- …could the e-levy be the solution to decades of distortions in our financial services sector?
In recent times, many people including the President, my Boss, Ing. Yaw Osafo-Maafo as well as Tobge Afedi XIV have complained about high lending rates by our commercial banks despite the continuous trending down of the Bank of Ghana (BOG) prime rates from a high of 25.5% by end of 2016 to its current rate of 14.5% as at March, 2022. The President during the inauguration of the BOG Board last year urged the BOG to deal with the high interest rates. He noted and I quote “It is not right that the Central Bank’s Monetary Policy Rate stands at 13 per cent while the commercial banks lend to the private sector at rates of 21 per cent and above”.
The Senior Presidential Advisor, Ing. Yaw Osafo-Maafo in recent times during the AGI 4th Industrial Summit in Accra in 2021 also lamented about the high lending rates in Ghana as compared to our neighbours and business partners. He concluded that, unless something was done about it, Ghana was not going to reap the full benefit of AfCFTA Secretariat being cited in Ghana.
Togbe Afedi XIV also lamented about the operations of the BoG and the subsequent rebuttals from BoG also provided some learning curve for us as Economics students.
Even though the issues raised by both BoG and Togbe Afedi XIV were cogent, they do not actually address the main reasons why lending rates in Ghana are very high as compared to our neighbours and trading partners. For instance, the Francophone countries and Ethiopia are said to have average lending rate of 6%, South Africa and Nigeria are about 12%, UK is about 1.5%, USA is about 3.250%, Dubai is between 4.5-7% and China is about 4.350% So, how can we compete favourably with these countries in trade when the average lending rate in Ghana is about 21%. For some category of businesses, it could go as high as 30%.
There are several reasons why lending rates in Ghana are high. It is a combination of failures of the key stakeholders in the financial services sector. They include government policies, poor supervision, and lack of appropriate deterrent policies by the regulator (BOG); banks poor due diligence and collusion with clients which results in high non-performing loans (NPLs) and finally, rogue customers or clients of the banks who are serial defaulters and have serially been involved in the collapse of many banking institutions in Ghana. (Details of how these key stakeholders’ roles have affected the banking sector can be found when you google ‘Banking Rot: A Senior Economist’s 2017 memo provides key insights’).
For the purpose of this article, I will concentrate on the two key stakeholders (Government and Central Bank, BoG) whose positive actions in terms of policies could turn the economy around within a very short time.
- Macroeconomic management: If government cannot control its macroeconomic indices and allow the cedi to depreciate or interests’ rates to rise, then this will affect financial services sector. For instance, when the minimum capital requirements of the banks were changed to ¢60.0 million in 2008 at a time the cedi to the dollar was ¢1.0 : $1.0. Just by the cedi depreciating to ¢7.0/$1.0 in March, 2022, the banks have lost almost 85.7% of the original values of their minimum capital (the ¢/$60 million is now worth about ¢8.57 million). This has nothing to do with the banks’ poor operations in terms of negligence or poor recoveries of loans.
- Treasury Single Account (TSA) policy: The implementation of the TSA even though was a wonderful idea to consolidate government’s dispersed funds in over 15 thousand bank accounts with various banks, its implementation also created serious liquidity challenges for most of the banks. It is estimated that about ¢5.0 billion of funds of Ministries, Departments and Agencies (MDAs) were lost to the commercial banks to the Central bank. This has affected the float of the commercial banks that will now have to raise funds from the public or capital markets at a much higher interest rates for their operations. Hence, this action of government compounded the possibility of lending rates coming down as consistently as the prime rate.
It must be noted implementation of Treasury Single Account (TSA) in full is not good for an economy like ours. If you implement TSA in an economy that has low savings culture by its citizens, then you are starving the financial institutions of cheaper loanable funds, and this will have negative impact on your lending rate and the economy in general.
- Management of government contracts to the private sector: The greatest damage to our economy and the financial services sector is the construction industry. From 2012 onwards, the industry has been bedevilled with debt where successive governments have taken more than one year to pay contractors after they have raised certificates for work done. This has exacerbated the banks’ non-performing loans (NPLs). For instance, non-performing loans (NPL) as reported by the Bank of Ghana for 2019, 2020 and 2021 were ¢6.4billion, ¢7.1 billion and ¢8.2 billion respectively. This resulted in bad debts write off of ¢1.0 billion, ¢2.18 billion and ¢2.086 billion for the 2019, 2020 and 2021 respectively. This loan write-offs could be avoided if payments are done on time and within a financial year.
Bank of Ghana (BOG) Regulatory Policies
- Poor Supervisory Role. Not intending to blame any administration but the corporate entity, the BOG over the years have not performed satisfactorily in its watchdog role over the financial services sector. This was evident in the banking sector crises. Poor supervision led to some banks acquiring banking licences under dubious circumstances. Also, most of the banks were sitting on toxic assets. Yet, it took the IMF to point that to us and insisted on the banking sector clean-ups as one of the conditionalities for their bailout. This could have been avoided if the BOG was proactive and its intelligent unit working efficiently.
- Retail Banking: The BOG has been forced to play a retail banking role as a result of the implementation of the TSA policy. Even though, the TSA consolidates various funds in different accounts and makes it possible for government to now have access to funds that it would otherwise, not have been aware of, it has however, created additional burden on the BOG to play a retail banking role that it should not be doing. This has created delays and cues in BOG for officers of MDAs who go there to cash their cheques. It has also denied the commercial banks cheap funds that would have aided in cheaper loanable funds to the private sector.
- Poor Credit Reference Bureau regime: One of the missing links in our banking sector that is affecting consumer purchases is the lack appropriate Credit Reference Bureaus in the economy. We do not have a system that checks the credit worthiness of individuals and institutions for which vendors could advance credit sales as seen in other economies. Such systems support both the banking sector through advancement of mortgage loans and consumer spending. With the advent of the Ghana Card (National Identification card), there should be no excuse why such systems cannot be in place now. The BOG could set up such systems or license other institutions to provide such services.
- Failure to publish list of serial defaulting clients: One of the injustices we have done to ourselves as a country is the failure of the regulatory authorities to publish the names of serial loan defaulters. There are people in this country whose names/companies are associated with all the banking crises in this country. They move from one bank to another to take huge loans mostly beyond the single obligor limit and end up defaulting. Sometimes with the connivance of some top officials of some of the banks, the loans are written off as bad loans. Then, they start the cycle again either with the same bank or a different bank.
HOW E-LEVY COULD BE HELPFUL IN DRIVING DOWN LENDING RATES.
Government has promised to use proceeds (About ¢7.0 billion initial estimate) from the e-levy for job creation as in entrepreneurship and for the construction industry especially the road sector. Even if 50% of e-levy proceeds is spent in the construction sector, it could make a huge impact in the financial services sector and the economy in general.
For instance, government is the biggest employer in the economy especially in the construction industry which has been responsible for the woes of the banking sector challenges. If government can clear the arrears in the sector and ensure that all future contracts to be awarded are fully backed by earmarked funds (as in this case, e-levy), then the banks will be ready to loan out to the private sector at a reduced rate.
Government can even invest these monies in the local banks and use those investments as guarantees (not necessarily security for private clients) for government contracts rightly awarded to individuals and institutions.
In addition, government could enter into an agreement with the local banks (with investments of e-levy funds) to provide affordable loan schemes to the construction sector for which the qualification criteria could include those who honour their tax obligations as well as those who have not defaulted on loan repayment.
This kind of policy will not only make our local banks stronger and reduce the NPLs and loan write-offs but will also revive the construction industry which is the heartbeat of the economy. With stronger local banks, they could compete favourably with the foreign banks and handle some of the big-ticket transactions and hence, retain most of the profits in the industry in Ghana.
The repatriation of profits by the foreign banks and other multinational companies are the cause of the consistent cedi depreciation in the first quarter of every year. It must, however, be noted that such a policy needs the support of a credible credit reference bureau to monitor the performance of the beneficiary clients.
The E-levy is therefore very key not only to the banking sector and construction sector but also to the general macroeconomic environment.
Other Roles Required by Government
- Ensure macroeconomic stability. Inflation and exchange rate must be managed appropriately. They are the enemies of the economy and the poor. Government must take a second look at its profit repatriation policy. Either the percentages allowable to be repatriated should be reduced or should be spread across the year to lessen the pressure on the cedi.
- Government must take a second look at the TSA policy. Government must allow the MDAs and MMDAs to have at least one operational account with one local bank. This will reduce the pressure on the BOG in playing the retail banking role and also make cheaper funds available to the commercial banks to loan out to the private sector.
- There should be incentives to protect the local financial institutions by ensuring that majority of the government MDAs and MMDAs route a minimum percentage of their businesses through the local financial institutions.
- Ensure prudent financial management by ensuring proper and strict implementation of the GIFMIX programme so that payments for executed contracts can be made in good time.
- Government should do well to pay contractors and suppliers of MDAs and MMDAs in time to honour their obligations to the banks to reduce the Non-Performing Loans and loan write offs.
Central Bank/Bank of Ghana (BOG)
- It is safe to say that since the banking sector clean-up started in 2017, the BOG has demonstrated admirable commitment to its regulatory role. It has implemented several reforms including new corporate governance rules and capital requirements among others that have brought confidence and liquidity into the banking sector. A lot still needs to be done especially a very strong intelligent unit to pick signals from struggling or suspicious transactions happening in some institutions. This is one of the ways to break the cyclical crisis in our banking sector.
- If the government takes a second look at the Treasury Single Account (TSA), the BOG could be spared of this additional burden of having to play the role of the retail banking. Otherwise, the Governor must advise the government to allow it to concentrate on its monetary policy role while another institution or subsidiary handles the non-core roles of the Central Bank.
- The central Bank must start working on Credit Reference Bureaus that are capable of handling both individuals and institutional credit worthiness. A study tour to other countries where the Credit Reference Bureaus are working seamlessly can be embarked upon to learn from best practices. This is one of the ways to open-up the economy and boost consumer spending and eventually, expand the economy.
- BOG must set limits within a range for both deposit rates and interest rates for the various Tiers in the sector. The deposit rate should not be too wide from government’s Treasury bill rate. Likewise, the interest rate should also not be too wide from the policy rate of the BOG. This may not be a popular action for a free market economy like Ghana but is worth discussing with key stakeholders to bring down the rates.
- BOG together with the managers of the Credit Reference Bureaus must publish the list of defaulting clients periodically. Where necessary some of them should be blacklisted especially, the serial and wilful defaulters whose names have been associated with several bad loans across industry.
The economy could turn around much quickly if the government actual invests a greater percentage of the e-levy funds in the financial services and the construction sectors of the economy.
My little contribution for God and country.
The writer is the Senior Economist, Office of the Senior Presidential Advisor.