High interest rate makes lending riskier

Efforts by banks to disburse cheap funds to Small and Medium Enterprises are being undermined by high interest rates, which remains the biggest risk of default in the financial market, Joe Jackson, Director of Business Operations at Dalex Finance, has indicated.

Concerns have been raised that the financial sector, which is the economy’s backbone, remains reluctant in the provision of funding for start-ups and budding small-sized business to mature and contribute meaningfully to socio-economic growth.

But the situation, according to Mr. Jackson, has more to do with the continual borrowing of government, which shoots up interest rates and puts banks in a more risky position lending to the business community.

In an interview with the B&FT on the side-lines of the maiden Power Business Breakfast, an initiative of Business Television Africa, he said: “Banking is a service; if we don’t lend, we don’t make money. However, high interest rates remain the biggest cause of default.

“What we should be seeking to do is look at ways government can reduce its borrowing, so that interest rates can fall so financial institutions can to lend at cheaper rates to SMEs.”

Mr. Jackson said the prevailing interest rates have been set by the market based on what is considered as risk against returns, and that the sector’s competitiveness does not encourage banks to lend any lower.

“It is obvious that the current interest rates do not augur well for small and medium-sized businesses to rake in more gains and contribute meaningfully to socio-economic growth.

“But this is a very competitive sector, and if it was possible to lend cheaper I’m sure someone would lend cheaper to grow his/her business,” he said.

Currently, the average lending rate of banks is 27.9 percent; and businesses are concerned the policy rate hikes, which largely determine interest rate trends, will be inimical to business growth in the country.

Mr. Jackson disclosed that the current average percentage rate (APR) -- which includes all the fees and related costs that SMEs pay on loans -- are in excess of 60 percent.

“This means for every GH¢100 gained in a year, the borrower has to put GH¢60 aside to service loan obligations before thinking of his inputs and profits/margins.

“If we are to support SMEs to access finance for growing their businesses in this current environment, the first thing we will have to do is drive down the high interest rates,” he said.

The maiden edition of the all-inclusive quarterly forum was on the theme ‘SME Financing -- Challenges and Prospects’, and provided a platform for small-sized businesses, civil society and development partners to brainstorm practical and context-based solutions to challenges facing SMEs in the country.

President and chairman of Groupe Nduom, Dr. Papa Kwesi Nduom, advised SME owners to prepare adequately for the business environment so as to overcome the myriad of market challenges.

This, he said, should include the ability of entrepreneurs to embrace a positive savings culture and adequate preparations toward their pension.

“Most of the time, businesses complain of inadequate support from government; but that is the current environment, and the aspiring business person must be aware of the situation and prepare to overcome it.

“SMEs must embrace proper book-keeping practices, as this communicates the business’s financial position to boost the confidence of potential lenders and investors,” he advised.

Dr. Nduom further advised business owners to relax their engagement in running the business to fast-track growth and productivity.