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Banks fleece customers as they charge huge interests on loans, against paltry reward for deposits

BY: Suleiman Mustapha
Dr Abdul Nasiru Issahaku — Governor, BoG
Dr Abdul Nasiru Issahaku — Governor, BoG

Banks are still paying paltry amounts as interests on customer deposits, in spite of earning handsome profits from the high interest rates they levy on loans and advances.

A report on the Annual Percentage Rates (APRs) on loans and advances and the Average Interest (AI) paid on deposits in the country, shows that unlike deposits which attract an average interest rate of 12.3 per cent, the average rates on bank loans and advances was 27.5 per cent as of May this year.

This shows a 15.2 percentage points difference between the amount customers earn on their deposits with banks and the amount those same customers pay as interest onloans and advances taken from these same banks.

The APRs and AI, which are yet to be released by the Bank of Ghana, shows that Capital Bank and First National Bank offered the best competitive interest rates on deposits for the month of May 2016.

Capital Bank offers 18.0 per cent with First National Bank offering 16.1 per cent on deposits. Bank of Baroda, Stanbic Bank and Fidelity Bank followed in that order with 16 per cent, 15.5 per cent and 15.4 per cent respectively.

Standard Chartered Bank performed the least offering only 4.3 per cent, while Energy Bank offered 6.6 per cent on deposit to customers. ADB, UT Bank, PBL and GCB follow respectively with 7.5 per cent, 9.8 per cent, 10.0 per cent and 10.0 per cent. The banks offered rates far below the industry average of 12.3 per cent. 

The APR is the true interest rate banks and non-bank financial institutions charge the public on loans and advances. It reflects the true cost of borrowings and charges and commissions levied by the banks.

Loans on agriculture

SCB, however, charged the lowest lending rate on loans for agricultural purposes. The bank charged between 18.4 per cent and 28 per cent.

Bank of Baroda and SG Bank charged 21.0 per cent and 21.8 per cent respectively. ADB on the hand charged 29 per cent on loans and advances for the agricultural sector. uniBank charged the highest rates of 40.8 per cent and 45.8 per cent on agricultural loans.

SCB once again led with the lowest lending rate on commerce. The bank charged between 18.4 per cent and 28 per cent, as Bank of Baroda again followed with the second lowest charge of 21 per cent. Instructively, uniBank charged the highest rates of 40.8 per cent and 45.8 per cent on advances on commerce.

On loans to the manufacturing sector, SCB again set the pace with its 18.4 per cent lending rate against an industry average of 32.8 per cent. Universal Merchant Bank, however, charged the highest of 49.48 per cent.

 Cheap vehicle loans

With regards to vehicle loans, SCB once more offered the cheapest lending rate between the range of 18.4 per cent and 28.0 per cent. Unibank charged the highest rates within the range of 40.8 per cent and 45.8 per cent.

SCB topped the list with its 18.4 per cent and 28.0 per cent on loans to the construction sub sector. Bank of Baroda, SG Bank followed with 21 per cent and 21.8 per cent respectively. The bank with the highest lending rate is The Royal Bank with 41.2 per cent, over and above the industry average of 32.4 per cent.

Interestingly, GN Bank offered the cheapest lending rate of 15.1 per cent on mortgage loans as against HFC’s range of 29.7 per cent and 30.3 per cent.

The highest rate for the sub sector was within the range of 40.8 per cent and 45.8 per cent offered by uniBank. This figure is way above the industry average of 30.6 per cent.

Analyst and customers have always complained about the excessive interest spreads by banks in Ghana. The interest spread between lending and deposit rates was too wide as banks charge between four and six times as much on loans as they offer for deposits.

The regular publication of the APR is seen by many analysts as a welcome development since it will push the banks to reduce their loans to the various sectors and increase their deposit rates due to competition.

Communications Director of the Bank of Ghana, Mr Bernard Otabil, said customers must know the full cost of a credit facility at all times to ensure that hidden charges do not throw up surprises. Equally, he said, applicable interest on deposits must not be hidden in small prints but must always be part of the boldly expressed statements of the financial institution, just as it would display its core values.

“The true cost of borrowing is important in any loan or credit advance situation and that is why it is important that people use APR, which reflects the real cost of a loan or credit advance and not just the quoted interest rate in their assessment”, Mr Otabil said.

 Promoting trust and transparency

“Frankly, APR is critical in building honesty, openness and trust in a financial system because in an annual percentage terms, you will be able to know the total cost of a loan. Interest applies on loans, which is often known, but there are others costs, such as administration cost and insurance cost that may apply. All of this gets included in the ultimate pricing of the facility so the APR helps the customer to understand the total effect of that facility on their finances,” Mr Otabil explained.

Continuing, Mr Otabil explained that understanding such “dynamics in the basic way” would help consumers to understand and appreciate it better when “quoted interest by a financial institution and the final applicable fee are different. It is also part of basic financial education, which is necessary as we seek to promote a culture of financial inclusion at all levels”.

“It is also worth noting that Bank of Ghana is revising the uniform base rate model that is used by the banks to price their loans. This is part of efforts to promote transparency, openness and fairness within the banking system, with every one of us becoming an ultimate beneficiary”, Mr Otabil said.

 Pull quote

Frankly, APR is critical in building honesty, openness and trust in a financial system because in an annual percentage terms, you will be able to know the total cost of a loan. Interest applies on loans, which is often known, but there are others costs, such as administration cost and insurance cost that may apply.