Case study: Loans for Ghana’s grey economy

The story

UT Bank, based in Accra, was set up to cater to the financial needs of smaller businesses in Ghana, including those operating as part of the informal economy.

Founders Prince Kofi Amoabeng and Joseph Nsonamoah realised it was almost impossible for many small entrepreneurs to obtain loans from traditional banks because they had neither the documentation nor the collateral that were recognised by lenders.

Moreover, the informal sector had little understanding of financial planning. Entrepreneurs approached banks when they were already in urgent need of assistance rather than with a view to future needs, making them less attractive to traditional creditors. They typically ended up at the mercy of informal lenders charging high interest rates.

The challenge

UT Bank would have to tailor its products to these specific customers.

Many were barely, if at all, literate. Few could keep accurate records or plan their financial needs.

Many also had no fixed postal address, which made it hard to keep track of the recipients of loans.

At the same time, because business owners in the informal sector often needed funds urgently, UT Bank had to develop a mechanism for disbursing loans more quickly than the traditional lenders.

The strategy

In the absence of a formal postal address, official UT employees visited clients’ premises and recorded directions on how to find them. During visits, the bank officials extrapolated data about the business from basic information provided by the client.

The loan disbursement process was streamlined so UT could deliver within 48 hours. UT officials trained clients to record transactions so financial data could be derived.

Constant monitoring of a client’s business and frequent collection of repayment instalments in person by a UT official ensured clients did not default. Customers were monitored in line with their business cycles, and loan instalments were collected on a daily, weekly or monthly basis to minimise the risk of default. Collections were made by loan-monitoring officers using UT vans – for both branding and security purposes.

Thanks to this close working relationship, loan-monitoring officers could advise the credit team if a customer was likely to default and UT could take steps to mitigate this possibility. This might even include facilitating transactions between clients.

UT also established ancillary business divisions under its holding company, UT Holdings, to offer other financial services ranging from mortgages and insurance to logistics.

The outcome

Beneficiaries of UT loans spread word of the service and more entrepreneurs applied for loans from UT Bank.

With UT teaching them how to keep accurate records of transactions and monitoring their businesses regularly, borrowers began to appreciate the importance of keeping up repayments.

UT made more loans than anticipated. From January to March 2011, UT gave out loans totalling 169.5m cedis – the equivalent of roughly $95.2m. The original budget was for 78.9m cedis.

In 2011, UT’s bad debts stood at about 12 per cent, compared with an average for the sector in Ghana of 16 per cent.

Key lessons

UT sees clients in the grey economy as potentially productive customers. Its business model is a service system that focuses on: solving customer problems; fast loan approval; disciplined monitoring; and training clients. The model is designed to ensure that customers are trained to meet their obligations and to manage their businesses profitably.

Companies can look at simple ways to improve the lifestyles of customers so that they leave a good impression with clients who then market the company for free to others.

- Financial Times, 16 Apr 2012