Economic challenges keep cost of borrowing high

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Cedis
  • Analysts say no chance of cheap lending soon

Even though banks have shown resilience in the face of a difficult year that saw their operations impacted by the coronavirus pandemic, B&FT’s analysis has shown there has not been any significant reduction in lending rates ever since the Bank of Ghana reduced the policy rate last year March, thereby, making cost of borrowing still high for businesses and households.

According to the Summary of Economic and Financial data (January 2021) data, following a cut in average lending rate to 22.3 percent in April 2020 from the 23.4 percent the previous month, primarily in response to the 150 basis points cut of the policy rate by the central bank in late March same year, average lending rate as of December 2020 is still high at 21.1 percent, even though lower than a year earlier.

And between eight-month period – April 2020 and December 2020 – the data further reveals that average lending rate has reduced by just 1.2 percentage point, a situation that could have been far better should the macroeconomic environment favoured the central bank to cut the policy rate which has otherwise been maintained for five consecutive times. And also given that Bank of Ghana introduced a raft of measures last year to enable banks to free up capital to lend to the private sector.

This argument is further supported by the growth of total advances, which the data shows, declined to 5.8 percent in December 2021 from 23.6 percent the previous year, a sharp drop of 17.8 percentage points despite robust growth in total assets, deposits and investments in 2020.

Commenting on whether businesses stand the chance of seeing any reduction in lending rates in the short foreseeable future, banking consultant Dr. Richmond Atuahene told the B&FT in an interview he does not see that coming anytime soon, due to uncertainties in the economic environment which have increased risk of default.

“The banks are not sure about the risk complexity in the system. They are not sure what the policy rate will be in future and how long it will stay there. They are not sure whether the borrowers can service their loans as required. So the banks cannot drop the lending rate as easy as that.

There is a whole risk – credit, market, operational risks, among others. So when you do not analyse things well and you reduce the lending rate, it will affect the business of the bank. So the banks are being conservative in reducing lending rate.

The uncertainties in the economy will not allow the banks to reduce the policy rate as expected. It will take some time, especially with the COVID-19 related uncertainties. I can rest assure that the policy rate won’t come down in the short-term. The banks are treading cautiously,” he said.

Another banking consultant and also a risk management expert, Francis Owusu-Achampong, also told the B&FT he does not expect any significant reduction in lending rates considering the impact the coronavirus pandemic has brought on businesses as well as the financial sector.

“The additional driver of interest rate is the COVID-19 pandemic. There is so much cost in maintaining systems and getting business move as usual. Let us not forget that a lot of these businesses that have borrowed from the banks are in a weaker position to repay because of the pandemic and as result of that the provisions for bad debt figures will rise.

The capacity of the same borrowers to repay there is dwindling and for that same reason, as a result of the rules around provision for bad debt, chances are that the banks are going to write off a lot of bad debt which is an additional expense they probably didn’t anticipate.

So with increasing cost or decreasing prospects of profits, it is not unlikely that banks would not be able to reduce lending rates. Some banks have given holidays in repayments and all these add up to the banks’ cost. As a result of COVID-19, human resource cost is rising. All these are factors the banks didn’t take into consideration but which have come to impact their profitability. So to the extent that interest rates will drastically reduce, I cannot think of that coming too soon,” he said.

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