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Mr James Asare-Adjei — President of AGI

Cap lending rates — AGI

THE Association of Ghana Industries (AGI) has taken its fight against exorbitant bank charges in the country to a new level, by requesting that the Bank of Ghana (BoG) direct commercial banks not to lend to businesses above a stipulated threshold.

The association is expected to formally put that request before the top leadership of the central bank at a meeting it requested between its national executives and that of the bank.

This is after years of fruitless appeals to commercial banks to reduce their lending rates in other to spur growth in the private sector and the economy in general.

The President of AGI, Mr James Asare-Adjei, told the paper on May 24 that instead of allowing banks the free will to decide how much to lend to businesses, BoG, which regulates the banking industry, should put a cap on interest rates, thereby making it illegal for a lender to go above the agreed limit.

He explained that the cap on bank charges could come in the form of a new regulation that would be institutionalised and communicated to all players in the banking industry.

Interest rates are currently averaging 30 per cent per annum, an amount the business community despite yet the banks justify, using the current policy rate and the treasury bill rates.

“It does not have to be a situation where banks will always be comparing their Treasury bill (T-bill) rates and the policy rate, no. What we are asking is can’t the BoG say that based on the kind of economy we are operating, no bank should lend to businesses at 400 percentage points above the existing policy rate,” Mr Asare-Adjei asked.

Of utmost concern, he said, was the disparity in interest rates between Ghana and its peers in the sub-region.

Although the economies of West African countries are virtually at the same threshold, cost of credit in them is varied, with that of Ghana being the highest.

Currently, interest rates in most countries within the sub-region hover around 22 per cent, with that of Nigeria, which is home to Africa’s largest economy, being at 27 per cent.

“I have always asked that is the economy of Ghana an isolated case in the sub-region, where interest rates are around 22 per cent yet ours is as high as 30-35 per cent? Because we keep on asking these questions and not getting the desired results, that is why we are now asking if the BoG can intervene in the market with a regulation,” he asked.

He said the association was optimistic the initiative, if properly implemented, would help lower the cost of credit, an issue that continues to rank among the top three challenges businesses are facing in the country.

Exorbitant prices

AGI’s current stance on interest rates comes at a time the fortunes of industry are dwindling while that of the banking sector is blossoming.

Data from the Ghana Statistical Service (GSS) showed that the contribution of the financial services sub-sector (which banking is an integral part) to total output rose from 4.7 per cent in 2012 to 7.3 per cent in 2014.

Similarly, a survey of bank performance by the GRAPHIC BUSINESS also showed that their net profits have been going up, thanks to a corresponding rise in loans and advances given to their respective customers.

The industry’s net profit rose from GH¢1.56 billion in 2013 to GH¢2.13 billion last year, representing a growth rate of 36.3 per cent within the 12-month period. 

The growth was largely influenced by a strong growth in loans and advances within the period under review. The data showed that bank loans and advances rose by 56.8 per cent (from GH¢1848 billion in 2013 to GH¢28.97 billion in 2014) to partly make the industry one of the most profitable in the services sector.

But while this is happening, the fortunes of the manufacturing sector has been declining.

The sector’s contribution to GDP declined from 5.8 per cent in 2012 to 5.3 per cent in 2013 before recovering to 5.7 per cent in last year.

These developments are not favourable to the economy, Mr Asare-Adjei, who is the Managing Director of Asadtek, said.

“It poses a real danger to the economy and that is why the central bank must intervene,” he said.

Change tactics

Because BoG’s current inflation targeting (IT) mechanism requires that it raises the policy rate – the rate at which commercial banks borrow from the central bank – anytime it anticipates inflationary pressures, the AGI President said allowing market forces to determine interest rates (as is the case currently) was inimical to industry, given that banks would continue to jack their lending rates anytime the policy rate was increased.

This then leads to a situation where, although the cost of wholesale funds to financial institutions might not be high, commercial banks will still increase lending rates, leading to exorbitant profits to them at the expense of industry, he said.

As a result, he appealed to the central bank to change the strategy used in controlling inflation, explaining that its continuous application would continue to pose a challenge to the survival of businesses and the economy in general. 

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