AFB Ghana, the largest micro-financing and payroll lending institution in the country is now turning to deposits for the financing of its loans portfolio, after relying primarily on the issuance of Medium Term Notes (MTNs) over the past half a decade. This provides a clear indication of the new direction which non-bank financial intermediaries are taking due to prevailing circumstances in Ghana’s financial markets.

The change of strategy is coming in the face of rising interest rates on medium-term bond issuances in Ghana as government strives to retain the subscription of foreign portfolio investors who have been the main buyers of such government debt securities since they were opened up to non-resident investors in 2007. Coupon rates on medium to long term government treasuries with tenors of over two years, rose by an average of four percent through 2018, with seven year yields on the secondary market rising by 4.7 percent, from 16.3 percent to 21.0 percent.

Corporate bond issuers have to offer significant premiums over and above rates on government treasury issuances of similar tenors. While AFB is the only financial intermediary listed on the Ghana Alternative Stock Exchange (GAX) which has an international credit rating, which thus makes it a more favourable investment option than its competitors, it cannot escape altogether the effects of rising medium-term bond rates.

So far AFB has issued GHc294.7 million in MTNs of three to seven years tenors through the GAX, in 23 different tranches priced at coupon rates ranging between 300 to 600 basis points above the coupon rates for government 182-day treasury bills. The next issuance is scheduled for May and the company has accepted the fact that it will be relatively costly.

“The coupon rate is likely to inch upwards because the benchmark government bond rates have risen over the past two quarters” predicts Arnold Parker, AFB Ghana’s CEO. “We expect to witness an increase in the coupon rate for our next MTN issuance of close to 200 basis points.”

Consequently, the company is stepping up its deposit mobilization drive. While it has always been licensed to accept deposits it has preferred issuing its MTNs because this has been cheaper with regards to its cost of funds. The company claims that its ongoing shift towards deposits is to avoid over-concentration of risk.

“Our license has always permitted us to accept deposits but bonds have been cheaper for us” explains Parker. “But they also increase our gearing ratio because our bond issuances are classified as borrowings.”

But while this is true, the other, unstated fact is that deposits are now cheaper. AFB prices its savings account deposits offerings at a benchmark of one percent above inflation, which currently adds up to 10 percent. Individual and corporate deposit rates are benchmarked against treasury bill rates and even if the company offered a premium above those rates similar to that it offers its bond investors, at current treasury bill rates of about 14 percent, its offered deposit rates would still not exceed 20 percent, which is substantially lower than the at least 25 percent it will have to pay on its next MTN issuance.

As at the end of 2018, less than two years after it started accepting deposits, it had some GHc48 million of these in its coffers. This year however, in response to the changing structure of interest rates, it is targeting GHc100 million in new deposits.

By the end of this year, the company hopes that deposits from corporate customers, with tenors of between one and three years, will account for 30 percent of its total financing while deposits from individuals, with tenors averaging six months to one year, will account for another 10 percent. This would leave its its MTN issuances, with tenors of seven to 10 years, accounting for the other 60 percent.

AFB expects its credit rating to give it a similar advantage over its competitors for deposits as it has for its bond issuances. Its MTNs are rated BBB+, but the company itself is rated BB+ which potential depositors will find very attractive; none of its competitors have credit ratings and instructively AFB’s bond ratings have enabled it borrow more than its competitors and at lower coupon rates.

Deposits tend to have shorter tenors than bonds but this does not matter practically since companies such as AFB only lend short term; even medium term loans are few and far apart for the simple reason that lending rates are too high for borrowers to take money for very long.

Importantly, AFB is on the verge of transforming into Letshego Savings and Loans – it has all the requisite approvals already – in line with the brand name of its current owners, the pan- African Letshego Holdings Limited, which is headquartered in Gabarone and which has been listed on the Botswana Stock Exchange since 2002. This move will make it even more attractive to depositors who regard the savings and loans industry as safer and more financially solid than the micro-finance industry.

AFB has been the industry leader for the past decade and its new strategy is showing the way forward for the rest of the industry, as it strives to keep its credit affordable and still remain profitable. AFB Ghana‘s profitability remains strong, posting pre-tax profits of GHc11.809 million jn 2017, up from GHc7.180 million in the previous year.

This is good thing for depositors, fixed income investors and borrowers in Ghana, and indeed for the rest of the industry it operates in as it sets a prudent, financially efficient example which its competitors will follow.