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Financial institutions reaping heavily from small businesses

By: Fred Yaw Sarpong, Daily Express

Even though the establishment of Microfinance companies in Ghana is to help small businesses to get capital for their business activities, at the same time these companies are reaping heavily from these small businesses by making lot of money from them.

The interest rates charges by these companies are more than what the commercial and universal banks are even charging.

These companies’ interest rates are more than double of what even Ghana Commercial Banks and other big banks charged their clients.

While the both commercial and universal banks in Ghana are charging interest rate of between 20% and 25% per annum, these microfinance firms charge between 4% and 6.5% per a month.

This makes the microfinance firms gain more from these small businesses. While commercial and universal banks are charging between 20% and 25% per annum, the microfinance companies are charging between 48% and 78% per annum.

The worse part of this interest rate calculation is that, instead of the microfinance companies to use reducing balance method to calculate the interest rate on loans for the small businesses and other clients, they rather use straight line to calculate their interest rates.

For instance, if a client borrows GHc15, 000.00 for a period of six month at a monthly interest rate of 4%, the principal monthly repayment will be GHc2, 500.00 plus a fixed monthly interest charged of GHc600.00.

With this the client will be paying GHc3, 100.00 as monthly repayment. Instead of the interest charged of GHc600.00 will be reducing in each month when use reducing balance, it rather remains the same with straight line method.

Going by this straight line method, as used by most microfinance firms in Ghana, the principal balance for the client will be reducing, but the actual interest charged rather continue to rise. At the end of the six month period the client end up paying about 24% actual interest charged.

With regard to the reducing balance, the interest charged and monthly repayment reduces on each month, as the actual interest charged remains at 4%, even at the sixth month, unlike the straight line method where interest charged remains the same and the actual interest charged increases at each month.

This reporter finds out that majority of these financial institutions do not explain the detail of interest payment on loans to their clients. Similarly, many clients also refused to seek the detail of their loans repayment structure.

Executive Secretary of Ghana Association of Microfinance Companies (GAMC), Mr. Richard Amaning explained that it is important for their customers and Ghanaians to know that, they are working for profit but lost.

‘People have to understand that the business we are doing involve a lot of risk and we take all these into consideration. Because our business involves high risk, we make sure that we do not lose the focus of our business entirely,’ said Amaning.

According to him the interest rate on money lend to them by commercial and universal banks are on the higher side, and they cannot chose to give it out to their client on the lower side.

Our interest rates are moderate because we take into consideration a lot factors when given out loans to our clients. ‘Most of our clients borrow money and they never comeback to pay back,’ he added.

Mr. Kofi Kapito, the Leader of Consumer Protection Agency in Ghana told Daily Express that he will investigate about this issue and will come out strongly against it when find out the companies are reaping heavily from Ghanaians. He stated that he has held a lot but yet to know the detail.

Rev. Dr. Emmanuel Ameevor, the Managing Director of Gentrac Investments Limited, he confirmed this interest rates charges and indicated that some of his colleagues are causing harm to the microfinance industry and customers as well if care is not taken.

He urged clients to demand the details of their loan repayment, whenever they apply for a loan, especially with regard to reducing balance and straight line methods interest rates calculations.

Madam Comfort Badu Mensah of Adom Ventures at Mallam in the Ga South Municipal Assembly said that even though the interest rate charge on her loans is high, she prefer going to these microfinance firms than universal and commercial banks.

‘My bank has understands my business and am coping with their terms as well,’ she added.

But Mr. Daniel Asamoah, who operate a shop at Accra Central complaint bitterly that he has had problems with two micro finance companies and one universal bank in Accra. ‘’These financial companies nearly collapse my business,’’ he told Daily Express.

‘I realized I was still paying interest rate on a loan I took three (3) years ago. Looking at my record I was supposed to finish paying the loan two (2) years after, but they continue taken money from me till I got to know about it,’ said Mr. Asamoah.

Bank of Ghana (BoG), the regulator of the banking industry is worried about the influx of Microfinance companies in Ghana. According to the regulator, some of them are operating even without license, while some of them are not obeying the rules and regulations of the sector.




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