to the benefit of most SMEs and individual consumers. The one big difference between credit delivery in Ghana and some of the advanced countries is the ease of accessing credit and the relative ease of assessing repayment probabilities.
This is made even more fluid with the existence of credit reference agencies, proper national identification and address systems, proper and quick law enforcement, among others. We can and must follow these lofty practices to make life easier for everybody.
An unfortunate practice that is creeping into our society is the penchant to take temporary facilities from the Telcos and refusing to honour repayment obligations. Consumers simply switch to other SIM cards to avoid repaying facilities taken earlier.
Anytime you want to transfer funds to a friend or relative and they ask you not to send the money through their regular phone number, there is a high probability that they are afraid the Telco will seize any incoming funds to offset default on outstanding loans. Let us all help to deepen credit creation within the system by honouring debt obligations.
Back to ethical business transactions
Business ethics enjoin citizens to accept morality as central when they become part of the commercial landscape. Issues of right and wrong must be addressed as core to the sustenance of a business. There is an inextricable connection between business and ethics. This must not be broken for the sake of profit. Contemporary emphasis on economic and social risk management attests to this.
Indeed, the sustainability of any business cannot be assured when a business operator consciously jettisons morality in the quest for profit. The moment consumers become aware of a business’s unethical practices, the business’s market share comes under siege, leading to a possible collapse.
The place of morality is central to any religion. The last population census clearly shows that Christians and Muslims together make up over 80% of the population in Ghana. It is gravely inexcusable therefore that our value systems appear to be declining. With this massive proportion of religious adherents, who then, are responsible for the crimes, thievery and corruption that have engulfed this country and stifling our growth.?
Each time I observe the frenzy associated with church services and the sanctimonious manner in which some Christians accept communion, I tell myself that if all of us could live promoting the love of neighbour as Paul expounded in 1 Corinthians 13, what a wonderful world we shall have! Sadly, my wishes evaporate at the same speed as my thoughts for a morally sound society emerges.
Within the same church compound, I bought adulterated honey from supposedly born- again Christians who know very well that they are selling a bad product to me. When I later found out about the adulteration, I asked myself if the same Christian brother will join a prayer session where noisy prayer warriors will pray in tongues for my healing if (God forbid) I am diagnosed with cancer apparently caused by the carcinogenic materials they add to the honey they callously and recklessly sold to me to make more profit.
Unethical practices from Regulators cannot be left out. If a business- person consciously ignores ethical standards to produce and sell harmful products, one would expect the appropriate regulatory agency to keep them in check for the general good. If your conscience pricks you to report the unethical practices, you suddenly become a victim when you are exposed to the villainous producer, against the accusation that you are attempting to ruin their business. For the sake of national reputation and cohesion, I refuse to mention which regulatory agency has disappointed me to the point of writing this piece.
A deficit of ethical morality that puts individual interests above the collective is ruining our civilization. We must not continue to make religion appear so abstract and only fit for reciting quotations and engaging in frenzied prayer sessions. God cannot be mocked!
Let us allow our religious principles to permeate our business activities, even in the absence of legislation and effective law enforcement. After all, integrity has been defined elsewhere as reflecting what we do when no one is watching. Corrupt officials and thieves should not revel in the wrong notion that a thief is only someone who has stolen and has been caught……. as long as you have not been caught, you are a gentleman or lady. God is watching from a distance.
My nostalgia about the Garden City.
Kumasi used to be called the Garden City of West Africa with many tree lined streets and manicured patches of green grass and flowers almost everywhere. In my teenage years, after the most intense of rainfall, flood waters receded within thirty minutes due to the natural hills, valleys and streams.
With modernization, when we should know better, buildings have sprung up in natural water ways at Dakodwom, Kwadaso, Suntreso, Oforikrom and other areas. Even River Subin has been buried under monstrous buildings along the railway yard, due in part to haphazard planning and corruption. Now with the least rain, the lives of innocent children are lost because of blocked water ways. Are the gods to blame for this self- inflicted catastrophe too?
The writer is a Fellow of the Chartered Institute of Bankers, an adjunct Lecturer at the National Banking College, a farmer and the author of “Risk Management in Banking” textbook.
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