The Head of Business Advisory Services for Ghana Export and Import Bank (EXIM Bank), Mr Frank Obeng, has identified that the reluctant behaviour put up by most Small and Medium-sized Enterprises (SMEs) in the payment of their loans increases the cost of borrowing.
He noted that banks charge interest based on certain factors including risk factor, therefore the non-payment by SMEs did result in high risk premium charged by the banks.
Speaking in an interview with the Ghanaian Times, Mr Obeng realised that most of these SMEs failed to oblige by the contract despite taking the loans.
“I don’t know whether it’s a cultural thing,” he bemoaned, “instead of them returning the money so that they or others get it back in the future, they just don’t want to.”
From his past experience dealing with SMEs, the financial advisor said that the issue of non-payment on their part is a ‘matter of character’.
Mr Obeng further elaborated that banks become prone to losing their licenses due to the habitual attitude of these SMEs.
“By the International Financial Reporting Standard (IFRS), a bank that gives loan must make provision for a bad loan. Therefore when you make that provision, it’s going to hit your profit and loss,” he explained.
Mr Obeng cited that when the default rate becomes very high it attributes to a loss thus affecting the bank’s asset or shares.
In furtherance, when the bank lacks profit to cover these losses they would be forced to dip their hands into the coffers of the shareholders.
“When you touch the capital contribution that the shareholders make, it is going to affect your capital adequacy and if it is affected, the license of the banks get revoked,” he went on to say.
When asked what measures could be put in place to curb this unpleasant habit, Mr Frank Obeng advised that a tight monitoring system would do.
“Any money that the banks give to the SMEs, they must do a follow up. If the person says that he used it in purchasing an item, demand a receipt from them,” he said.
Although a tight monitoring system might be needed, cost can be incurred as well which will make the Small Medium-sized Enterprises unable to borrow.
“Your stuff has to go there and you also have to pay for transport and other miscellaneous which no one wants to incur such kind of cost,” he noted.
The financial advisor also entreated all banks to update their system by using the credit reference bureau which will prompt other banks so as not to give out money to defaulters or put in proper measures to ensure that the default rate is low.