Achieving Low Interest Rate

For almost two years, the Bank of Ghana (BoG), regulator of the banking sector in the country, has been adopting measures to address high interest rates charged by commercial banks but no major achievement has been made so far.

High interest rates charged by banks have been identified as the main factor which makes it difficult for businesses to access loans, and experts believe high interest rates impede the growth of trade.

Last week, Vice President John Dramani Mahama urged commercial banks in the country to reduce their interest rates for trade to flourish and reflect the current economic trends in the country.

The reduction, he explained, would also facilitate rapid economic growth and provide conducive atmosphere for trade, commerce and employment.

As a result of the high rates charged by the commercial banks and other financial institutions, only a few business owners are able to borrow funds from banks.

This development, according to experts, hampers the growth of the economy.

If many companies are able to borrow money from the banks they would expand their businesses and employ more people who would improve their living standards.

The Bank of Ghana determines the policy rate but in the past year and a half interest rates by the commercial banks continue to remain high despite a decline in the monetary policy rate of the central bank. Interest rate spread is the difference between the bank’s earnings from loaned funds and cost of funds

Many individuals, organisations and groups have joined members of the Association of Ghana Industries (AGI) to call for a reduction in the rates.

The latest body to call on government to address the high interest rates charged by government is the Canadian Chamber of Commerce Ghana (CCCG).

At a breakfast meeting, which is the third to be organized by the chamber in Ghana and brought together private sector operators and government officials, various stakeholders appealed to government and the BoG to crack the whip to ensure a reduction in interest rates in the country.

The meeting, which was under the theme: “Ghana’s Real Economic Challenge: Interest Rates,” was geared towards discussing the high interest rate regime in the country and its impact on businesses.
“We are of the firm conviction that if more small businesses are able to access finance or credit at an affordable cost, the gains would be immense,” Alhaji Abdulai Nangtonmah, President of CCCG said.

The chamber, he stated, “sees access to credit as playing a very important fundamental role in building a strong private sector in Ghana in the current competitive global enterprise.”

Millison Narh, Deputy Governor of the BoG, whose speech was read on his behalf by Dr Samuel Ameyaw, Head of Monetary Policy and Economic Analysis Office, confirmed that the Central Bank was aware of the phenomenon.

“We, at the Central Bank, have identified some major challenges in achieving low lending rate regime as the slow transmission mechanism, structural rigidities in the banking sector and the need to intensify financial sector reforms to enhance efficient financial intermediation within the financial markets.”

He noted that the weak financial intermediary role played by the banking industry had reflected in the wide spread between deposit and lending rates.

The Deputy Governor stated that studies conducted by the bank suggest that key impediments to lowering lending rates of commercial banks include high overhead costs, high funding costs and high non-performing loans.

These costs often indicated some inefficiency in the operations in the banking system, which in most instances, is passed onto consumers.

Having identified these structural rigidities, he said, BoG has started encouraging banks to explore the idea of infrastructure sharing to improve efficiency and reduce cost of operations, especially in the delivery of financial products and services.

This is to lead to a reduction in the banks’ lending rates to ensure availability of more funds at reduced costs to entrepreneurs for the growth and expansion of businesses in the country.

He disclosed that the central bank has established a tripartite committee to investigate the determination of base rates in the banking sector to promote a level playing field for setting lending rates and improve transparency and efficiency.

Additionally, he said the bank has put in place a collateral registry including the credit reference bureau, which was expected to reduce information asymmetry in credit allocation in the banking sector and in the long run help lower the risks associated with the increasing non-performing loans in the bank’s portfolio.

“We expect that these measures will induce banking efficiency and reduce intermediation spreads.”

Mr Narh gave the assurance that BoG would intensify its surveillance activities to ensure efficient risk management and good corporate governance structures in the banking sector.
Kofi Bentil, Policy Analyst and Vice President of IMANI Ghana, called on banks to stop the unnecessary search for “best talent” to reduce the cost of borrowing.

Mr. Bentil said charging high interest rates enables banks to make more profits to pay their staff higher salaries and poach talents from other banks.

He called for improvement in statistics to ensure proper planning and forecasting in the banking sectors to regulate the sector.

Yvonne Nduom, Executive Chairman of Coconut Groove Hotels, who spoke on behalf of the private sector, called on government to ensure efficient and effective monitoring of the financial sector to prevent commercial banks from making unnecessary profits from borrowers.

However the Ghana National Chamber of Commerce and Industry (GNCCI) noted that controlling interest rate, as was done in the past years, is not the best.

Seth Adjei Baah, President of GNCCI, in an interview appealed to government to help regulate interest rates to sustain the private sector.

He was of the view that government must regulate interest rates instead of controlling them to assist in the development of businesses.

The private sector, he said, intends to partner government in the socio-economic development of the country, adding that private sector operators must be assisted in all aspects.

By Emelia Ennin Abbey