Ghana Banking Rule

By: Richard Manu Asamoah

Call it the '80/20 Rule', 'Law of the Vital Few and Trivial Majority' or the 'Pareto Principle ' ', it will still have its inherent principles as revealed by the Italian economist in 1906.

Vilfredo Federico Damaso Pareto, an Italian economist, after a careful study of the daily economic activities or many phenomena in Italy observed that 80 percent of properties in Italy were owned by 20 percent of the population. He made this observation after having stayed and worked in Italy for almost 37 years (1868 to 1893). Later, Pareto observed this same trend in action in other parts of life such as gardening: 80 percent of his peas were produced by 20 percent of the peapods.

In fact, many experts and authorities in their fields of study have applied this rule to many facets of human activities ranging from business to horse racing (or sports in general). For instance, Bryan Eisenberg (2002) made the following applications to the Pareto Principle by way of questions: Does 20 percent of your sales force produce 80 percent of revenues? Do 20 percent of your products account for 80 percent of product sales? Do 80 percent of customer complaints arise from 20 percent of your products or services? etc.

In Ghana, just like in any other country, one can observe this law of the vital few and trivial many at play in diverse areas. In football, as an example, 20 percent of the total number of clubs in the premier league almost always wins 80 percent of the trophies presented by the Ghana Football Association.

The Ghanaian banking industry is no exception when it comes to observing the 80/20 rule in action. In fact, one can even say that it is the sector that is dominated by this principle. Real banking is meant for the few rich as they benefit from all facets of banking especially when it comes to accessibility of credits.

Researches conducted by institutions of high repute as well as some individual researchers have revealed two interest rate spreads - the difference between deposit and lending rate - within the banking industry. Using the averages of deposit and lending rates prevalent in the industry, these two different spreads can be observed.

In Ghana, high net-worth clientele (credit worthy customers) of the commercial banks are offered high savings deposit rates averaging around 13% as against low lending rate averaging about 20% - Centre for Policy Analysis (2006). Customers who fall within this category - spread one - constitute the 20 percent in Pareto's principle i.e. the 'Vital Few'.

The large majority of customers whose savings deposits constitute a small portion of the total liability base of the commercial banks - low net-worth clientele - are offered low savings deposit rates and granted loans at very high lending rates. The gap between these two extremes constitutes spread two. In fact, the large majority of customers who fall within the category of spread two are charged lending rates of about 32% percent in real terms with deposit interest rates of about 1 percent. It is this category of clients that Pareto refers to as the 'Trivial Majority'.

This prevailing situation in no way facilitates the growth of the small and medium scale enterprises (SMEs) sector of the Ghanaian economy. Small businesses in Ghana finds it difficult - if not impossible - to grow and expand their scale of operations. Also, the overall savings culture of this trivial majority group may continue to dwindle since they are discouraged to save.

My passionate appeal therefore is that, the Central Bank should continue to make processes and terms required to establish financial institutions more flexible so as to benefit small and medium scale businesses. Though the Bank of Ghana should continue to grant more licenses to foreign banks to increase the competition prevalent in the banking industry this must be done cautiously.

Whether we like it or not, the Pareto Principle is in action within the Ghanaian banking industry. And what we can do is to support the call for banks to lower their interest rates and come out with more innovative products to support the SMEs.

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