High lending rates: how will the Monetary Policy Committee respond?

Only Ghana Card can be used for all financial services from July 1—BoG directs
Dr. Ernest-Addison, Chairman of the Monetary Policy Committee and Governor of the Bank of Ghana

The Monetary Policy Committee (MPC) is holding its 102nd meeting during September 22-25. The meeting will end with a decision on the Policy Rate (PR), currently at 13.5%. The MPC meeting is being held at a time of heightened concern about the persistence of high lending rates in the country.

This concern was given further focus recently by President Akufo-Addo when he inaugurated the new Board of Bank of Ghana (BoG) on August 20. Noting the negative effect of high lending rates on the economy, the President called out the Board to address the problem as a matter of urgency.

This is not the first time President Akufo-Addo has drawn attention to the problem of high lending rates and called out the BoG to find an answer to it. He has done so on several other occasions, including in his state-of-the nation addresses. President Akufo-Addo is also not the first President to have made this call. His two immediate predecessors, Professor Mills and Mr. Mahama, also made several calls to the same effect.

We at the IEA have also conducted extensive research and advocacy on the problem and made concrete proposals for addressing it, some of which informed the calls by the three Presidents. Notwithstanding the persistent calls, however, the BoG has not yet come up with an effective remedy, and the problem has persisted till today.

Following the recent call by the President to the BoG Board, IEA pro-actively organised a public forum on September 9 to discuss the issue with key stakeholders drawn from government, BoG, banks, academia, businesses, CSOs and the media.

At the forum, IEA argued that banks, government and the BoG are jointly responsible for the problem of high lending rates in the country. The IEA traced the responsibility of: i) banks to their operating inefficiencies, high structural costs, poor system of project appraisal, collusive practices and “customer capture;” ii) Government to high borrowing from banks to finance budget deficits, macroeconomic instability associated with high budget deficits, and high and multiple taxes imposed on banks; and iii) BoG to inherent upward bias of monetary policy on interest rates, cost to banks of high unremunerated and currency-differentiated reserve requirements and lack of well-functioning Credit Reference Bureaux, which increase borrower risks. The IEA called on all the three parties to work together to reduce lending rates.

The IEA drew attention to not only the high level of lending rates, but also to the wide spreads between lending rates and the Policy Rate, Treasure Bill rate, savings rate and inflation. The IEA argued that these spreads could not be justified in terms of the costs of banks and other factors that usually support high lending rates and interest rates generally. This is because banks have been consistently profitable and, in spite of recent distress encountered by some local banks that triggered extensive reforms by the BoG, financial stability indicators have been generally sound.

The IEA pointed out that, while it recognised that all the three parties—banks, government and BoG—were jointly responsible for the problem of high lending rates and, as such, were also jointly responsible for its resolution, the problem also represented a market failure in the financial services industry.

The industry has been left to the interplay of market forces, with the BoG adopting a completely hands-off, laissez-faire approach in terms of regulation and oversight. This approach has led to a highly-concentrated, collusive and uncompetitive industry, with an unfettered tendency to dictate unjustifiable spreads with impunity.

The IEA argued that, given past experience, it cannot count on banks, government and the BoG to voluntarily honour their respective roles to bring lending rates down in the foreseeable future. As such, the IEA suggested that the best way to achieve effective and prompt results is to “regulate” the lending rate-Policy Rate spread. This approach will force the hand of banks to follow the Policy Rate more closely and to keep the lending rate within bounds. To this effect, the IEA proposed the imposition of a 5 percentage points spread by the BoG.

At the forum, the Ghana Association of Bankers (GBA) CEO, who was present, rejected the spread-capping proposal, arguing that it will be counterproductive. He also pointed out that high lending rates are not the responsibility of banks and that the problem is blameable on the economic conditions.

The BoG representative at the forum also expressed similar reservations about the spread-capping, pointing out that Kenya tried it before but had to abandon it since it led to lending apathy. The latest person to add his voice to this sentiment is Mr. Adombila, a former deputy Finance Minister who, in an elaborate article on Graphic-on-line of September 18, raised the same counterproductive argument and the alleged failure of the policy in Kenya.

Despite, these counter arguments against spread capping, however, we have not yet heard of any superior proposal that will bring lasting solution to what has obviously become an intractable problem and an albatross around the neck of the BoG and policymakers.

Meanwhile, the MPC is deliberating on where next to position the PR, which is an important benchmark for the lending rate. Given that the last three readings of inflation saw successive increases from 7.5% in May to 7.8% in June to 9.0% in July and to 9.7% in August, and the fact that continuing food supply shortfalls and pipeline effects of increases in fuel prices constitute upwards risks to the inflation outlook, the natural response per the Inflation Targeting (IT) framework would be to increase the PR.

However, such a move, which could trigger corresponding increases in lending rates, would appear to suggest lack of attention by the BoG to the President’s call to do something about the high lending rates. Cutting the PR, on the other hand, would amount to disregard for the tenet of the IT framework, which the MPC seems to be religiously attached to.

The MPC, in fact, is faced with a very challenging decision at this juncture, given these competing demands or interests. In the circumstance, our expectation is that the Committee will go for the safest option, i.e. STAY PUT!—implying that it will keep the PR unchanged at 13.5%. Choosing this option, however, will not make the problem of high lending rates go away. The BoG will only be postponing the solution; the problem will continue to haunt us!

The IEA also pointed out at the forum that it is not only lending rates and spreads that are prohibitively high, but so also are other financial charges and fees, including those levied on loans, use of credit cards, use of ATMs and foreign exchange transactions.

In other jurisdictions, charges for financial services as well as other services and goods that are used on a universal or mass scale—including water, electricity, public transport and postal services—are regulated, since leaving them to the dictates of the market could lead to exploitation of the large numbers of consumers by providers bent on making abnormal profits.

The IEA, therefore, called on the BoG to regulate prices of other financial services as well, a call that we want to reiterate here. The IEA also wishes to reemphasise that capping the spread between the lending rate and the policy rate, and regulating other financial charges, do not amount to introducing a “control policy” in the financial industry, as some people would want to suggest.

The BoG will only be exercising its regulatory mandate as most central banks do. Regulating lending rates and prices of financial services is key as it will ease the burden on consumers of financial services, while also easing the cost of investment as a vehicle for catalysing the growth of the economy.

The BoG, indeed, has a national duty to attend to the incessant calls by governments, businesses and CSOs to address what is obviously one of the most important hindrances to the progress of the Ghanaian economy.


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