FBNBank Ghana Limited (FBNBank) has announced a new partnership with Unity Link Financial Services for instant money transfers to all FBNBank Ghana accounts in a fast and secure way. This forms part of the bank’s commitment to improve virtual payment and money transfer services in the country and the global financial space.

Country Head, Technology & Services of FBNBank Ghana, Rachel Adeshina said the bank’s introduction of the Unity Link money transfer service is based on its proposition to always put customers first by ensuring that its products and services are tailored to meet their needs and aspirations.

Mrs. Adeshina also stated that, FBNBank Ghana rolled out the Unity Link money transfer services to leverage the wide e-platform capabilities it offers to further ease the money transfer process for their numerous customers that constantly seek new and easier payment options.

The Unity Link money transfer service allows customers to receive their remittances directly into their accounts with the bank. With the introduction of the service, FBNBank Ghana now provides money transfer services for a total of seven operators such as Western Union, MoneyGram, Ria, Sigue, TransFast, and Wari. Non-customers of the bank can also pick up their Unity Link remittances from any branch of the bank.

Unity Link is a non-bank financial institution authorised by the Financial Conduct Authority (FCA) and registered with the HMRC in the UK and by regulators in other European countries to provide money transfer and other related business services.

About FBNBank Ghana Limited                

FBNBank Ghana emerges from an enviably rich heritage and banking tradition, which has shaped its business to become the leader across several markets in Africa and beyond. Our parent bank, First Bank of Nigeria Limited has built and nurtured the FBNBank brand with a strong heritage of time-tested values of trust and excellence, backed by innovation over a period of 126 years. FBNBank Ghana Limited, formerly International Commercial Bank (ICB) has been in the business of banking for 24 years in this country. FBNBank has 21 branches and agencies in Ghana, employing over 400 Ghanaians and providing indirect employment for its numerous Ghanaian service provider companies.

FBNBank Ghana Ltd., a subsidiary of First Bank of Nigeria, has extended a hand of support to the 37 Military Hospital in the fight against the spread of COVID-19.

The support, which includes presentation of Personal Protective Equipment (PPEs) and cash donation forms part of FBNBank Ghana’s over GH¢500,000 contribution that was made to various institutions including the Awutu Senya East Municipal (ASEM) Health Directorate, Kasoa and through the Ghana Association of Bankers.

Making the presentation at the 37 Military Hospital, the Managing Director of FBNBank Ghana, Victor Yaw Asante reiterated the bank’s commitment to promote the health and wellbeing of Ghanaians. He said the bank found it necessary to support every effort to stop the spread of COVID-19 in Ghana and the world.

Mr. Asante emphasized the need for all to continue to observe the necessary preventive protocols; which include wearing of face masks, regular washing of hands with soap, use of hand sanitizers and maintaining social distancing to help contain the spread of the virus.

The FBNBank Ghana MD lauded the relentless dedication demonstrated by health professionals in dealing with COVID-19 and urged Ghanaians to avoid stigmatizing people that had been affected by the disease to avoid people keeping infections to themselves.

Since the outbreak of the COVID-19 pandemic, the FirstBank Group has spent over US$2,000,000 in interventions to support the health sector, especially relating to testing, isolation, treatment and the provision of Intensive Care Unit (ICU) facilities in Nigeria and countries in which FirstBank of Nigeria Limited subsidiaries provide banking services.

Receiving the items, Brigadier General Dr. Nii Adjah Obodai, Commanding Officer of the 37 Military Hospital expressed appreciation to the FBNBank Ghana Managing Director and wished the bank well.

About FBNBank Ghana

FBNBank Ghana Limited is a member of First Bank of Nigeria Limited Group. FBNBank Ghana Limited (FBNBank), a subsidiary of First Bank of Nigeria Limited, has 21 branches and agencies in Ghana with over 400 staff and offers universal banking services to individuals and businesses. FBNBank Ghana Limited was formerly International Commercial Bank (ICB) and has been in the business of banking for 24 years in this country. FBNBank Ghana is part of the trade hub that has grown economies for 126 years across Africa, Europe and China.

From left to right: William A. Neequaye, Head, Commercial Banking, Victor Yaw Asante, Managing Director, Brigadier General Nii Adjah Obodai, Commanding Officer, 37 Military Hospital, Semiu Lamidi, Chief Financial Officer & Mohammed Ozamah, Chief Risk Officer

It is common to record changes in business performance as a result of unforeseen situations. Such will be the case for this COVID – 19 pandemic which has directly affected over 2.6 million people across the world and has already resulted in the death of over 180,000 people.  A lot changed overnight, with businesses and organizations required to change the way they conduct business.

On March 9 2020, the World Health Organization (WHO) suggested people turn to cashless transactions to halt the spread of the virus, a piece of advice many governments and businesses acted upon.

In Ghana for example, one of the first steps we took was for banks to step up provision of digital banking alternatives for customers. Mobile money transactions were also made cheaper and more flexible by Telcos. As a result, transactions that could be handled online have been moved online. In addition, working from home, which many employers dread due to possible productivity loss has become routine with employees also having to adjust to a new work culture.   There will be enough time to focus on the future of banking post COVID – 19 but it is reasonable to already start some discussions on what the future has in store.

According to Mr. Victor Asante, the Managing Director of FBNBank Ghana, many of the changes caused by the global pandemic especially to business operation and regulations should become the new normal after Coronavirus pandemic.

“Why would banking move back to pre-Coronavirus mode of operation when the potential for digital transformation has had such a significant lift? Why would a bank require a customer to visit a branch to complete routine transactions like account opening or loan application? Why would a customer want to revert to old ways of conducting banking transactions after experiencing the convenience of digital channels?” Mr. Asante asked rhetorically. He projected that “banks will implement their digital strategies ahead of their timetables and remain committed to the new methods in order to stay relevant in the banking and finance industry. The cashless economy agenda has been handed a great opportunity for accelerated implementation. The crisis of COVID – 19 is too good an opportunity for the cashless agenda and this in all probability should not be wasted.”

Banking transactions on mobile applications and other digital channels have increased significantly due to the pandemic. For instance, in the United States time spent on finance apps increased by 35% between December 2019 and March 2020 according to Liftoff (a Mobile App Marketing & Retargeting Company) while E – commerce increased by 25% between January 2020 and March 2020 according to Forbes Magazine (a global media company, focusing on business, investing, technology, entrepreneurship, leadership, and lifestyle). This validates the result of the 15th March survey of 1,000 customers by Lightico, a technology firm with focus on digitally transforming the connection between businesses and their customers. The result of the survey was that about 60% of the customers were more inclined to try a digital app. Similarly, the usage of blockchain payment apps have also increased. Everywhere in the world, coronavirus is expected to cause monumental growth in the use of mobile money transactions.

Mr. Asante believes that other payment channels aside mobile money will also record increased usage and will become more integrated into the payments system. Also, he thinks other aspects of banking such as relationships, retail banking and marketing may alter significantly post the COVID – 19 pandemic. According to him, “digital transformation powered by artificial intelligence (AI), which makes high level of personalization and real-time information dissemination a key part of product development, innovation and marketing will receive a huge boost”.

He however, cautioned against challenges that could emanate from the digitization process, especially fraud. The report of TransUnion’s global fraud and identity solutions division showed a 347% upsurge in account takeovers. In this regard, the MD of FBNBank acknowledged that as digital channels increase, so will the routes and opportunities that will be available to fraudsters. He therefore admonished banks and banking professionals to concern themselves with fraud management and prevention. He posited that “as banks transform technologically, fraudsters become more sophisticated. Therefore, as the industry is adopting faster and more convenient channels, banks now more than ever require potent fraud management strategies to stay ahead of the fraudsters”.

Cyber security’s place in banking and finance has just shot up to number one on the risk agenda. The issue of cost of business is another area he commented on, drawing attention to the fact that Banks would have to accelerate spending plans on digital platform roll out “as the issue has moved from just being a competitive advantage to that of health and safety”. Digital platforms used to be about banking convenience, but now all of a sudden it is also a health issue. He also reckoned there will be strict regulation and supervision to match the times. “This too shall pass,” concluded Mr. Asante, quoting the now very popular phrase.

Management of FBNBank Ghana Limited has assured the public that notwithstanding the outbreak of COVID-19 as a result of which movement has been restricted in parts of the country, all its branches remain open to provide services.

According to a statement on the bank’s website, the Bank noted that: “following the government’s enhanced response in the fight against the spread of COVID-19, FBNBank Ghana, in putting customers first, will continue to offer a full range of banking services at all the bank’s branches from 9am to 3pm on weekdays to serve customers.”

The statement added that there will be Saturday banking for branches that open on Saturdays from 10am to 2pm while its two agencies at Diamond House, PMMC and Kasoa will be closed. Even so, customers that desire to do transactions can use FBNBank Ghana’s digital channels like the ATMs, Quick Banking *894#, FBN Mobile and Online Banking channels.

“We have implemented all necessary health and safety measures across these branches to keep you safe at all our locations,” the statement read.

In keeping with observing social distancing, in the fight against the spread of COVID-19, the bank has implemented a business continuity plan which required that 50% of staff work from home permanently. The other 50% of staff alternate with a maximum of 25%-30% of staff working at any one time in the office.

FBNBank Ghana takes this opportunity to assure you that in the wake of the reported coronavirus cases, we have put in place measures to keep you safe at our branches and offices. It is important that in addition to measures we have put in place to keep you safe at our branches, you take multiple steps to minimize health risks to yourself and your communities.

We urge you to cooperate with the protocols put in place at our branches. Wash your hands thoroughly and regularly with soap under running water or use sanitizers before and after you visit our branches for transactions. The same should apply when you use our ATMs.

We remain open to offer you convenience so please do use our ATMs, FBN Mobile, Quick Banking *894# and Online Banking channels.

Remember to wash your hands regularly and avoid touching your face with your hands. Social distancing is also recommended and therefore avoid physical contact and close meetings as much as you can.

Finally, if you suspect you have been around anyone showing Flu-like symptoms or you are experiencing Flu-like symptoms yourself, reach out to a medical facility for assistance or call any of these national emergency numbers  0509497700, 0558439868, 0800110555 (Toll free). Let us know if you need additional assistance.

Not long ago, there was a good news from the Governor of Bank of Ghana “we have successively cleaned up the financial sector.” This followed two years of the revocation of licenses of banks, microfinance companies, savings and loans and finance houses. The clean-up exercise that started in August 2017 culminated in a decreased number of Commercial Banks to twenty-three (23) from thirty-six (36). The Savings and Loans institutions shrunk from forty-one (41) to twenty-five (25) while the Microcredit and Microfinance institutions got reduced from five hundred and fifty-four (554) to one hundred and sixty-eight (168). The Finance Houses, Leasing and Remittance Companies went down to seventeen (17) from twenty-six (26).

Almost simultaneously, there was a sad news from minister of finance that “the government had injected an average of GH¢18.6bn in the form of bailout to prevent systemic crisis in the banking sector (MOFEB 2019).” The bailout cost approximately 5% of GDP. It was a bad news because this humongous amount could have been deployed to improve the country’s road infrastructure, the health care system, education or the one district one factory project among others to improve the Ghanaian economy.

The above lends credence to the axiom that shock waves in the failure of financial services affects the entire country. The functions in the financial system are so closely interconnected that any problem in the banking sector will have multiplier effects on other services. This contagion effect possibly led to the revocation of licenses of fifty-three (53) fund management companies on 8^th November 2019 by the Security and Exchange Commission of Ghana on account of illiquidity, failure to perform their functions efficiently, honestly and fairly.

According to the banking sector report issued by Bank of Ghana in November 2019, “the positive dividends from the clean-up and recapitalisation reforms have remained broadly sustained reflecting in a sound, solvent, profitable and resilient banking sector.” Indeed, the financial metrics improved significantly in October 2019 when compared with that of the pre-recapitalization/reform exercise in 2017. The Non-Performing Loan ratio has reduced from 22.7% to 17%, total industry assets increased to GH¢121bn from GH¢93bn, total capital jumped to GH¢17.3bn from GHS12.3bn, cost of funds improved to 5.3% from 8.1% while Return on Equity leaped to 20.7% from 16.7%. The task ahead is how to sustain this achievement. Aptly put, how do we prevent the industry from witnessing another crisis in future.

This discussion will be split into two: the responsibilities of regulatory authority and that of the operators in the financial services sector. The manner and style by which these entities carry out their fiduciary duties will significantly affect the tendency of resurrection of the bank’s failure in future. And the burden of responsibility lies more heavily on the regulators than the operators.

The regulatory authority has issued many prudential regulations including Corporate Governance Directive, Fit and Proper Person Directive, Borrowers and Lenders Act, Capital Requirement Directive, Interbank Forex Market Guidelines and others to prevent banks’ failure in future. Beyond this, the regulator needs to ensure strict adherence by the banks to these guidelines. Monitoring and evaluation of compliance are now sine qua non because what is not inspected is not expected and the more time we spend on prevention, the less the need for crisis resolution. This also becomes imperative in the current dispensation where the surviving banks have huge regulatory capital at their disposal. Thomas F. Heelman et al, in their article dubbed “Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough” posited that when there is huge regulatory capital, the bank executives have high tendency to gamble in asset allocations.

Some of the reasons associated with the insolvency of the banks that had their licenses revoked were insider dealing, false reporting and obtaining banking licenses on the basis of capital with questionable sources (suspicious and non-existent capital) and poor corporate governance. It is very critical and essential that those behind these practices either the erstwhile banks’ owners, the operators or the regulators are prosecuted and sanctioned by the regulators to serve as deterrent to others. It is only when this is done that we can have public confidence and trust in the industry. Both the public and industry players are eagerly awaiting the result of on-going attempts to hold the people involved accountable.

According to reports on the banking crisis in Ghana (various IMF country reports and Bank of Ghana annual reports), one of the prominent factors responsible for the crisis is high non-performing loans most of which were granted to connected and related parties. Banks with high non-performing loans on their books will not generate enough income to operate their business and this further erodes their capital base. These high non-performing loans in the industry were attributable to high lending rates due to sourcing of funds at high costs, high inflation during the period and government’s inability to pay its contractors and other service providers. The second factor is weak regulation where regulators were not attentive to the franchise value of the Banks. Bank of Ghana therefore needs to work assiduously in reducing the interest rates in the industry which will ultimately reduce cost of funds thereby engendering an efficient financial system.

The financial environment is constantly changing arising from the evolution of information technology disruption, increased interest rate and exchange rate volatility and new financial products. Faced with these inevitable changes, banks have had to develop new markets and services to maintain their market shares and to meet the growing needs of customers. Bank have partnered with telecom companies to roll out innovative products that are multidimensional and transnational in nature. This changing landscape presents new supervisory challenges to the regulators. The supervisory body needs to invest heavily in skill and capacity development in order to be able to effectively supervise the operators in the industry.

The establishment of Ghana Deposit Protection Corporation (GDPC) by the Government is another initiative that can guarantee financial stability as well as curtail the potential effects of bank failures on state resources. The existence of this arrangement connotes prevention of depositors from making panic withdrawals from their banks, thereby avoiding financial instability and the upshot of several real economic effects. In order to achieve its core mandate, which is to protect small depositors from losses as a result of the collapse of financial institutions, government needs to strengthen the institution with appropriate resources and power to execute its programme. The premium to be paid by the banks should be well protected and invested such that it would be available when and if the need for it arises.  There should be firm handshake and collaboration between the GDPC and Bank of Ghana especially in areas of supervision or examination of the operations of banks.

The next is the enforcement of the provision of Credit Reporting Act No 726 of 2007 which makes it mandatory for registered financial institutions to submit data on borrowing customers on monthly basis to all approved Credit Reference Bureaus. The import of this provision is to make credit information especially impaired facilities about customers available effortlessly to financial institutions to aid in credit assessment of potential loan customers. Had this been strictly adhered to, a situation where one customer had huge exposures to about ten banks in 2016 could have been avoided because it posed a serious threat to the industry.

On the part of the operators, the position of the Basel Committee on Banking supervision is unambiguous “the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers, or counter parties, poor portfolio risk management, or a lack of attention to changes or future changes in economic or other circumstances that can lead to deterioration in the credit standing of the bank’s counterparties.” All banks must ensure that their risk management framework is enhanced to best international standards that will not only guarantee repayment of the loan but also facilitate recovery of the collateral in case of default.

Interestingly, the task to prevent future undesirable occurrences in the banking system and the inherent contagion effect across the entire financial system has been placed on the shoulder of the seven-member Financial Stability Advisory Council. The main responsibility of the council is to “coordinate and share information to ensure speedy recognition of problems and early resolution before they become systemic problems.”

What we need is chemotherapy but not life-threatening surgery. An appropriate adage in this instance is “an ounce of prevention is worth a pound of cure.” The more time spent on prevention, the less the need for crisis resolution. And the time to act is now!

By: Semiu Lamidi, Chief Financial Officer, FBNBank Ghana Limited

semilad@yahoo.com

Academia, professional bodies and corporate entities have been urged to ensure that bankers have the right skills and capabilities to stay relevant and also to meet the changing demands of the banking industry. Hence, there has been a call for renewed focus on the role of professional training and apprenticeship by professional bodies and other training institutions.

This call was made by the Managing Director of FBNBank Ghana, Victor Yaw Asante in Accra at the 5^th Burgess, Kalinauckas, Adu-Amankwah Memorial Lectures. The event is an annual event organized by Opoku Ware Old Boys Association (AKATAKYIE) to celebrate the first three headmasters of the school. This year’s lecture was on the theme “Preventing the Next Financial Crisis – Getting it Right with Training, Education, Apprenticeship.”

According to Mr. Asante, the recent financial crisis was by far the biggest in the country’s history considering the job losses and the cost of the clean-up exercise to the tax payer and emphasized the need for all to work together to prevent a similar fate in the future. “This is because performance of the financial sector is important for the advancement of any economy. This is especially true as we seek to build a resilient and stable base for industrial and technological advancement.”

According to him, “we must therefore educate, train our human resource and fully utilize apprenticeship in the process.” He mentioned “inadequate partnership between the academia, professional bodies and corporate entities and less focus on internship and apprenticeship as some of the gaps in the current method of training bankers.”

He however argued that the future of the industry looks bright given the expected rapid development in financial technology with alternative payment channels. Currently, the Agence Française de Développement (AFD) classifies Ghana as the fastest growing mobile money market in Africa, ahead of Kenya which is usually considered the leader in digital transformation on the continent.

As at the end of 2019, registered number mobile money accounts stood at 32.5 million with about 14.5 million active accounts. Also, mobile money transactions had reached GH¢32 billion from GH¢ 22.6 billion in December 2018, representing a growth of 45% within the period. This, he explained, showed how crucial mobile money was and will be for the financial inclusion process going forward.

He further explained that the growing number of financial technology companies was expected to reinforce the digital transformation of the industry. However, Victor Yaw Asante noted these opportunities were susceptible to threats such as cybercrime, money laundering and sim box fraud among others. He opined that, these may require changes in regulatory regime, a sharpening of monitoring, supervision and enforcement tools. In addition, he said, this will require enhanced capacity and a strong ethical culture of the central bank’s supervisory department and that of the industry to meet the demands of the time.

This, he said, means that education, training and apprenticeship were very important and required the universities and the professional bodies to find innovative ways of training and educating their students. According to Mr. Asante, there was the need to have a renewed focus on ethics education as ethical behaviour or conduct was very fundamental in the performance of duties of bankers and finance related professionals. According to him, “ethics education should be part of pre-professional qualification programs and must be treated as both a separate unit and also integrated into other units of study. However, it was also important for professional bodies to continue to provide ethics education to its members post qualification.”

Mr. Asante, a Rotarian, mentioned that the core pillar of Rotary was ethics; reflected in the 4-way Test of Rotarians. That is, “Is it the truth? Is it fair to all concerned? Will it bring goodwill and better friendships?  Will it be beneficial to all concerned?”

“I believe ardently that the Rotarian 4-way test was applicable universally in all sectors of human endeavor, including the financial sector” he stated.

Taking inspiration from George Santayana that “those who cannot remember the past are condemned to repeat it,” Mr. Asante, proposed that, the recent events in the industry be documented as an academic case study. This should state the causes, the consequences, the lessons and the way forward, similar to the report of the Special Investigation Commission in Iceland after the global financial crisis in 2008. He added that the case study should be made part of the curricula of all education and training institutions or departments where banking and finance was taught. Also, the production of such a case study should involve all those who matter to ensure that it was complete and fit for purpose.

Mr. Asante also asked his audience some rhetorical questions to emphasize the point that financial literacy among customers also needed critical attention. “How many of us went after investments that we knew didn’t make sense? How does one get a return of 120% per annum with any investment anywhere in the world? How many of you double your net profit every year at your organizations? How can we scream that the credit cost of 30% per annum is killing businesses and then invest in pyramid schemes that give us a return of over 100% per annum? Should the contradiction not be clear enough to us?” he questioned.

These questions reflect some of the causes of the recent crisis in the financial sector. Therefore, he stressed that customers needed to be educated to know which investment opportunities were too good to be true. In this regard, he suggested that the country should adopt the statement of the Organisation for Economic Co-operation and Development (OECD) in improving financial literacy. That is, “financial education should start at school” and should be “as early as possible, probably before children reach 7 years old.” Therefore, he suggested that banks in the country adopt the Life Skills initiative of Barclays Bank (UK) to improve the level of financial literacy in the country.

Mr. Asante in his lecture also discussed the need to emphasize apprenticeship as a key requirement in the training of banking and finance professionals. According to him, “there were aspects of every profession that cannot be learned in the classroom, but must be learned where the profession was practiced.” He further stated that the inadequate focus on apprenticeship was a problem created by the institution which had not developed robust internship and apprenticeship systems.

This need not be, in his opinion, and he suggested that institutions find a way to be very relevant with training people who will be required to run them. Also, institutions must ensure that students who go on internships were not used as glorified office boys and girls to buy food for their supervisors but that they should learn on the job and gain useful, relevant skills and experience.

Education, training and apprenticeship, he said, would all come together to play a significant role in the way forward in the banking and finance industry. “But underlying it all was a strong backbone of ethical behavior that we must cultivate as a matter of necessity in this crucial and sensitive sector.” Finally, he admonished banking and finance training providers to “always be ahead of the industry in terms of identifying the skill requirement of the industry to sustain its development.”

By: Victor Yaw Asante, MD/CEO. FBNBank Ghana Limited.

The banking industry is the engine of economic activity in every economic system. As a result, banks are a very important part of driving economic growth by efficiently allocating financial resources and diversifying risk. This becomes more impactful only within an environment where pricing of credit is efficient.

One of the major challenges in the Ghanaian economy is the cost of credit. The lending rates have trended downwards for most part of the country’s recent economic history. It is however considered as one of the highest on the African continent and indeed the world. The situation makes it difficult for businesses; especially small and medium scale businesses to access credit to expand their operations.

In the last three years, the inflation rate and treasury bill rates, which were cited for high lending rates trended downwards with inflation and Monetary Policy Rate (MPR) falling by about 7.2 percentage points and 9.5 percentage points (950 basis points) respectively. The 91-day Treasury Bill rate fell to 12.08 percent (4.73 percentage points) in July 2017 before inching up. However, lending rates did not fall enough to reflect the fall in these variables. It recorded just about 4.4 percentage point decline and stood at about 24% at the end of October 2019, according to the latest Bank of Ghana data.

Expressing his view on the cost of credit in the country and how it can be reduced, the Managing Director of FBNBank Ghana, Victor Yaw Asante acknowledged the negative effect of the high cost of credit on business, but emphasized that banks were doing their best to lower the cost of credit to support the growth of the economy.  He stated that, interest rates had been trending down, but not as fast as businesses would have wanted due to some well-known factors. He explained that sometimes, market conditions made it difficult to cut rates as business would want it.

According to him “it was really neither in the interest of the banks nor the customers to have high lending rates. The money the banks give as loans to customers is from other clients who will ask for the funds to be returned to them sooner or later. Therefore, banks do not deliberately charge high rates to make it difficult for the borrowers to pay back their loans.”

Some countries in Africa have reacted to the challenge of high lending rates by establishing an interest rate ceiling to protect customers from the high interest rates charged by banks. Notable among them is Kenya.  This raised a conversation about introducing a similar approach in Ghana amidst views that banks were doing very little to reduce the cost of credit to businesses. However, Victor Yaw Asante believes that this approach will be suboptimal as it will distort the market and prevent the efficiency required in the industry. He pointed out that some unexpected negative consequences of the Kenyan approach meant care must always be exercised.

The Bank of Ghana at its Monetary Policy Committee (MPC) meeting in November 2019 outlined some policy measures to bring lending rates down. Among others, it expects to help the banks scale up market efficiency in pricing. This Mr. Asante said, was an important step by the central bank and was certain that it would aid in reducing the cost of credit. In addition to the measures by the central bank, I believe what the banks are doing should drive interest rate downward even if marginally.”

He added that, there was the need to also bring the Non – Performing Loans (NPLs) of the industry down. According to him “a significant reduction in NPLs will lead to a reduction in risk which will reflect in the cost of credit. As it stands, the NPL level of the industry shows that the banked population of the country is high risk.”

However, the sector clean – up and the various guidelines issued by the central should bring sanity and transparency to pricing in the industry, he concluded.

Author, Emmanuel K. Zewu

Lending rates play a critical role in every financial system through allocation of resources in an economy. One challenge of the Ghanaian economy is the high lending rates which the business community has on many occasions complained about. Recently, Mr. Victor Asante, the Managing Director of FBNBank Ghana was reported to have said that “it is really neither in the interest of the banks nor the customers to have high lending rates”.

By implication, high lending rates have some adverse impact on both banks and customers. This also means that, the commercial banks have factors that goes into the determination of the lending rate. There are equally important customer factors that affect the decision on the lending rate. Currently, the lending rates of banks can be divided into two major components. That is, the Ghana Reference Rate (GRR) and the risk premium. While the GRR is fixed and it is given by the Bank of Ghana, the risk premium is largely dependent on a particular bank and customer specific factors.

One of such factors is the nature of the collateral presented by the customer against borrowing. Generally, the lack of qualified collateral as required by banks in the country is a major challenge for many businesses seeking loans. Possible reasons for borrower’s’ failure to meet banks’ collateral requirement include but not limited to lack of assets that they could offer as collateral.

Aside this, collateral requirements following the strict adoption and implementation of IFRS9 (IFRS 9 is an International Financial Reporting Standard) has also placed certain restrictions as to what qualifies as acceptable collateral for the purposes of credit decisions and for purposes of managing loan impairment charges. In these cases, banks are likely to reject loan applications which are not supported by collateral acceptable to them. The problems of a lack of collateral and high interest rates are inter-linked since they relate to the degree of risk perceived by the bank in making the loan. Usually, lowest interest rates are associated with collateral that the bank deemed the best security.

Until the coming into effect of the GRR in April 2018, how the spread or the risk premium was determined did not receive much attention. However, the emergence of the GRR required banks in operating in the country to, inter alia, disclose to its customers the fees and charges, the size of the spread around the GRR (offered lending rate less the GRR) and the factors responsible for the spread. Pursuant to this, all banks resorted to the use of risk-based pricing models to determine the risk premium commonly called the spread. A percentage of this margin can be directly attributed to difficulties in realizing collateral.

To appreciate the significant of the collateral one presents in securing a loan and its implication for the risk premium and the lending rate, it is important to discuss the importance or the role of collateral in a loan contract. Collateral serves two major important roles. These are as signaling tool and an enforcement tool.

The most talked about role is as a signaling tool. In this regard, collaterals help to reduce the risks associated with adverse selection and moral hazard; problems related to information asymmetry (a situation where one party, for example, the borrower has more material knowledge or information than the lender). Banks use collateral to screen and differentiate  borrowers. Normally, borrowers who are very likely to default, as per a bank’s rating, are more open to agree a low collateral requirement for some increase in interest rate. In other words, borrowers who are less likely to default are more open to agree a high collateral requirement for some reduction interest rate.  Even though sticky interest rates, relationship lending and others have implication for this process, it is generally believed to have helped banks in classifying customers.

Through this, the prospective borrowers indicate their risk types by revealing their preferences between collateral and interest rates. High collateral requirements adversely affect low risk borrowers relative to high risk borrowers since their chances of default are low. Therefore, collateral as a signaling tool is important to banks.

As an enforcement tool, collaterals secure the loans against risks that lead to loan default. First, activities related to moral hazard are reduced due to the fear of losing the collateral to the bank in the event of default. Secondly, in the event that the borrower defaults, the bank can take possession of the collateral to cover part or the full amount (depending on the value of the collateral) of the loan given to the customer. These imply that collateral as an enforcement measure makes it costly for the borrower to default and also reduces the bank’s default loss.

From the above discussion, the important information is that, offering a qualified collateral reduces the bank’s risk associated with adverse selection and also reduces the risk premium and the lending rate.

To be continued

By Kenneth Amponsah, Head, Credit Risk Management, FBNBank Ghana