BY: RICHARD ADJORLOLO
Default is the failure of a borrower to satisfy a post lending condition on due date. The
subject of default could be financial or non-financial. It ranges from failure to submit a
simple report on due date to meeting an installment payment.
Default has been a torn in the flesh of the Ghanaian banking sector for many years
and all attempts by the regulator and sector players to curb the menace have seen
little success.
The latest attempt by the Central Bank of Ghana to publish details of borrowers who
willfully default; for all intent and purposes – named and shame can only be another
desperate attempt to solve the age-old challenge. Unfortunately, this approached is
most likely to fail.
The definition of willful default is highly subjective and open to different interpretation.
The question many will ask is; after naming and shaming, then what? Will name and
shame encourage the customer to rectify the default?
A major cause of default which players and regulators have failed to address is the
unbelievable high cost of borrowing. The cost of borrowing ranges from cost of
processing and discharge of mortgages, preparation of financial statements, various
processing fees among others plus the actual lending rate, cumulatively the customer
could be paying as high as forty percent or more of the facility amount to the bank and
other institutions. Why won’t the customer default?
The actual reasons for customer default have more to do with difficult and non-friendly
business environment than willfulness on the part of the customer. It must be noted
that business owners have options; either to invest their capital in the various safe
investments and enjoy the returns with their families and so to risk their capital in a
turbulent and uncertain business environment, as we have in Ghana, with high lending
rates, depreciating currency, unfair competition from imports, abnormally high taxes,
very high operating costs and so on, they (business owners) should be protected and
not punished when there is a default.
So, now it is the banks and the almighty Bank of Ghana vrs the customer. Are banks
being pampered? As a business entity, the sole objective of banks is to make profit;
pure and simple. If a cement dealer grants credit to his buyers and they fail to pay him
as agreed, which regulator comes to his aid? And why not? BANKS SHOULD BE PUNISHED FOR DEFAULTS
There is no law that compels any bank to lend to anyone, a bank chooses who
it wants to lend to by taking the prospective borrower through rigorous approval
processes. These processes could take months all to ensure that they grant
good credit. In this day of KYC, I find it difficult to understand why a customer
will post an appropriate and acceptable collateral, go through countless
processes, get facility approved, meet all conditions precedent to drawdown, at
times facility disbursed in phases then willfully default. This does not make
sense. Most defaults are as a result of poor due diligence, poor facility structure,
banks’ lack of understanding of customers’ enterprise, internal weaknesses,
negligence and at times sheer incompetence of banks’ personnel or some
uncontrollable external factors which the bank should have projected. Banks
should therefore be partly sanctioned for creating non-performing loans and not
dump all the blame on the customer.
At times the cause of default can be traced directly or indirectly to banks. The
situation where defaults are wholly and always hanged on customers’ neck is
unfair. Banks also, directly or indirectly, cause default and bad facility
performance. For example, a customer applies for a facility of say GHS1M, the
bank after analysis, approves an amount of say GHS500K. This could easily be
a recipe for major defaults.
Again, a customer applies for a facility of GHS1M; GHS500k for stocks and
GHS500K for equipment. You could get an officer collapsing all into GHS1M
overdraft because the bank may not be prepared to finance the equipment. Here
the customer may not appreciate the difference, as long as he gets the GHS1M,
he is fine.
Additionally, banks at times process customers’ requests without any sense of
urgency as if they are doing their customers favours, causing undue delays and
lapsing of business opportunities.
HIGH LENDING RATES VICIOUS CYCLE
The publication of willful defaulters’ smacks of desperation. Considering the
meaning of default this is likely to add to the many rules and regulations that are
never implemented. Does this directive replace repayment of facilities or after
naming and shaming and blocking all means possible support to bounce back,
banks will still go after the customer for repayment? This is really unfair! Banks
already carry out referencing to verify credit worthiness of prospective borrowers, this is a good process and could be strengthened to prevent
borrowers from abusing the banking system. The referencing bureau is also
available to help.
One of the prominent reasons for default is the unexplained high lending rates.
Banks are caught up in a vicious cycle; they charge extremely high lending rate;
as a result, customers are unable to repay, they default; consequently, they
make high provisions and write-offs; and they pass on the cost of provisions to
the customer in a form of high rates.
It should not be too difficult to do some resetting here.
It is instructive to know that while defaulting customers are charged penal rates
which takes some defaulting borrowers’ situation from bad to worse. The
generality of borrowers (including defaulters) are also charged for the general
non-performing loan (NPL). I can say without fear of contraction that majority of
borrowers fail to repay their loans as a direct result of compounding penal
charges.
Consumer protection advocates should come in here to protect borrowers.
In August 2025 we were told by Bank of Ghana that NPL is about 26%, what
this also means is that performing loan portfolio is 74%, are banks sharing the
returns on this performing loan portfolio with their customers? If not, why are
they passing on the 26% NPL to their customers? Why on earth should a
regular, paying borrower pay for the sins of defaulters.
FULL DISCLOSURE OF LENDING RATES
Banks would usually state their lending rate as; GRR – X%, margin – Y%, total
– Z%. This method of pricing does not give the customer any basis for
negotiating down rates they are charged. In the interest of fairness BOG should
request banks to fully disclose details of the Z% in their ‘offer letters’. For
example, it is known that some of the build up to the lending rates include; risks
premium, cost of funds, profit margin, operating cost, whether facility is long or
short term and so on. If the rate for each of these cost items is clearly disclosed
borrowers would have the basis to effectively negotiate. For example, if a
borrower uses his fixed deposits investments as a collateral for a facility, this
customer should be able to negotiate risk premium and other rates next to zero
and so on; banks just have to put in place the appropriate indemnities. This
approach can help bring lending rates down.In this day and age, it is almost impossible to secure a facility without an acceptable
collateral (not just any collateral). If banks are to name and shame, practically
destroying borrowers’ reputation and integrity, what then happens to collateral or after
naming and shaming borrowers’ collateral will still be liquidated?
Again, what happens to the legal provision of banker/customer confidentiality? Or a
defaulting customer automatically forfeit this right?
In solving the difficult issue of non-performing loans, the Central Bank should look more
within than descend heavily on the ‘poor, orphaned customer”.
If the last customer dies the last bank will dies.
BY: RICHARD ADJORLOLO
BIG RKNA, TAKORADI