Finding the sweet spot – why banks need a smart approach to lending
Imagine a tightrope walker – they need perfect balance to move forward without tumbling. That's the kind of delicate act our banks in Ghana are facing right now.
Recently, the Governor of the Bank of Ghana (BoG), Dr. Johnson Pandit Asiama, sat down with the heads of our banks and delivered a clear message: Let's find a smarter, more balanced way to lend money.
He emphasized that this is the key to keeping bad loans (what we call Non-Performing Loans, or NPLs) in check while still making sure that businesses that can truly grow our economy get the financial support they need. It’s a crucial point, because banks must juggle making a profit with being careful about who they lend to.
So, what exactly does ‘balanced credit strategy’ even mean?
Think of it as a common-sense approach to lending. It's about banks being smart about who they give loans to, ensuring that money flows to the businesses that can use it to create jobs and wealth, all while being careful about the risk of those loans not being paid back. It boils down to:
• Not putting all their eggs in one basket by lending to a variety of different types of businesses.
• Really checking out borrowers and having strict rules about who qualifies for a loan.
• Regularly monitoring loans and spotting potential problems early on.
• Setting aside money to cover potential losses if some loans aren't repaid.
This way, banks aren't so cautious that they stop lending and hurt the economy, but they are also not so carefree that they end up with a mountain of bad debt.
What can we learn from the rest of the world?
Turns out, other countries have figured this out well. Let’s take:
• Canada: Their banks were careful about who they gave mortgages to back in 2008, which helped them avoid the big housing crisis that hit the US.
• Singapore: The people in charge of their money (the Monetary Authority of Singapore) have tough rules about how much risk banks can take and how much money they need to set aside, which keeps their bad loans low, even though they lend a lot.
• Germany: They have a mix of different types of banks – private, public, and cooperative – that all play a role in supporting smaller businesses while being mindful of risk.
Ghana can pick up some valuable lessons from these success stories.
Why is this so important for Ghana right now?
1. Getting rid of bad loans: Lots of unpaid loans can really hurt a bank's ability to lend more and can even threaten their survival. A balanced approach helps banks avoid this problem and keeps them strong.
2. Helping the right businesses grow: Dr. Asiama specifically mentioned the importance of lending to key sectors like agriculture, manufacturing, and small businesses. This is exactly what Ghana needs to boost its economy and create more opportunities. A smart lending strategy makes sure the money goes where it can do the best.
3. Keeping our financial system stable: When banks manage risk well, it prevents big financial meltdowns. The banking cleanup we went through a few years ago was a tough reminder of what happens when things go wrong.
how can our banks make this happen?
Here are some key things they need to focus on:
1. Smarter risk management
o Using data: Employing tools that analyze data to better predict who is likely to repay their loans.
o Understanding different industries: Being careful not to lend too much to sectors that are known to be risky, like potential real estate bubbles.
2. Better loan checks
o Stronger security: Making sure loans are backed by valuable assets.
o Focusing on repayment ability: Looking closely at whether a borrower actually has the cash flow to pay back the loan, not just what they own.
3. Early warning systems
o Using technology: Employing AI and machine learning to spot potential loan defaults before they become a big problem.
o Regular check-ups: Constantly reviewing loans to catch any issues early.
4. Being prepared for losses
o Saving for a rainy day: Setting aside funds during good times to cover potential future losses.
o Following the rules: Adhering to accounting standards (like IFRS 9) that ensure a realistic picture of potential losses.
Things to watch out for
While being balanced is great, we need to be careful not to:
• Over-regulate: Too many rules could make it hard for even good businesses to get the credit they need.
• Ignore the big picture: Things like changes in exchange rates or global economic problems can still impact even the best lending strategies.
• Give in to pressure: Sometimes there’s pressure to lend to certain politically favoured projects, even if they are risky. This can be a recipe for disaster.
The bottom line – a strong and growing Ghana
Dr. Asiama's call for a balanced credit strategy is a smart move to ensure our banks are both strong and supportive of Ghana's growth. By being smarter about risk, improving how they assess borrowers, and keeping a close eye on their loans, banks can reduce bad debt without choking off the flow of credit to businesses that can help our economy thrive.
The Bank of Ghana has a crucial role to play in guiding this process, while also allowing banks to make sound business decisions. If we get this right, it will pave the way for a more stable financial future and long-term prosperity for Ghana. Let's aim for that sweet spot – where growth and stability go hand in hand, and where taking risks leads to real rewards for our nation.
>>>the writer is a Chartered Banker and a Chartered Global Investment Analyst with over nine years’ experience in mainstream banking, having worked in various capacities. He currently works as the Head of Member Experience and Growth at Chartered Institute of Bankers, Ghana. He has been a qualified member of Chartered Institute of Bankers, Ghana with a good membership standing since the year 2013. He also holds an EMBA and a BA from the Kwame Nkrumah University of Science and Technology and the University of Ghana, respectively.
