Before the recent collapse of UT and Capital Bank Ltd, the number of banks in Ghana was 36 (18 local and 18 foreign banks), 30 savings and loans companies, 23 financial houses, 140 Rural and Community Banks and 429 Microfinance Institutions (MFIs). All these banks and financial institutions engage in credit/Loan business in one way or the other.
A loan is a common way of financing companies: you borrow from the investors/lenders an agreed amount (the principal) and repay the principal and interest to them after a specified period of time.
Simply put; a loan is a money lent, which has to be returned, usually with interest (Oxford Dictionary of economics).
Loans may be secured; that is backed by collateral which a lender can sell if the borrower fails to pay or unsecured; in the event where a lender has no claim on any asset of borrower/debtor in case of default. The purpose of this article is to educate you on the things lenders or investors will look out for before parting money to you as a loan.
In determining the creditworthiness of a business or an individual, banks, lenders or investors have so many ways of knowing who qualifies for credit/loan some of which include:
- The LATEST analysis
- CAMPARI method
- 5Cs of credit
For the purpose of this write up I will only touch on the 5Cs of credit which are; Character, Capital, Capacity, Collateral and Condition.
The first ‘C’ (Character)’ refers to a borrower’s reputation or track record for repaying debts. This information appears on the borrower’s credit reports.
Generated by the three major credit bureaus – Experian, TransUnion and Equifax – credit reports contain detailed information about how much an applicant has borrowed in the past and whether he has repaid his loans on time and whether you are servicing a loan with another bank.
These reports also contain information on collection accounts, judgments, liens and bankruptcies. With the above credit bureaus, Banks and other financial institutions are able to cross-check and disburse a loan within 24hours or less. A common model UT used by to disburse loans in less than 48 hours, GCB bank 24 hours, also used by the likes of Bayport Financial Services to approve a loan within 30 minutes or less.
In Ghana, a Loan Officer or an investor also looks at your financial position before lending you money or investing in your company.
Lenders also consider any capital the borrower puts toward a potential investment. A large contribution by the borrower decreases the chance of default.
For example, borrowers who have a down payment for a home typically find it easier to get a mortgage. It is for this reason that Unibank in collaboration with Erata Motors will insist you make a 20% payment before you get your car loan.
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The common question a Ghanaian investor or Loans officer will ask is “what are your stakes in that venture and what do you stand to lose?
With the 3rd ‘C’ is (Capacity). Banks or investors are interested in the debtor’s ability to repay a loan by comparing a customer’s income/salary against recurring debts and assessing the borrower’s debt-to-income (DTI) ratio a.k.a debt-service-ratio (DSR).
In addition to examining income, lenders look at the length of time an applicant has been at his job and job stability.
No sound lender parts with his money as a loan without considering this 3rd “C” because Whereas some Banks like GCB think a loan shouldn’t be a punishment and approves of a 33% Debt-service-ratio (DSR) other banks can allow a DSR up to 50% or more on special cases.
A car or Auto Loan and mortgages are secured loans since car loans are secured by cars, and mortgages are secured by homes.
The lender can easily take over your car or your home if you default. But if the loan is not a car loan or a mortgage, any bank or lender will want an additional security in a form of an asset so they can sell and recoup their money. And normally they want an asset owned by the loan applicant to back the loan.
A typical Ghanaian businessman is sceptical and usually will look and double look before they leap into financing you or loaning you their money.
Every lender or bank will like to know the purpose for which you want the loan before lending you that sum of money. It makes it easier for them if you have a specific reason or the purpose of the money. Usually, they demand to know because they don’t want to be guilty of financing illegal business or terrorism and they need to know the specific purpose to be able to secure whatever asset you are using the money for so they can take it in case you default.
If you really need a personal loan or an SME loan, you need to make sure all these 5Cs are checked right before you step into a bank or into the corridors of Ghanaian businessman who might demand even more than just these 5Cs before parting with their money as a loan or investment.