I was recently consulted by a lady trader who had been sued by a microfinance company for default in paying back a loan of GHC 20,000 she had contracted to augment her working capital for her China business.
On scrutinising her loan agreement, I realised that even though on paper, she had been granted a loan of GHC 20,000.00 by the microfinance company, listening to her, I realised that the whole amount of the loan had not been disbursed to her.
Firstly, a whopping six per cent of the loan amount had been deducted as processing fees. Secondly, an amount of GHC 3,200.00 had been deducted and put in a compulsory ‘‘savings account’’ on her behalf without disclosing the rate of interest on the savings. What this situation amounts to simply is that even though the customer intended to receive the full loan amount of GHC 20,000.00, she nevertheless, received a fraction of the amount.
While the staggering six per cent deducted as processing fees is obviously onerous and unconscionable and not in accordance with the benchmarks in mainstream banking, the amount of GHC 3,200.00 set aside in a compulsory ‘‘savings account’’ is obviously intriguing.
The only tangible rationalisation for this compulsory ‘‘savings account’’ might obviously be a cushion by the lender against default.
However, much as the situation recounted above is a deviation from standard banking practice, nevertheless, in negotiations for a loan transaction, it is often the case that a borrower’s expectations and requirements might be substantially whittled down or some safeguards might be built into the loan agreement by the lender all in an effort to ensure repayment after a thorough credit risk assessment. Almost invariably, such situations always prove detrimental to the borrower’s expectations.
A typical case in point is the botched China Development Bank loan of US$3billion, which never hit the coffers of the Bank of Ghana in full. Similarly, it is also reported that a US$1billion loan contracted by the Liberian government from China Development Bank was also never disbursed in full. Apart from loan transactions, it is also known that sometimes, even aid and grants promised developing countries by development partners and multilateral agencies are not disbursed in full or at all for some reasons.
It is also currently known that there is a moratorium of some sort by some of the nation’s development partners on the disbursement of grants promised to the government in budget support.
The lending proposition
In the case of Barclays Bank v Sakari 1996/1997 SCGLR 639 © 648, the late Chief Justice Acquah made a profound statement on the need for lenders to make a thorough assessment of borrowers requirements for loans and the ability to pay back. He said that ‘‘in loan contracts, the rationale underlying the need to disclose the purpose for which the loan is sought is to ensure that the loan is going to be utilised for a lawful and gainful object which if prudent precautions are taken, would enable the borrower to fulfil his obligation of repaying the loan with the requisite interest. The purpose for the loan is not the subject matter nor the fundamental obligation owed by the borrower to the lender.’’
Also at page 646 of the same case, the learned late Chief Justice said of a loan transaction as follows, ‘‘when a bank lends money to its customer, the obligation of the customer is to repay the loan. If the loan is sought for let us say, a business venture and the business flops resulting in massive financial loss to the customer, this misfortune though may be due to no fault of the customer, does not change the nature of the obligation of the customer to repay the loan he has contracted for. He will still be obliged to fulfil his obligation’’.
Reluctance of lenders to meet borrowers loan requirements in full.
The statements quoted by the late Chief Justice Acquah offers a valid explanation for the reluctance of lenders to meet borrowers loan requirements in full sometimes. Peter Lyons, an acknowledged banking expert who has written extensively on banking gives several propositions of the lender’s view why borrowers loan requests are often not met in full. Some of the lenders propositions for not complying fully with borrowers loan requests are whether it is affordable for the lender to grant the loan request of the borrower in full, whether the purpose for which the loan is requested is valid or sound according to late Chief Justice Acquah’s dictum in Barclays Bank v Sakari (as previously cited), the ease of monitoring and also the viability of the business for which the loan is sought. Other lending propositions are the requirement for security, the ease of repayment and also accessibility of the loan.
Following an assessment of the lender’s proposition for the loan, the lender should subject the loan amount requested to such analysis as trading forecast and whether the forecast of profit and turnover are adequate to ensure repayment. A lender which is approached for a loan to augment working capital may have to impose conditions necessary to ensure that the money will be applied for the purpose, for example by the bank paying directly for stocks supplied to the borrower by the supplier.
Borrowers expectations in a loan agreement
Borrowers are often heard complaining bitterly about the inability of their banks to help them in times of difficulties. Some businessmen tell stories of abandoning their banks for other banks which are deemed sympathetic to their cause.
Some also regale stories of their banks turning their backs on them when they were small and growing up and now turning round to chase them after they have been ‘‘nurtured’’ by another bank to grow.
The point is that borrowers, especially business people are always full of high expectations for their businesses and often do not tailor their projections to match with reality. Business projections are often made in a straightjacket manner without allowance for such things as sluggish demand, sudden escalation of input prices, high inflation, and sudden change in fiscal and monetary policies etc.
Banks, operating on statistical and mathematical forecasts are not likely to buy into a borrower’s business proposals which are made in a straightjacket manner. Obviously, loan requests made to finance such business ventures will be considered risky by a bank and turned down.
Borrowers often expect banks to buy into their business proposals once they are optimistic and enthusiastic about the prospects of their business.
Borrowers also often expect to borrow without providing security due to their enthusiasm and expectations about their business prospects. However, the caution must be sounded that lending remains the most profitable segment of a bank’s business and as such, lenders will normally not give out loans and advances without subjecting the prospects of repayment to stringent analysis. This is primarily due to the fact that a bank must always maintain a healthy balance sheet to ensure that its shareholders always wear smiles on their faces.
Overview of borrowers propositions
In my encounters with business people, especially those in the micro sector who have defaulted on their loan repayments and have been hauled before the courts, I often get the impression that sometimes, loans are taken with the prospect of non-repayment. Some are also of the view that because of the high interest rates charged, banks will make profit anyway since the discharge of the loan obligations by the relatively successful customers will even out their indebtedness.
However, the hard truth is that any loan from a lending institution is not free and must be repaid.
It is also incumbent on borrowers in the micro sector especially to employ more professionalism in their business operations to enhance their prospects of easy access to loans and credit.
The writer is a lawyer with specialisation in international business law.
email: guymilo@ yahoo.com
