Akufo-Addo implores commercial banks to cut rates

Ghana’s banks were grilled by the president in August for high lending rates. Akufo-Addo instructed the Board of the Bank of Ghana to ensure that the gaping gap between the central bank’s policy rate and the lending rate of commercial banks is closed.

“It is a gap that we must bridge if we are to realize the vision of a Ghana with a globally competitive economy,” the president said.

On September 27, the Bank of Ghana maintained the monetary policy rate for the third time at 13.5%, with commercial banks continuing to lend at an average interest rate of 20.6% to private companies.

However, the government is pressuring banks to cut interest rates to allow more businesses to access credit, expand their operations and create jobs. But with banks insisting that the high interest rate is the result of tough government policies, the central bank must step in to resolve the situation.

The Akufo-Addo Economic Development Plan

President Nana Akufo-Addo has articulated nearly all of his major economic transformation programs around private sector growth.

From the 1-District 1-Factory initiative, which seeks to increase industrialization, to the GHS100bn CARES program for the mitigation and revitalization of private enterprises amid the Covid-19 pandemic, Akufo-Addo reiterated the role essential that the private sector plays in the Ghanaian economy and the need to support them.

However, President Akufo-Addo was troubled by the fact 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 profits from the banks.

“If we are ready to give impetus to the private sector to lead the socio-economic transformation of our country, credit rates must come down, and they have to come down urgently. When banks do not become mere for-profit enterprises but see themselves as active partners with government in building a healthy and stronger economy, then we will achieve significant progress,” the President remarked in Accra in 2018.

This is a gap we must bridge 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%, while the Bank of Ghana’s policy rate was around 17%.

“Getting loans from a bank here is not easy. Sometimes it’s not because the banks don’t consider your request but you realize from their terms that you will find it difficult to repay. I had a terrible experience paying off 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’s very high if you ask me,” says Kwame Asare who runs a commercial print shop in Accra.

Lending rates charged by commercial banks have made it difficult for small businesses to obtain loans to expand their businesses and have therefore led to the collapse of some.

In Kenya, the benchmark central bank 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%.

The Deputy Chief Executive of the Ghana Bankers Association, John Awuah, rejects the view that banks are compounding their lending rates to make absurd profits.

He argues that economic fundamentals, including inflation, budget deficit and recurrent central government borrowing, largely determine the lending rate.

“The lending rate is a derivative of the treasury bill rate, the interbank lending rate and the policy rate. The basic cost of funding a bank is around 16.5% excluding staff costs, infrastructure cost, risk of default before [profit] margins. By the time you evaluate all of this, you will already be around 20%. the [profit] the margin is extremely small. Banks don’t make money with high interest rates,” he says. The Africa Report.

“In fact, we are concerned because the higher the interest rate, the higher the interest burden on lenders and the higher the probability of default by lenders. We don’t want customers to default,” he adds.

Is anything going to change?

Nana Otuo Acheampong, a banking consultant, is optimistic that commercial lending rates from banks will soon drop to an appreciable level.

“While everyone wants the gap between the Monetary Policy Committee (MPC) rate and the lending rate to narrow, we are not there yet, but hopefully we will get there. Prices will go down. We are on the right path,” he says.

As reassuring as it sounds, the real situation seems to be a chicken and egg situation. While the banks believe that the government should make a significant contribution to reducing the lending rate by easing the tax burden on them and controlling the budget deficit, among others, the government is of the view that reducing 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, holding both government and banks accountable, has already been put in place.

He explains that even if the government is doing its part in try to reduce the budget deficit, banks are pushed to work more efficiently in a way that allows them to save 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 reduce the budget deficit, it’s not easy but they push. We’re making sure banks become more efficient so they can pass on some of their efficiencies in lower lending rates,” Addison told reporters.

The central bank also hopes that its new credit infrastructure available to banks will help them reduce lending risk and therefore the interest rate on loans.

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