Ghana’s banks were burned by the president in August for high lending rates. Akufo-Addo tasked the Board of Directors of the Bank of Ghana to ensure that the gaping gap between the central bank’s monetary policy rate and the commercial bank lending rate is closed.
“This is a gap that we must close if we are to realize the vision of a Ghana with a globally competitive economy,” said the President.
On September 27, the Bank of Ghana kept the monetary policy rate at 13.5% for the third time, with commercial banks continuing to lend an average of 20.6% interest to private companies.
However, the government is pressuring banks to cut interest rates to allow more businesses to access credit, expand operations and create jobs. But with the banks insisting that the high interest rate is the result of tough government policies, the central bank must step in to resolve the situation.
Akufo-Addo’s economic development plan
President Nana Akufo-Addo has focused almost all of his major economic transformation programs on private sector growth.
From the 1-District 1-Factory initiative, which seeks to increase industrialization, to the GHS 100 billion CARES program for the mitigation and revitalization of private businesses amid the Covid-19 pandemic, Akufo-Addo reaffirmed the essential role that the private sector plays in the Ghanaian economy and need to support them.
However, President Akufo-Addo is not convinced that private companies continue to struggle to access credit from commercial banks to expand their businesses.
Commercial bank lending rates are too high
Since taking office in 2017, Akufo-Addo has repeatedly complained about the high lending rate of commercial banks which he says boils down to bank profits.
“If we are ready to give a boost to the private sector to drive the socio-economic transformation of our country, loan rates must come down, and they must come down urgently. When banks do not become simple for-profit businesses, but see themselves as active partners with government in building a healthy and stronger economy, then we would make significant progress, âthe president said in Accra in 2018.
This is a gap that we must close if we are to realize the vision of a Ghana with a globally competitive economy.
At the time, commercial banks were lending at an average interest rate of 27.5%, although the Bank of Ghana‘s monetary policy rate was around 17%.
âHere, getting loans from a bank is not easy. Sometimes, it is not because the banks do not take into account your request but you realize from their conditions that you will have a hard time repaying. 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 companies like mine cannot afford it or risk it. About 20% interest? It’s very high if you ask me, âsays Kwame Asare, who runs a commercial printing house in Accra.
Commercial bank lending rates have made it difficult for small businesses to obtain loans to expand their businesses and thus have leads to the collapse of some.
In Kenya, the central bank benchmark lending rate is 7% while commercial banks lend at an average rate of 12%. In Nigeria, the benchmark lending rate is set at 11.5%, but commercial banks lend between 18 and 30%.
Ghana Bankers Association Deputy Managing Director John Awuah dismisses the view that banks are catching their lending rates to make absurd profits.
He argues that economic fundamentals, including inflation, budget deficit and recurring central government borrowing, largely determine the lending rate.
âThe loan rate is a derivative of the Treasury bill rate, the interbank loan rate and the key rate. The basic cost of financing a bank is around 16.5% excluding staff costs, infrastructure costs, risk of default before payment. [profit] margins. By the time you assess all of this, you will already be around 20%. The [profit] the margin is extremely low. Banks don’t make money with high interest rates, âhe says The Africa report.
âIn fact, we are concerned that the higher the interest rate, the higher the interest charge on lenders and the higher the likelihood of lender default. We don’t want customers to default, âhe adds.
Will anything change?
Banking consultant Nana Otuo Acheampong is optimistic that bank commercial lending rates will soon drop to a noticeable level.
âWhile everyone wants the gap between the Monetary Policy Committee (MPC) rate and the lending rate to narrow, we’re not there yet, but hopefully we get there. The prices will go down. We are on the right path,” he says.
As reassuring as it may sound, the real situation appears to be a chicken and egg situation. While the banks believe that the government must make a significant contribution to reducing the lending rate by reducing the tax burden on them and by controlling the budget deficit, among other things, the government believes that the reduction in the insatiable appetite for abnormal profits will do the magic.
At the end of the line
Bank of Ghana Governor Ernest Addison said a two-way approach, putting the blame on both the government and the banks, has already been put in place.
He explains that while the government is doing its part in try to reduce the budget deficit, banks are pressured to work more efficiently in a way that saves them enough resources to free customers from the high interest rate on credit.
“We are working on it, the government is working on it [too]. They are reducing the budget deficit, it is not easy, but they are pushing. We are making sure that banks become more efficient so that they are able to pass some of their efficiency gains on to lower lending rates, âAddison told reporters.
The central bank also hopes that its new credit infrastructure available to banks will help them reduce lending risks and hence the interest rate on loans.