Mr Charles G. Ackah (left), Research Fellow, ISSER, explaining a point at the forum. With him are Dr Joe Abbey (middle), Executive Director, Centre for Policy Analysis (CEPA) and Dr Ekwow Spio-Garbrah, Minister, Trade and Industry.

Banks sacrifice economic growth for handsome profits; Collude to fix high interest rates — ISSER

In preference for handsome profits to long-term economic gains, commercial banks have long colluded among themselves to take advantage of loose regulation and persistent macroeconomic imbalances in the economy to fix killer interest rates that impede the growth of businesses and the economy at large, a research fellow at the Institute of Statistical, Social and Economic Research (ISSER) has said.

Dr Charles Godfred Ackay said the situation was further complicated by the burgeoning inefficiencies in the banking industry, where over 40 per cent of cost was often passed on to customers in interest rates.

These developments, according to the research fellow, had been the reason behind the high cost of credit in the country, a challenge that continues to rank topmost among the list of challenges facing the business community.

For many years, the Business Barometer Survey (BBS) of the Association of Ghana Industries (AGI) has ranked the cost of credit and access to credit among the first five constrains facing businesses.

The blame game

Currently, interest rates on loans and advances average 30 per cent per annum, about 500 percentage points above the 91-day treasury bill (T-Bill) rate and 900 percentage points above the policy rate.

For the banks, the Treasury Bill and the Policy Rate of the Bank of Ghana (BoG) are key ingredients in the determination of their respective base rates on loans they give out. As a result, they often argue that interest on loans and advances cannot reduce any further when the public's lending to the government through the purchase of T-bills – considered risk-free – is rated at about 25 per cent.

Dr Ackay, however, told the Graphic Business on May 5 that that argument was lame, given that there had been times when interest rates continued on an upward slide, in spite of consistent drop in inflation, the policy rate and T-bill rates.

He referred to 2010 and 2011 when inflation was below 10 per cent, T-bill rates hovered around 12 per cent and 15 per cent respectively and the policy rate averaged 13 per cent, yet interest on loans still remained as high as 30 per cent.

"They (banks) tend to blame fiscal slippages and things like that but it is not entirely the case. We have had stable macroeconomic environments in this country before but the blame game for high interest rates had shifted and the rates remained almost on the same trend," he said.

Loose regulation

At the maiden forum on high interest rates in Accra, where Dr Ackay was a panelist on the topic: 'The causes and solutions of high cost of credit in Ghana’, the discussants, comprising seasoned economists and experts in the banking industry, concurred that poor regulation of the local banking sector by the BoG, persistent macroeconomic imbalances and inefficiencies within banks themselves were the three key factors behind the killer rates.

Although suggested solutions to the issue were varied, the need to tighten the regulatory environment and improve the fiscal slippages in the economy took centre stage.

Dr John Kwakye of the Institute of Economic Affairs (IEA) and Mr Kwame Pianim, an Economist and investment Banker, said the government was to blame for the high cost of credit.

They mentioned the government's increased appetite for domestic funds, depreciation of the cedi, fiscal deficits and high inflation as factors conspiring with others to push the cost of credit up.

Financial Services Authority 

Although Dr Ackay of the ISSER, a research institute of the University of Ghana, agreed with that argument, he said the ultimate solution to the problem was for the country to establish a Financial Services Authority (FSA) with enforcement powers. 

The FSA should be empowered to investigate and prosecute banks that colluded to malign the system and fixed rates that allowed them to make handsome profits for themselves and their stakeholders, he stated.

"In every market, having many players is supposed to bring competition and engineer variety but that is not the case in Ghana’s banking sector. What we are seeing in the system is more of a collusion or an oligopoly and not competition,” he said. 

Dr Ackay’s caveat: “Of course, we cannot say for sure if they meet to agree on the rates to charge but it’s like each of them is observing what the other is doing and copying, and that defeats the logic behind having many banks.” — GB

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