Money lending has been in existence for long, as regular individuals and even the Government borrows money. For example, in December 2022, the International Monetary Fund (IMF) and Ghana reached a $3 billion staff level agreement on a 3-year extended credit facility.
According to the Ghana Ministry of Finance Public Debt Data, Ghana’s debt between Jan-Dec 2021 stood at about $58 billion. However, they have reasons for borrowing and experts who manage this debt. As an individual, you can either borrow money from your friends or relatives.
Depending on the lender, your loan conditions may differ. Lenders usually use the 5 C’s of credit (character, capacity, capital, collateral, and conditions) to determine your creditworthiness. .
However, just because a loan is up for grabs doesn’t mean you should take it. There are several questions you should ask before borrowing, especially for investment.
Do You Understand The Investment?
Avoid investing out of “Fear of Missing Out” (FOMO). Do your own research instead of relying on public forums like Reddit, Quora etc.
You should also beware of scams and Ponzi schemes. According to a Ghana Cybersecurity Authority Alert Report, Trojans targeting financial apps have been discovered. This means a scam investment could deploy these to defraud you.
Investment apps fall under the category of financial apps, making them a prime target. Visit the Ghana Stock Exchange website to confirm that a stockbroker is licensed by them, before dealing.
For example, scams regulated to forex trading are very common in Africa, and many investors get duped by charlatans claiming to make quick returns from forex trading.
But you must note that forex trading is not yet regulated in Ghana, although it is not illegal. So, many local traders trade via foreign offshore brokers, which puts their money at risk.
In Africa, since most of the local regulators have not regulated forex trading, expect for South Africa & Kenya, so traders mostly trade via brokers regulated in these regions. It is estimated that 1000s of the local traders’ trade currencies & derivatives by registering with these foreign brokerages, mostly with South African brokers that are regulated with FSCA as most of these brokers also accept foreign traders.
It is also important to note that while these brokers offer trading on multiple asset classes, you are trading Contract for Difference (CFDs), which are derivatives. You do not have to own the underlying asset, but can only profit (or lose money) by predicting the rise or fall in the price of the assets. It’s just like betting, so it is very risky for traders.
If you predict an increase and the price of the underlying asset increases, your broker pays you the price difference and vice versa.
However, CFDs are leveraged as such if the market goes against you, the loss may be more than you expected. CFD trade also comes with several risks that you should learn about.
Have You Read Conditions Of The Loan?
Every loan you take has some sort of conditions even if it’s from a friend. Before borrowing, carefully read and understand the terms & conditions.
When borrowing from the bank or professional lenders, you want to keep a tab of the current prevailing interest rate.
Due to the economic & inflation situation in Ghana, the interest rate is at 27% and this is quite high. The borrowing rates are even higher, so repaying high interest is very difficult. Be sure you understand the Interest you have to pay on the loan, and that you are willing to pay it.
Also, when borrowing stocks from your broker to short sell, it is equient to a loan. You also need to understand the conditions of the loan. Keep in mind that the original stock owner can request for them at any time.
Another thing to keep in mind when short selling is that you may be required to pay dividends. This is because stocks usually pay dividends and when a broker borrows you the stocks, it means the third party you sold to will now earn the dividend.
As such, if at the time you are holding the shorted stock the company pays dividend, you have to pay the original lender the dividends they are supposed to make from the stock they borrowed to you via your broker.
To profit from short selling, you need to take into consideration the commission, Interest, and dividend that you will have to pay the broker.
If the condition involved in taking a loan is not favorable for you, then you may want to reconsider. This is because it’s beyond taking the loan, you also need to keep your part of the obligation to the loan contract.
Do You Have Collateral?
Most loans require some sort of collateral. Even when borrowing from your friends or family, depending on the amount involved, they may request for a collateral.
Brokers are not left out when it has to do with requesting collateral. In order to borrow stock from your broker to short sell, you need to have at least 50% of the short position ue in form of stocks or cash your margin account. This serves as collateral.
To keep the short position open, the ue of the stocks in your margin account must not fall below a certain margin level, which varies from broker to broker and depends on the stock.
For example, you want to short 10,000 units of TSLA stock ued at $1000. Your broker will look at the present market ue of the stock you have deposited in your margin account as collateral. The ue must be worth 50% of $1,000 which is $500.
Now if the market price of your collateral stock falls causing its total ue to be below $500, and your short position is not yet covered, your broker will give you a margin call asking you to deposit more stock to bring your collateral ue back to $500
On the same note, when trading CFDs, you also need to leave a certain required amount of equity in your margin account, to keep the position open.
If your margin account falls below a certain threshold, you will get a margin call requesting that you add funds, or get closed out of the position.
That said, before taking a loan, consider if you have a collateral, and if you are willing to part ways with the collateral if things do not go in your favour.
What’s Your Risk to Reward Appetite?
The world today faces lots of risks. According to Eurasia Group’s Top Risks for 2023 Report, there are 10 major risks the world faces this year, including inflation shockwaves which can affect your investment even in Ghana.
Firstly, if you are not used to taking risks, you should stick to safer investments like fixed deposits and bonds. However if you have a high risk appetite, you could invest in equities where there’s a potential for high profits and losses as well.
Secondly there’s something called a risk to reward ratio (RR ratio). It compares the potential loss to the potential profit of an investment.
RR Ratio is calculated using formula RR= (Potential loss)/ (Potential profit)
For example, while trading EUR/USD currency pair, you set your take profit at 120 pips and your stop loss at 60 pips. Your risk reward ratio is 60/120 = 0.5
When the RR ratio is greater than 1, it means risk Is high but if it’s less than 1, it means low risk. When the RR ratio is equal to one, it means the potential to make profit or loss is equal.
Do You Have Capacity To Repay?
Consider the financial situation in Ghana. If inflation continues to rise the ue of Cedi reduces which will pose more repayment challenges, if the loan were denominated in a stronger foreign currency.
This is because you will need more Ghanaian Cedi to pay back the face ue of the loan and it’s Interest. Also consider the tax implications of your investment. Taxes could eat into profits, thus hampering your ability to repay the loan.
For example under the Ghana Revenue Authority Domestic Tax Types, individuals are required to pay Capital Gain Tax (CGT) of 15% when they sell an asset situated in Ghana, or if they live in Ghana and sell their asset situated overseas.
Corporates in Ghana are also taxed 25% on their income, individual residents and non-residents are charged 30% and 25% respectively on their personal income etc.
A Withholding Tax (WHT) of 8% also applies to individuals when they receive dividend payments, and interest; and 15% on royalties.
Quick to Borrow Is Always Slow To Pay
Borrowing to invest is not something to do in a hurry. You should carefully analyze the odds and possibility of making profits, paying back the loan and other obligations.
It is not wise to borrow to invest with a gambling mindset. The money at risk is not yours, and you have to pay back plus interest.
Do your due diligence to understand the investment, calculate your risk reward ratio, euate the possibility to repay despite the volatile economic situation and don’t borrow when you do not understand the conditions involved. Doing these does not eliminate all the risks, but instead makes the investment riskier.
