Ghana Commercial Bank: Opportunities in the Informal Banking Sector

Interview with Simon Dornoo, Managing Director of Ghana Commercial Bank

The Ghanaian Banking sector is trying to figure out how to involve and mobilise the informal sector that is generally viewed as being high risk. A new young crop of financial entrepreneurs are now trying to take advantage of this market. I have been told that there are 2 million bank accounts in Ghana, but that some individuals hold more than one account. So perhaps we could say about 1.5 million people have a bank account in Ghana whilst the vast majority of the population do not. What is your opinion concerning this vast part of the population, is it that you are not that interested in them because they are not your kind of clientele as they have such low incomes?

Well that is a very interesting question. The informal sector actually represents a huge opportunity for the banking sector in Ghana. We know that there is a huge number of people out there that don’t have a bank account. The banking sector currently has about 3 or 4 million accounts and that probably translates to about 3 million customers. So obviously the opportunities are out there, and are principally in the informal sector. Now we have to think about how we can attract them. There have been major obstacles. Thankfully we now have vehicles that have been established such as XDSData that is collecting customer information and data and helping to formalise that sector.

Banks have been very much interested in the informal sector and have started to design products that service that sector. For example we are heavily involved in this at the moment; we are a medium mass market bank, so naturally we have expertise in that sector as we have been working with it for a long time. We want to leverage that expertise, particularly our distribution network, to continue to reach out to that sector through electronic banking products which obviously are the cheapest way of servicing that sector.

In Ghana you know that generally the income levels are low for the majority of people, so you have to be very mindful of that in terms of what kind of products you offer and how you sell to your customers. I think the way forward is to deal with electronic products and empower the people to do their banking electronically. That is the way forward for us.

These people could open a bank account if it is just a case of keeping their money in a bank, but when it comes to getting a loan it can be very difficult for them because you can’t check them out, many of these people barely even have an address. They end up going to an informal loan service where they will get credit.

Yes, those are some of the challenges that we face as a bank. There are interesting propositions, for example where you can leverage community based institutions and maybe roll out agency banking. From an agent’s point of view, the agent probably knows their customers well and they probably live in the same community so they can get to know the people better. Therefore the formal banks could probably leverage the network of large or small corner shops to roll out banking products to these customers without having to establish actual branches in those communities. The central bank has done quite well in terms of formalising the role of rural banks, there are quite a number of them now and they are all supervised by the same formal body. That has helped to bridge the gap between the major banks and the rural network. We are all leveraging those resources to be able to reach out to the informal segment of our society.

There is one service that you are going to launch by the end of the year regarding the SMEs; it is a new automated small and medium scale enterprise lending facility that is aimed at achieving a faster turnaround time for processing SME loans. Can you tell us more about this?

Maybe before I talk about that I can give you the background about our lending procedure, etc. and how we rolled out our first credit scored product for the personal segment which has massively improved the turnaround for lending to individuals. Based on the lessons learnt from that we felt it was the moment to migrate it into the SME segment. What we are trying to achieve is the automation of the lending process. Currently it is a very long and convoluted process from applying for a loan and actually granting it. So what we are doing is that we are credit scoring customers from the SME segment who have being banking with us for a long time so that we are able to lend to them based on their account behaviour. That means that we can minimise all the requirements for collateral and that will be a major step forward in lending to this segment. Not everyone can provide a bank with collateral and sometimes the requirements are onerous and most people cannot fulfil them. However if you have a credit score that actually demonstrates and supports your borrowing, why shouldn’t that be enough? We will lend to you. We want to be able to distinguish those customers and be able to lend to them and put them on a faster route to having access to loans to grow their business and employ people.

Have you done this on an individual basis already?

Yes and it has been very successful.

Can you explain how you do this?

It is purely a credit scored product. What that means is that it is based on your account behaviour. It works like this: you conduct your business with the bank and have an account with the bank, we study your history and your profile and based on that the system has been programmed to make decisions regarding whether or not you are approved for a loan. So in effect you can come to a bank and ask for a loan, you may not even know that the loan has probably been pre-approved, and depending on your credit score you will get a loan. That is the way that it works.

The beauty of what we have done is that we have actually linked it back into the credit bureau and the XDSData. What that means is that we actually bounce off that database to be able to distinguish and understand the customer profile. I think there are now 3 reference bureaus and so over time there will be a richer database that will also facilitate the growth of that industry which I think is a very good thing.

What is going to be the trend when everyone starts to use these services? How do you view the sector in a few years’ time particularly in regard to SMEs and the informal segments?

I think directionally it is going to go a long way. I think we will definitely see growth. Banks generally want to lend and are looking for opportunities. The fact that we now have so many banks in the system makes it very interesting because all these banks are willing to lend as long as they find bankable opportunities that are able to deliver efficiently. I think that the opportunities are huge and we can already see banks developing products and services that will target these very important segments. Increasing from a 20% bankable population to maybe a 40% or more bankable population will not be easy but I think with a combination of what we are doing as banks, investing in technology in order to service these customers and of course from a government or central bank policy point of view they are also supporting this change as part of their financial inclusion strategy.

You have already announced your re-branding, you say that it is going to be effective, can you give us a bit more about what you are planning to do?

It was a very important announcement. We are celebrating our 60th anniversary and the announcement was to give people a flavour of what people can expect as we go forward. We announced that we were going to re-brand the bank, but it is not merely a re-branding, there are other components. There is going to be a network re-design of all our branches, they will all be upgraded to make them more comfortable for when our customers come in. We want to improve the customer experience. We have had this profile for 60 years, but now we want to actually improve on it. Brands undergo changes and we felt that it was an important step for us to give our brand a facelift. Customer service underpins it all. We know that it is one of the most important areas in which we can make a big impact as we move forward. Whilst we are re-branding we are mindful of the fact that there are other work streams that are equally important or even more important than just re-branding. I am referring to the customer service culture change program that we are also undertaking. This is a 3 year program.

Also at the international level, you are targeting a profitable market outside of Ghana…

Yes, that is part of the rebranding, but that is more of a medium term strategy because the focus now is to actually get it right in Ghana by developing a template and then to move into other markets. We want to export a brand but it must first all come together.

Banks and oil companies are under threat from the 700 million cedis of government debt, which is the government’s failure to pay the bulk distribution companies. This is putting pressure on the BDCs and of course the banks, what is your take on this?

Well naturally if there is a delay in payment, NPLs will be an issue, there will be NPLs going back into the banking sector so it is something to watch. Not many companies can afford borrowing at 23% as it is now in the market. Therefore we would expect NPLs bank balances to be under pressure. But I think that judging from the results that we have seen it seems like bank capitalisation ratios are doing well and may be able to absorb the impact. It is definitely an issue to watch.

You mentioned the interest rate of 23%, obviously from a foreigner’s perspective this is very interesting. What is your view on that? Do you see this interest rate lowering to a more desirable rate?

The point is clear, 23% is a very high interest rate, and it basically reflects what is going on in the economy at the moment. There is an attempt to try and address it. The government is trying to reign in the fiscal deficit which is one of the ways to actually deal with it. The idea is to raise taxes to slow down borrowing. They are also trying to refinance some of the domestic loan portfolio, by issuing a Eurobond of 1 billion. The purpose is to try and change the shape of the debt portfolio. If that happens, naturally you should expect some reduction in interest rates especially on the short term end of the market where rates are currently at around 23%. That should begin to trigger or send the signals to the market that say ‘look, maybe 23% is on the high side. Inflation is at about 11%, so it may make you wonder why inflation is at 11% but the banks are lending at 23%. There are other factors to take into account and it is probably a reflection of issues around the expectations of NPLs to continue rising and of the other costs of doing business all of which impact these rates.