Introduction

Merry Christmas and happy New Year to you my beloved reader of my articles. In a series of articles, I will be sharing my views on how to educate bank customers in Ghana about the cost of credit in Ghana, ways banks can reduce non-performing loans, increase customer experience and proposals to reduce the cost of credit. These series of articles will be captured in six different articles as summarized below:

1.    Educate customers about the cost of credit through an interactive cost of credit website. Ghana’s Registrar General Department (RGD) went papers in October 2017 and Driver and Vehicle Licensing Authority (DVLA) goes digital with registration of drivers’ license on November 7, 2017, now there is also a need for an interactive cost of credit website and app on google play and app store.

2.     Introduction of the Ghana Bank’s Reference Rate (GBRR) to replace banks setting their own base rates. This will increase transparency in credit lending and enhance the transmission between the Central Bank Rate and banks’ lending rates. It will be calculated as the weighted “average of the central bank rate and the weighted 2 months moving the average of the 91-day Treasury bill rates” and should be adjusted every six months barring any extreme conditions in the markets.

3.     Reduce the costs of external charge of credit through the following: 

(i)                           A digital movable assets registry and a securities (collateral) depository, which will allow transfer of securities from one institution to another without having to discharge and charge securities again. This will be more like the transfer of shares at the Central Depository System  (CDS) and will eliminate high legal costs and also considerably reduce the time for transferring securities

(ii)                        Reforms in the Lands and Companies registries; expansion of credit information sharing beyond banks to all credit providers; enhancing consumer protection practices; conceptualizing of alternative dispute resolution mechanisms; and transparency in the pricing which drives effective competition. Such reforms include:

a.           Integrate all channels of registration of collateral charges: companies registries (section 107 of the Companies Act, 1963 (Act 179) to register charges with the Registrar of Companies) ,  DVLA (vehicle registration) , land commission (under Land Registry Act 1962 (Act 22) or Land Registry Act 1962 (Act 122) and collateral registry (If collateral charge document was created after February 1, 2010, it should be  registered with the Collateral Registry in accordance with the Lenders and Borrowers Act, 2007 (Act 773)  so that a charge over a collateral registered at one either channels automatically get registered at all the other channels.

b.          Expanding the sources of information used by the Credit bureaus to cover sources such as the Controller and Accountant General’s Department, Telecom network operators, National Identification Authority, Retail shops, Microfinance and Small Loans Centre (MASLOC) in order to enrich credit reports

c.            Automatic link between Credit bureaus with the above-mentioned sources as well as Registrar General’s Department, Lands Commission, Collateral Registry, Ghana Police Service, and Registries of the courts and tribunals

d.          The provisions of the Companies Act, 1963 (Act 179), the Bodies Corporate (Official Liquidations) Act, 1963 (Act 180), or any other enactment relating to corporate insolvency or liquidation should be enhanced to include: (1) expedient in-court approval of settlements negotiated out of court; (2) post-commencement financing recognizing creditor priority to enable financing for the firm during restructuring (3) inclusive restructuring involving all creditors (including secured and public creditors) (4) pre-insolvency processes that enable restructuring before reaching non-viability; (6) simplified and cost-effective insolvency processes for SMEs enabling a fresh start for entrepreneurs within a reasonable time period and (7) the facilitation of various restructuring tools, such as debt-equity swaps (for example, through removing the requirement for shareholders to approve corporate changes).

e.           A standard form of identification for credit purpose. The national identification form and the SSNIT number should the standard form of identification for credit purpose.

1. Introduction of government insurance programs for first time home buyers with a minimum 5% down payment
2. Collateral Lending: Are there Alternatives for the Ghanaian Banking Industry? Banks in Ghana banks, like other financial institutions elsewhere, face the same problem and rely heavily on collateral lending which is a traditional instrument of providing security against loan advances Although collateral lending gives lender some confidence, it has serious shortcomings. Notably, it hampers competition and limits lending activity especially if the banking sector demonstrates over-reliance on it. This study will use time series data, deploying cointegration and error correction techniques to identify a long-run model for determination of bank lending behaviour in Ghana. Evidence of over-reliance on collateral lending by the banking sector in Ghana is found, which can be attributed to less attention given to other credit mitigation measures by banks. The study will also review other credit mitigation measures, like credit referencing, which has been introduced in the market, and credit risk transfer, which has not been considered in Ghana. My view is that deepening the use of credit referencing, and the introduction of credit risk transfer instruments – most basic of which is credit derivatives – could increase lending activity so long as the necessary institutional capacity, regulation and oversight are addressed well in advance.
3. Customer experience in banking. How Banks can increase customer experience to grow  current account balances,  attract low cost of funds, fair balance or strong percentage of noninterest revenue to total bank revenue, good net interest margins ,  low NPLs/low credit losses, improvement in products per customer, increase in new client acquisitions, improvement in trends in client retention ratios, good Net Promoter Score (NPS ) , increase in market shares of various products and services, diversified client base, etc.

Executive summary

Let me start this article with a story of the Goldsmiths that Dr Ernest Addison, Governor, Bank of Ghana (BoG) recently shared at the Annual Dinner of the Chartered Institute of Bankers Ghana on Dec. 2, 2017.  The Goldsmiths, who originated banking, saw a business opportunity after realizing that people who deposited gold with them only withdrew a fraction at a time, while others placed more deposits. They then deduced the possibility of profit-making by lending out a proportion of the gold deposits and hoping that all the gold would not be recalled at the same time. But, the goldsmiths were not experts in the theory of probability. Hence, their credibility and reputation became the most priced asset. They became acutely aware that if at any given time the public lost confidence in their ability to safeguard the deposits, a run on them would bring certain calamity. Over time the business of banking has grown in complexity but the basic tenets of credibility and reputation have fundamentally remained the same.

As a Banker in the primer on-line bank in the world, I cannot agree more with the story of Goldsmith that the governor shared.  I have come to release one thing that bank products can be copied but Customer Service/Experience cannot be easily copied. Part of customer experience is transparency in pricing of loan products.  

In this article, I will like to share my view on some of the ways banks in Ghana through the Ghana Bankers Association and Bank of Ghana can help educate the public about the cost of credit.

Currently, BoG publishes the Annual percentage rate (APRs) of each of the products of the banks in Ghana on monthly basis.  In addition to the above, on February 10, 2017, Bank of Ghana issued a guideline called “disclosure and product transparency rules for credit products and services" [2]. Bank of Ghana issued the guideline in pursuance of Section 7 of the Borrowers and Lenders Act, 2008 (Act 773).  The guideline together with section 18 of Act 773 requires disclosure of APR, finance charge, amount financed and total payments in the pre-agreement between banks and its customers.

In this article, I will like the Ghana Bankers Association (GBA) and Bank of Ghana (BoG) to collaborate to launch an interactive website for the cost of credit in Ghana. This website should offer a comparison tool where a consumer is able to compare the total cost of credit from different competitors. Therefore, one can approach a number of banks and get the APR quotes and make an informed decision. This will increase the competition across the various loan products that banks offer.  An example of such website was recently launched by the Kenya Bankers Association and the Kenya central bank. See this link to the website:  http://www.cost-of-credit.com

Since BoG considers transparency to be a key element of an effective, safe and sound banking system. Thus, to achieve the maximum benefits of transparency and public disclosure, it is in the interest of BoG and GBA to continue pursuing initiatives that promote comprehensiveness, relevance, reliability and timeliness of the information disclosed to enable customers to make informed decisions. Thus, I   believe that the launch of the cost of credit website will go a long way in promoting greater transparency in the banking sector.

Though section 33 of Borrowers and Lender Act 2008, Act 773, allows banks and other financial institutions to takeover collateral used in securitizing loans without going through the rigours of court, several loopholes have seen debtors’ slow banks down in taking over properties or securities. The trick adopted by some borrowers is to sue the bank on some issue e.g. contest the quantum of the loan amount indicated in the demand letter. There can be no attachment or sale before legal issues are decided by the courts. By having transparency in the cost of credit, banks save themselves from the trick adopted by borrowers to contest the quantum of debt.

Total Cost of Credit or TCC refers to the total amount payable for a loan, including all bank fees and charges, and estimated third-party costs such as legal fees, and valuation and stamp duty in the case of loans secured by a physical asset.

Before signing a loan agreement, a customer should request the bank to provide them with a Total Cost of Credit breakdown as well as the Loan Repayment Schedule. This will not only empower the customer to make an informed decision but also will enable the customer to compare the fees and charges within the market.

There are various costs associated with a loan. These costs are in addition to the interest rate component and range from bank fees and charges to third-party costs, such as legal fees, insurance and government levies.

Because loan applicants will tend to focus only on the interest rate when making a loan decision, Bank of Ghana currently requires Banks to adopt the Annual Percentage Rate or APR model, which converts all direct costs associated with the loan (also known as the Total Cost of Credit) into one number.

With the APR, borrowers are empowered to comprehensively compare different loan products on a like-for-like basis, based on the total cost of the facility; and therefore make better-informed credit decisions.

Credit Information Sharing (CIS) is a process where credit providers such as banks submit information about their borrowers to a licensed credit reference bureau so that it can be shared with other credit providers. Sharing of credit information will enable borrowers to build the credit history, which can be used to negotiate better credit terms. Positive credit history can also be used as alternative collateral to traditional physical collateral.

To achieve transparency and timely information to consumer, I recommend the following:

·      The Ghana Bankers Association and Bank of Ghana should launch a website called”  Ghana cost of credit “  to provide consumers with information on the Total Cost of Credit and features a simple Cost of Credit calculator, which loan applicants can use to estimate the total cost of a bank loan. Banks are required by the Bank of Ghana to provide you with a Total Cost of Credit breakdown as well as a loan repayment schedule.

·             Commercial banks in Ghana have adopted the Total Cost of Credit (TCC) pricing mechanism, which enables consumers to compare different bank loan costs based on standardized parameters and a common computation model

Similar to the approach adopted by the Kenya Central Bank, the operationalization of the 'cost of credit website' initiative is recommended to be as follows:

• This initiative should be rolled out in phases. First only three types of loans should feature on the website: personal secured loans, personal unsecured loans and mortgage loans. Additional loan facilities will be added gradually.
• All commercial banks should fully participate in this initiative.
• All commercial banks should submit, update and upload their data on the three types of loans highlighted in point (i) above. The data submission and updates should be done on a quarterly basis or as and when there is any change in the data input variables. The Chief Executive Officers and Heads of Credit of the respective banks should be held responsible for the accuracy and timeliness of the data submitted.

·             All commercial banks will use the website template as a standard template to disclose all the total cost of credit of the loan products

Questions and Answers about cost of credit

Q1: What is APR and how is it calculated?

The Bank of Ghana Feb 10, 2017, guidelines on disclosure and product transparency rules defines “APR” (Annualized Percentage Rate). APR is defined by Bank of Ghana as the annual rate charged to borrow, expressed as a percentage of the yearly cost of funds over the term of the loan, including interest rate, security deposits, bundled products and services, interest fees and all other non-interest fees assessed directly or indirectly against a credit

In annex 1 of the Bank of Ghana guide, it specifies that the Annual Percentage Rate is calculated using the current Bank of Ghana directive on APR computation stated:

APR=(C/T*Pa)*100.

Where:

“C” is the Total Cost of the loan and estimated as; C=IP +OC

“IP” is the total interest payment

“OC” is Other Charges such as insurance fee, processing fee, commitment fee, and the opportunity cost of Mandatory Savings connected to the loan etc.

“T” is the repayment period of the facility stated in the number of years

“Pa” equals the average closing balance of the loan

Q2 what is the disclosure of cost of credit required by Bank of Ghana

Subsection 1 of Section 18 of Act 773 requires that a lender shall not conclude a credit agreement with a prospective borrower unless the lender provides the prospective borrower with a pre-agreement statement and quotation in the form specified in the Schedule.

Subsection 2 of Section 18 of Act 773 specifies that a pre-agreement statement shall specify

(a) the principal amount;

(b) the proposed disbursement schedule of the principal debt;

(c) the interest rate;

(d) other credit costs;

(e) the total amount involved in the proposed agreement,

(f) the proposed repayment schedule; and

(g) the basis of any cost that may be assessed if the borrower breaches

the contract.

The schedule in Act 773 has this table:

In addition to the above, the Bank of Ghana on February 10, 2017, issued prudential guidelines about disclosure and product transparency rules for credit products and services. Relevant extracts of the rules are below

Rule 22 information about interest, fees, charges and other requirements

Lenders shall provide the consumer with details of all charges and fees which will be charged to the consumer for the product or service chosen. These include:

(i) Regular charges: Regular charges are those costs or fees incurred as a condition of the product, independent of changes in terms and conditions or actions of the consumer. Lenders shall inform borrowers of all regular charges, including:

a) Annual percentage rate (See Annex 1 for a method of calculation).

b) Interest rate and whether the interest rate is variable or fixed.

(ii) Commissions, fees and any other charges:  These include all non-interest costs associated with the product, including any commissions, administrative or processing fees, and bundled products and services such as term-life insurance. These charges shall be disclosed to the consumer both individually and as a sum of all commissions, fees and other charges imposed directly or indirectly incident to the provision of credit.

(iii) Security deposits, savings or any other guarantees that are required as a condition to acquire the loan.

(iv)Bundled products and services.

(v) Total amount to pay:  This is the sum of all principal, interest, commissions, fees, insurance, bundled products and any other non-penalty charges assessed, expressed in the currency in which the facility was given

(vi) Other charges and fees:  A Lender shall inform the consumer of applicable charges, fees or additional interest the borrower will bear in the event of a late payment, a violation of the terms of the agreement, or upon early termination by the borrower of any contract. These include:

a) Late payment charges: Any costs or fees imposed on the consumer for failure to make a payment in the time required by the financial service provider.

b) Pre-payment charges: Any costs or fees imposed on the consumer for paying either a portion of or whole credit amount in advance of the scheduled payments defined in the credit contract.

c) Charges for replacement of lost documents: Any costs or fees imposed on the consumer for replacing documents related to the credit agreement.

d) Charges for requested documents: Any costs or fees imposed on the consumer for requesting information related to their credit agreement or any other related accounts.

e) Charges for activity and usage: Any penalties linked to activities by the consumer regarding the credit agreement or products or services linked to the credit agreement such as security deposits, savings accounts, collateral, insurance policies, or customer services.

f) Charges for cancellation of the credit agreement.

The above described regular charges or penalty charges and other key features of the product shall be disclosed in the pre-agreement statement. Charges that are not disclosed to the borrower prior to the signing of any credit agreement or receipt of a loan will be considered null and void. A lender shall refund to a borrower, all undisclosed charges previously imposed by the Lender.

Rule 24 Pre-agreement Statement

(i)                         A lender shall not conclude a credit agreement with a prospective borrower unless the lender provides the prospective borrower with a pre-agreement statement and quotation in the form specified in Annex 2 of this document.

(ii)                      The pre-agreement statement shall be written in plain language and shall summarize the key terms and conditions of the specific financial product.

(iii)                    The pre-agreement statement shall be provided in advance of the finalization of the loan agreement to give the borrower the opportunity to review the pre-agreement statement, including taking the agreement statement off the premises if desired and consulting with the financial service provider, before signing any credit agreement.

(iv)                     The terms and conditions within the pre-agreement statement shall be valid for up to five (5) working days of issuance. Within this five (5) day validity period, the lender shall, at the borrower’s request enter into the credit agreement under the terms given in the pre-agreement statement. The lender shall not vary the terms of the pre-agreement statement to the disadvantage of the borrower.

(v)                        The pre-agreement statement shall adhere to the requirements of information and format provided in these Rules and any subsequent amendments to the Rules.

(vi)                     A pre-agreement statement shall specify among other things:

 a) The amount of loan;

 b) The amount to be disbursed/received by the consumer and proposed disbursement schedule of the principal debt;

c) The APR, calculated as specified in Annex 1;

d) All regular charges, as specified in Rule 22, both listed individually as well as summed as the Total Charges;

e) The total amount to pay, as defined in these Rules, expressed in the currency of the loan;

f) The frequency of interest payments or deductions;

g) The amount of scheduled, regular loan payments;

h) The total number of such loan payments to be made;

i) The loan term, expressed in months, or as per the loan agreement;

 j) The basis of any cost that may be assessed if the borrower breaches the contract, including any penalty fees specified in Rule 22;

 k) The components of a bundled product. For all bundled products and services, it shall be specified in the pre-agreement statement, the particularized cost of the various products in the bundle and whether the inclusion or purchase of the products is a pre-requisite to obtaining the loan or not.

l) The proposed repayment schedule, presented in the form specified in Annex 2;

m) The type of interest that is applicable to the product. If the interest rate is variable, the pre-agreement statement shall specify it, and the lender shall provide to the borrower supplementary information on the components of the variable rate which may trigger a change in the interest rate;

n) Information on the right of borrower to recourse, and the appropriate channel within the financial institution, through which borrower may present complaints against the financial institution. This will include contact information comprising a phone number, physical address, email address, and name of the head of complaints handling unit.

 o) Information on the rights of a borrower to a cooling-off period, and how to exercise this right.

p) Grace period: information on grace period and the modalities on how it would be app

Q3: How do Banks price loans

Banks are structured and operate differently. However, the loan Interest Rate charged by a bank is determined by two characteristics, namely bank-specific characteristics and customer-specific characteristics.

a. Bank Specific Characteristics (Cost of Funds & Margins)

1. Banks will price loans based on their Cost of Funds. This is a cost that is influenced by both wholesale deposits and deposits from individual bank customers (also known as retail deposits).
2. The wholesale deposit rates significantly influence the loan interest rate. For example, corporations typically require a high-interest rate to be paid for the deposit they keep with a bank; the bank, therefore, will price most of its loans based on that wholesale deposit, plus a margin to cover the bank’s operational costs, risk and return to shareholders (profit margin).

b. Customer Specific Characteristics (Risk Profile & Product Specifications)

1. Just as banks are different, so are customers. When issuing a loan, banks will assess a customer based on that customer's ability and willingness to repay the loan. This is called the "risk profile" of the customer. There is a price associated with the likelihood that a customer is either unwilling to perform on an obligation or its ability to perform such obligation or the likelihood of default.
2. To determine the customer's profile, a bank will use a Credit Report provided by a licensed Credit Reference Bureau. The Credit Report covers the customer's Credit History (an account of debt obligations and repayment track record).
3. There are also different product types. Depending on the product, there would be a cost associated with the risk the bank would take by selling the product. For example, an unsecured loan carries a higher risk than a loan secured by an asset (collateral).

Q4. What is the total cost of credit?

• When you borrow, the cost you incur is beyond the interest rate. Borrowers should, therefore, know about the “Total Cost of Credit” or TCC associated with the loan or credit facility.
• The TCC will include the bank interest rate based on a reference rate plus a premium that covers the Cost of Funds component not covered by the reference rate, the operational costs, risk factor and profit margin. TCC also includes other bank fees and charges directly associated with the loan. Third Party Costs directly associated with the loan are also covered in the TCC, these include legal fees, insurance, valuation, and government levies.

Q5: Will APR make loans cheaper?

• There are various costs associated with a loan. These costs range from bank fees and charges to third-party costs, such as legal fees, insurance, and government levies.
• When taking up a loan, a borrower often focuses on the bank interest rate; however, this is just one of the loan cost components. Therefore, to better determine the total cost, a formula should be used to compute the various elements into a numeric representation (a percentage rate). When this percentage rate is based on a 12 month period, it is called the Annual Percentage Rate (APR).
• In Ghana, APR is mandated by section 18 and a schedule to the borrower and lenders act, 2008, Act 773 law.
• With the APR and TCC disclosures, customers will be empowered to shop around for the loan products that meet their needs.
• The enhanced transparency will, therefore, stimulate competition within the banking industry thus contributing to more competitive interest rates for customers with a good credit track record.

Q6 Why is APR the most important disclosure

• We tend to focus on the loan interest rate when comparing bank products; however, the interest rate does not cover the full cost of the loan. This is why the Total Cost of Credit or TCC disclosure by banks is important.
• For further pricing transparency, banks are mandated by Act 773 and BoG guidelines to adopt the Annual Percentage Rate or APR pricing model. APR is the numerical representation of the Total Cost of Credit.
• Because banks will use the same model to calculate the APR, borrowers are empowered to compare loan products on a like for like basis; and therefore make more informed decisions on all the components of the loan (interest rate plus all charges and third-party costs).

Q7: Is APR/TCC the only basis of comparing cost of credit from different banks

• The APR is only one of the factors that a prospective loan applicant can use to make a decision.
• Other factors are the additional value that the bank is providing including supplementary services and flexible repayment terms.
• [1] Ghana's Registrar General Department (RGD), the body responsible for registering businesses. RGD in October 2017 launched its online registration portal to make business registration services less cumbersome.  The portal is also integrated with the Ghana Revenue Authority e-tax portal and both make use of the Tax Identification Number (TIN) to identify portal users
• [2]https://www.bog.gov.gh/privatecontent/Public_Notices/Fin%20Stability/DISCLOSURE%20ON%20CREDIT%20PRODUCTS%20FINAL%2020%20Feb%202017.pdf