BoG under pressure to bring down interest rates

BY: Suleiman Mustapha & Manasseh Nii-Boye

The steady increase of the Bank of Ghana’s policy rate to 25 from 19 per cent at the beginning of the year has given policy makers some breathing space with stable currency but worries over cost of borrowing lingers.

Despite the favourable and handsome profits enjoyed by financial institutions in the country, the cost of borrowing is still high for the average Ghanaian, a phenomenon which has sparked another round of calls for action to bring it down.

Until recently, the Monetary Policy Committee (MPC) of the Bank of Ghana had maintained a fairly stable prime rate—the reference interest rate used by the banks—and yet, on the ground, banks and other loan companies do not reflect this in their lending practices.

 

The adjustment in the policy rate last September to 25 per cent was to offset the risk of inflation, which according to the BoG “has pushed up the disinflation path further from the target in the horizon, and monetary policy needs to be vigilant to avoid a build-up in inflation expectations,"

But it is the high cost of borrowing from the banks and other financial institutions that has got people talking.

Ahead of this week’s Monetary Policy Committee sitting, Economist and Associate Professor of the Institute of statistical Social and Economic Research (ISSER) of the University of Ghana, Professor Quartey Peter, wants the central bank to bring down its lending rate to ease the cost of borrowing.

“The role of the monitoring committee meeting will be more concerned about the interest rate hikes and therefore their target would be beyond inflation. If in their estimation, and as the figures would show, inflation is toned down then I believe that if it is possible for them they should reduce the rate so that it would have an impact on interest rate so that the private sector can borrow, but then perhaps if they would have to balance the rate of inflation,” he said in an interview.

“But given the way the government is behaving I am not too sure if the central bank would want to reduce the rate of interest,” he added.

Another Economist and Senior Lecturer at the University of Ghana, Dr Ebo Turkson, shared similar concerns and called on the Bank of Ghana to reduce its lending rate in order to ease the cost of borrowing.

What is more, many industry captains see the wide spread between deposits and loans by deposit taking institutions as unjustifiable in some cases.

What is significantly worrying to many is the low interest paid on deposits and the very high interest charged on credit advances.

Lending rates

Currently, the average interest on deposit by all the 27 banks operating in the country is less than 11 per cent, while lending rates are as high as 37 per cent on the average, depending on the bank or the kind of financial institution you are doing business with.

The high lending rate is even worse when it comes to the non-bank financial institutions. The rate they charge on loans seems to have no ceiling.

The average percentage rate for non-bank financial houses ranges between 86.45 and 95.04 per cent annually.

Again, for the non-banking institutions such as finance houses, the interest charges range between 61 per cent and 95.04 per cent annually.

The high lending rate has a multi-dimensional effect on the economy. Many people have ended up in debts because of the lending practices of some of these financial institutions.

Professor Quartey insist that the only way for the country to promote growth and employment through the private sector is to create the enabling environment for the private sector to borrow at a reasonable and affordable rate so they can produce and employ more.

Financial implications

But the worry is that most borrowers are often not aware of the financial implications if they are unable to service their loans. Even for those who know the implications, some still go ahead to borrow from bad lenders because of their dire need for cash.

Even though the banks, for example, generally admit that they are concerned about the effects of the high rates charged to customers on loans, they seem unprepared to do something about it.

The explanation given by the banks is that it is perfectly normal to charge a higher interest when you perceive an individual or institution to be a high-risk client.

This, of course, is purely on the basis of the economic theory of risk and reward- where you would expect a higher return for a risky project.

Maintain Policy rate

But Senior lecturer at the University of Cape Coast, Dr John Gatsi, in his analysis of the situation rather wants the central bank to maintain its policy rate.

''I think we have experienced some stability in terms of the performance of the currency, which should inform the Bank of Ghana (BoG) to maintain the policy rate rather than decreasing the policy rate because nothing significant has taken place over the past three months to warrant a decrease in the policy rate,'' he said.

But as the debate on the policy ensues, the argument is not that people should contract loans and not pay. It is far from that. The issue has more to do with the rate of interest charged that normally make it practically impossible for people to pay back their loans, even with the best of intentions.

The other side of the coin is that there also seems to be no one speaking for the small and medium scale enterprises (SMEs).

This is because for some companies, and high net worth individuals, based on their financial strength, they are able to borrow at the base rate and even below, which means that they are not directly affected by the rate malaise for them to use their clout in the economy to call the banks to order.

Much as this reflects the general economic imbalance, what is not clear though is whether it does include the large informal sector of the Ghanaian economy.

“But given the way the government is behaving, I am not too sure if the central bank would want to reduce the rate of interest,”

Key Note

Until recently, the Monetary Policy Committee (MPC) of the Bank of Ghana had maintained a fairly stable prime rate—the reference interest rate used by the banks—and yet, on the ground, banks and other loan companies do not reflect this in their lending practices.

Economic Research (ISSER) of the University of Ghana, Professor Quartey Peter, wants the central bank to bring down its lending rate to ease the cost of borrowing.

“The role of the monitoring committee meeting will be more concerned about the interest rate hikes and therefore their target would be beyond inflation. If in their estimation, and as the figures would show, inflation is toned down then I believe that if it is possible for them they should reduce the rate so that it would have an impact on interest rate so that the private sector can borrow, but then perhaps if they would have to balance the rate of inflation,” he said in an interview.

“But given the way the government is behaving I am not too sure if the central bank would want to reduce the rate of interest,” he added.

Another Economist and Senior Lecturer at the University of Ghana, Dr Ebo Turkson, shared similar concerns and called on the Bank of Ghana to reduce its lending rate in order to ease the cost of borrowing.

What is more, many industry captains see the wide spread between deposits and loans by deposit taking institutions as unjustifiable in some cases.

What is significantly worrying to many is the low interest paid on deposits and the very high interest charged on credit advances.

Lending rates

Currently, the average interest on deposit by all the 27 banks operating in the country is less than 11 per cent, while lending rates are as high as 37 per cent on the average, depending on the bank or the kind of financial institution you are doing business with.

The high lending rate is even worse when it comes to the non-bank financial institutions. The rate they charge on loans seems to have no ceiling.

The average percentage rate for non-bank financial houses ranges between 86.45 and 95.04 per cent annually.

Again, for the non-banking institutions such as finance houses, the interest charges range between 61 per cent and 95.04 per cent annually.

The high lending rate has a multi-dimensional effect on the economy. Many people have ended up in debts because of the lending practices of some of these financial institutions.

 Professor Quartey insists that the only way for the country to promote growth and employment through the private sector is to create the enabling environment for the private sector to borrow at a reasonable and affordable rate so they can produce and employ more.

Financial implications

But the worry is that most borrowers are often not aware of the financial implications if they are unable to service their loans.

Even for those who know the implications, some still go ahead to borrow from bad lenders because of their dire need for cash.

Even though the banks, for example, generally admit that they are concerned about the effects of the high rates charged to customers on loans, they seem unprepared to do something about it.

The explanation given by the banks is that it is perfectly normal to charge a higher interest when you perceive an individual or institution to be a high-risk client.

This, of course, is purely on the basis of the economic theory of risk and reward- where you would expect a higher return for a risky project.

Maintain Policy rate

But Senior lecturer at the University of Cape Coast, Dr John Gatsi, in his analysis of the situation rather wants the central bank to maintain its policy rate.

''I think we have experienced some stability in terms of the performance of the currency, which should inform the Bank of Ghana (BoG) to maintain the policy rate rather than decreasing the policy rate because nothing significant has taken place over the past three months to warrant a decrease in the policy rate,'' he said.

But as the debate on the policy ensues, the argument is not that people should contract loans and not pay. It is far from that. The issue has more to do with the rate of interest charged that normally make it practically impossible for people to pay back their loans, even with the best of intentions.

The other side of the coin is that there also seems to be no one speaking for the small and medium scale enterprises (SMEs).

This is because for some companies, and high net worth individuals, based on their financial strength, they are able to borrow at the base rate and even below, which means that they are not directly affected by the rate malaise for them to use their clout in the economy to call the banks to order.

Much as this reflects the general economic imbalance, what is not clear though is whether it does include the large informal sector of the Ghanaian economy.