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.
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" . 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:
· 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:
“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 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)
b. Customer Specific Characteristics (Risk Profile & Product Specifications)
Q4. What is the total cost of credit?
Q5: Will APR make loans cheaper?
Q6 Why is APR the most important disclosure
Q7: Is APR/TCC the only basis of comparing cost of credit from different banks