Ghana’s banks were roasted by the President in August for high lending rates. Akufo-Addo tasked the board of the Bank of Ghana to ensure that the yawning gap between the central bank’s monetary policy rate and the lending rate of commercial banks is bridged.
“This is a gap we have to bridge if we are to realise the vision of a Ghana whose economy is globally competitive,” the president said.
The Bank of Ghana on 27 September for the third time maintained the monetary policy rate at 13.5% as commercial banks continue to lend at an average of 20.6% interest to private businesses.
However, there is pressure on the banks from the government to reduce their interest rates to enable more businesses to access credit, expand operations and create employment. But with the banks insisting the high interest rate is a result of the government’s difficult policies, the central bank must jump in to resolve the situation.
Akufo-Addo’s economic development plan
President Nana Akufo-Addo has hinged almost all of his major economic transformation programmes on the private sector growth.
From the 1-District 1-Factory initiative, which is looking to increase industrialisation, to the GHS100bn CARES Programme for alleviation and revitalisation of private enterprises amidst the Covid-19 pandemic, Akufo-Addo has reiterated the critical role the private sector plays in the Ghanaian economy and the need to support them.
However, President Akufo-Addo has been unsettled that private businesses continue to struggle to access credit from commercial banks to expand their businesses.
Lending rates by commercial banks are too high
Since assuming office in 2017, Akufo-Addo has, on different occasions, complained about the high lending rate by commercial banks that he believes comes down to profiteering by the banks.
“If we are ready to give an impetus to the private sector to lead the socio-economic transformation of our country, lending rates must come down, and they must come down urgently. When banks do not become mere profit-making enterprises but see themselves as active partners with Government to build a healthy and stronger economy, then we would be making significant progress,” the president remarked in Accra in 2018.
This is a gap we have to bridge if we are to realise the vision of a Ghana whose economy is globally competitive.
At the time, commercial banks were lending at an average of 27.5% interest, although the Bank of Ghana’s monetary policy rate was about 17%.
“Getting loans from a bank here is not easy. Sometimes it is not because the banks don’t consider your application but you realise from their terms that you will struggle to pay back. I have had a terrible experience clearing a bank loan in the past and not much has changed. The interest rate is quite high and many businesses like mine cannot afford or risk it. About 20% interest? It is very high if you ask me,” says Kwame Asare who runs a commercial printing business in Accra.
The lending rates by commercials banks have made it difficult for small businesses to secure loans to expand their enterprises and have thus led to the collapse of some.
In Kenya, the central bank’s benchmark lending rate is 7% while commercial banks lend at an average rate of 12%. In Nigeria, the benchmark lending rate is pegged at 11.5% but commercial banks lend at between 18-30%.
The deputy chief executive officer of the Ghana Association of Bankers, John Awuah, rejects the view that banks are making up their lending rates to make absurd profits.
He argues that the economic fundamentals including inflation, budget deficit and recurrent borrowing by the central government largely determines the lending rate.
“The lending rate is a derivative of the treasure bill rate, interbank lending rate, and the policy rate. A bank’s baseline cost of funding is about 16.5% excluding staff cost, infrastructure cost, risk of defaulting cost before [profit] margins. By the time you price all these, you will already be around the 20%. The [profit] margin is extremely small. Banks don’t make money from high-interest rates,” he tells The Africa Report.
“We actually get worried because the higher the interest rate, the higher the interest burden on lenders and the higher the probability of lenders defaulting. We don’t want customers to default,” he adds.
Will anything change?
Nana Otuo Acheampong, a banking consultant, is optimistic that commercial lending rates by banks will soon reduce to an appreciable level.
“While everybody wants the gap between the Monetary Policy Committee (MPC) rate and the lending rate to squeeze, we are not there yet but I am hopeful that we will get there. The rates will come down. We are on the right track,” he says.
As reassuring as this may sound, the actual situation appears to be a chicken and egg situation. While the banks believe government must contribute significantly to reduce the lending rate by lessening the tax burden on them and checking fiscal deficit among others, the government is of the view that lowering the insatiable appetite for abnormal profit will do the magic.
The Governor of the Bank of Ghana, Ernest Addison says a two-way approach, putting the responsibility on both the government and the banks has already been set in motion.
He explains that while the government is doing its part by attempting to reduce the budget deficit, banks are being pushed to work more efficiently in a way that saves them enough resources to free customers of the high interest rate on credit.
“We are working at it, the government is working at it [too]. They are bringing down the budget deficit, it is not easy but they are pushing. We are ensuring that the banks are becoming more efficient so that they are able to pass some of their efficiency gains into lower lending rates,” Addison told reporters.
The central bank is also hoping that its new credit infrastructure available to banks will help them lower the risks associated with lending and consequently the interest rate on loans.
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