In Liberia, High-Interest Rates Are Killing Entrepreneurship

When Sia Kollie's business failed in 2018, she sought a loan and took a L$190,000 loan from Access Bank, which she had to repay in nine months.

But the loan, which carried a monthly interest rate of 6%, did little to improve Kollie’s business as it became a nightmare, weighing down on the business as she nearly ran into defaults as a result of the interest rate. 

“Instead of helping me, it harmed me,” Kollie said. “The interest was too high, and so I didn’t realize anything. I went back to zero after repaying the loan.”

Out of the L$190,000 she took, only L$178,600 was given to her on the day of disbursement, while the remaining L$11,400 was withheld by the bank.  

Of this amount, Kollie’s interest rate per the full nine months came to 72 percent.  72% of L$190,000 is L$136,800.  

Access Bank offers a 6% declining interest rate and an additional 6% interest deduction for disbursement (processing) expenses. The Bank calculates its interest based on the borrower’s outstanding balance, i.e. the balance when the loan is disbursed.

For example, if a client borrows L$190,000 for nine months, the bank multiplies that amount by 0.1470, resulting in a monthly installment payment of L$28,447.51 (190,000 x 0.1470), minus the L$11,400 that would be initially subtracted for disbursement fees from the loan amount of L$190,000.

Access Bank, which is a microfinance company that provides loans and financial services to small and medium-sized businesses, refused to grant a request for an interview even after a Freedom of Information request was submitted. 

The bank uses codes 0.2034 for a six-month payment; 0.1470 for a nine-month payment, and 0.1239 for a twelve-month payment to determine the installment payment each month. The bank multiplies the code by the borrowed amount and requires the client to do the exact payment each month for the entire duration of the loan.  

“Interest rate holistically compared to other countries is extremely high,” said Atty. Decontee King-Sackie, former Deputy Commissioner at the Liberia Revenue Authority, and now the managing Partner at ZE'AD Advisors and Consultants, a tax firm. 

“There are many factors that influence the setting of the interest rate and, of course, the forces of supply and demand also affect the decision as well as the risk because, as long as the level of repayment continues to be low, the bank will factor in its risk and that risk will be demonstrated in the loan they are going to give.”  

Kollie’s experience with Access Bank is not unique. Many borrowers, especially small and medium-sized enterprises, have very similar experiences with other banks and other lending institutions.

The high-interest rate and the relatively short period for the repayment, according to experts, are one of the many factors that are unhelpful for borrowers and increase the risk of default.  

This was the case of Kollie, who claimed that her business was worse off than after paying the loans and its interest rate. It would explain why the country is having a high level of non-performing loans (NPLs) with banks and the Central Bank of Liberia’s (CBL) struggle to bring the situation under control.

The CBL has singled out a rising non-performing loan rate of 22 percent — well above its 10 percent threshold — and has repeatedly warned of stiff actions not limited to restricted access to banking services but has yet to do so.

But while CBL is threatening, Ruth Dillion, who sells at the ELWA junction, is currently feeling the pain of the high-interest rate on the US$3,000 loan which she took to expand her business. 

She has not ruled out the risk of defaults and is not just complaining about high-interest rates, but also the time frame attached to the loans. 

Dillion claimed that once the loan is disbursed, payment on the loan and the interest starts from the following month, which complicates things. 

“The interest rate is too high, but what to do? We can’t sit down and expect the government to do everything for us,” said Dillion, also a client of Accessbank. “They told me that the access bank interest rate is high but I never listened.”

Dillion believes that the lack of a long-term loan plan is hindering growth for small and medium businesses (SMEs) that are growing and are potential sources of jobs and opportunity.

Sackie, who is also a Certified Public Accountant with the ZE'AD tax firm, noted that Banks in Liberia cannot lend out money for a longer period of time as they are under obligation to their clients (depositors) who may need their money anytime. 

She noted that this is the risk and other variables that affect Liberia's high-interest rates, even though it is a deterrent to small and medium businesses. 

“The way the loans are given today is as though you collect the money today, you start using it today, you start making money out of it today, and the bank expects you to start paying tomorrow, which ordinarily should not be the case.

“Because the banks are aware that these monies are not long term, they cannot give for a very long time,” she added.

But for Kollie and Dillion, no matter the situation, Banks in Liberia should increase their loan payment time frame and reduce the interest to spark serious growth among SMEs. 

Most small business loans in Liberia have terms of less than 18 months which, according to experts, makes it difficult for SMEs in Liberia to grow. A high interest rate means “higher overall borrowing costs.” 

They claim that as SMEs have to pay more in interest on their loans, it reduces the profitability of the business and puts a strain on its cash flow and, in the worst cases, banks may be deterred from lending to SMEs, especially those with limited collateral or track record, as the risk becomes higher for the lenders. 

“High-interest loan payments can put a strain on SMEs’ cash flows, making it difficult for them to cover operating expenses, or invest in new products,” experts in the banking sector told the Daily Observer. “This potentially leads to financial distress and even bankruptcy in extreme cases. When SMEs are burdened with high-interest debts, they struggle to compete with larger businesses or foreign competitors that have access to more favorable financing terms.”

“This leads to market concentration and reduced competition within the domestic market. SMEs play a significant role in driving economic growth and creating employment opportunities in Liberia. It is high-interest rates that hinder their growth and development, and the wide effects that it has have broader economic implications, such as slower job creation and economic stagnation,” they added.

The CBL however did not respond to a Freedom of Information request but one of its senior officials, Erica Willam, blamed the lack of proper information for being behind the failure of more loans in the country. 

According to William, the CBL has warned borrowers to carefully read and understand the terms and agreement of the loan contract before signing on to it, as ‘failure to do so is at their own risk.’

“Nobody should pressure you to sign any document,” Willam said.  “Protecting the interests of Liberia’s banking and financial institutions is the responsibility of the CBL consumer protection department.”

“Clients who are unable to make loan repayments are forwarded to the department, and clients who have concerns can submit their inquiries to the division for resolution.”

William’s justification however appears not to move Joshua Kanubah, who believes that the high interest rate on loans in the country and its short-term payment plan for SMEs, is bad for the country. 

Kanubah, who has been a client of Access Bank for the past seven years, said high-interest rates have been a major obstacle to his business progress.

“Business is bad but the interest rate is too high,” said Kanubah. “But if not, we would have managed. The interest rate is nearly the amount you have to repay and that leaves no room for any investment.”

The justification by William, from the CBL, would make sense in this case as many SME borrowers, who have had problems paying their loans, think that the loans they get come from “Gina” — a myth which continues to grow in strength daily. 

“Access Bank money is gina Money,” said Musu Turay who borrowed L$300,000 from the Bank and is now finding it hard to pay back as a result of the high-interest rate.  Turay’s view is commonly heard of among SMEs whose owners have defaulted on their debt or have troubling pay. 

“We are just selling for the bank,” said Krubo Johnson. “No improvement. You take a loan for the whole year, you can’t get anything for yourself.”

Yarkpazuo Gbusiwoi, the Managing Director at the Liberia Credit Union National Association, would agree more with the SME owners’ perspective. 

He does not agree that the lack of proper information is the reason for the country’s high loan default rate. He believes that it is the interest, which he noted is nearly half of the loan given. 

“The interest rate is too high,” Gbusiwoi noted. “So people will always fall back on payments.”