Banks Urged To Stop Collateral Lending

The debate on whether collateral lending in the banking industry is a disincentive is fast coming up as some financial observers' advice against using the method to advance loans.

Even though full investigations are yet to be conducted into the cause of the collapse of UT Bank and Capital bank, some observers have hinted that collateral lending may have played a part, particularly in the case of UT Bank.

Banking Consultant, Nana Otuo Acheampong is one financial observer who believes collateral lending is not an effective way to advance loans to individuals and businesses.

“I will broadly support that argument that collateral loan is not a preferred choice when it comes to credit. Because at end of the day it's not just collateral which is going to pay off the loan?,” he warned.

“Collateral means the person has given an asset as security for the loan. So assuming you borrow a GHS100, 000 and then you give your house as security. If you are not able to pay, then the lender seizes the asset and sells in default. Now the issue is when you do that then effectively you are changing your core business from banking to estate management,” he added.

After the world financial crisis in 2007, some financial observers warned banks in the country to desist from the practices of collateral lending.

A Former Director General of the Securities and Exchange Commission (SEC), Dr. Adu Anane Antwi cautioned banks not to rely on the method when advancing loans.

“Some years back, I wrote an article after the financial crisis and warned banks to desist from collateral lending. I pointed out that it is important to look at the ability of the borrower to pay back through its operational activity general cash follow. But most of the banks did not pay attention, they were happy to go for the property even though the business could not pay back the loan”.

Adding his voice to the call, a Former Deputy Governor of the Bank of Ghana, Emmanuel Asiedu-Mantey attributed the reason to the collapse of banks in the country.

“You have seen the evidence. The banks are collapsing and it is due to collateral lending. It is not the right thing. You must look at the business and its viability. The money is not for you, its depositors' money so you must check the cash flow of a business before you lend. It's not about houses and cars”

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By: Lawrence Segbefia/citibusinessnews.com/Ghana