Banks urged to stop demanding collateral

Banks have been urged to help support start-up companies with the needed funds to enable them take-off and grow.

The move, it’s argued, will help make the economy industrious while reducing the massive unemployment rate in the country.

The Chief Executive Officer of Africa Investment Group, Dr Samuel Ankrah, who made the call in Accra, subsequently tasked the banks to desist from demanding collateral from such start-ups before advancing money to them.

“They need to structure their transactions with such start-ups based on the credibility and viability of the business plans submitted and not what is backing it”, he said in an interview in Accra adding that “the banks stood the chance of growing their asset base should they lend more support to the start-ups”.

Many brilliant ideas developed by many school graduates among others are being wasted because of lack of funds.

The banks and other lending institutions have argued that it is too risky for them to support such start-ups with funds from their customers when there is no guarantee in cases of default.

That arguments on the part of the banks have been challenged in many circles although they also use the default rate (Non-Performing Loans) published from the Bank of Ghana as an excuse to deny start-ups and other small and medium scale (SMEs) companies’ loans.

 MPC Report

According to the Monetary Policy Committee’s (MPC) report for May this year, a latest Bank of Ghana survey of credit conditions indicated an overall net tightening for all loan types.The first quarter of this year’s private sector credit growth remained firm at 36.4 per cent but lower than the end-2014 growth of 42.1 per cent. In real terms, credit growth declined from 21.9 per cent to17 per cent over the same period. 

The non-performing loans (NPL) ratio improved from 12.4 per cent in March 2014 to 12.1 per cent in March 2015. Adjusting for the fully provisioned loss category, the NPL ratio went up from 4.4 per cent to 5.5 per cent. 

 Justification

In justifying why the banks need to support start-ups without demanding collateral, Dr Ankrah said considering the fact that “this country has been carried for almost all her lifetime by cocoa, timber and minerals, we have to evaluate our banking industry’s contribution to tillage, storage, value-added processing and export in the agricultural sector as well as support for research and development in the timber and mining sectors”.

According to him, the evaluation does not look admirable “considering that most of us (banks) have stuck steadfastly to collateral lending over the decades. We are importing almost everything from toothpick to tomatoes, our Cedi is falling freely, there are vast lands everywhere around us, including here in Accra.”

“Our young men and women including graduates are now very eager to get into farming and yet our banks are reluctant to lend the needed capital to start the farms and are demanding for collateral after collateral”, he said.

Dr Ankrah further reiterated that “If the banks really want to grow our assets as banks and help businesses grow in this country then they must take a look at their posture on start-ups and SMEs.

He further argued that, banking in Ghana has over the years largely shied away from the pioneering and adventurous spirit that built the so-called ‘tiger economies’ which many in this part of the continent seem to admire so much. 

“We have not invested enough confidence in ourselves to the extent that a number of us still seek offshore approval for even unpretentious investment proposals from indigenous clients.  Besides the expenditure of time in the process, these approvals often do not materialise”, he said.

Subsequently, he said “I would like to see more business start-ups access funds locally from our industry using proven methods like structured finance approach without the need for collateral and other securities which, is in itself an insurmountable barrier to the much needed funds”.

 Building capacity

In the area of human capacity building and the role of banks in that area, Dr Ankrah said there is considerable commercial business in the Students’ Loan Scheme, for instance, that with proper screening and a diligent recovery schedule, a consortium of banks ought to have grabbed the initiative from the government and set it up more efficiently as an adjunct to our interest in manpower development.
“With the ever growing pool of unemployed graduates, which is recorded as about 700,000 at home and unemployed with about 70,000 coming out of tertiary institutions each year, the banking industry needs to examine the possibility of introducing incubation seminars for young graduates who are briefed enough and of entrepreneurial spirit to pitch their capabilities against the banks’ intent to help open up the economy to new and profitable ideas and ventures”, he said.