Lending rates must come down — banks told

  • PEF advocates new formula

Following the central bank’s better-than-expected reduction of its policy rate, analysts speaking to the B&FT have said it is time for lending rates to trend downward.

“If your cost of operations has gone down; if the exchange rate is stable and growth momentum has picked up; and inflation expectations are not rising that much, then the economic fundamentals are telling you it is time to do something about lending rates,” said Prof. Peter Quartey of the University of Ghana’s Economics Department.

Said to be among the highest in the world, Ghana’s lending rates – largely above 31 percent for commercial banks and as high as 100 percent per annum for microfinance institutions – are often cited for holding back private sector growth.

The Monetary Policy Committee of the central bank, on Monday, cut the policy rate by 200 basis points; bringing it down to 18 percent, the lowest in three years.

In arriving at the new rate, the BoG cited ease of inflationary pressures, saying: “The current inflation forecast provides scope for monetary policy to realign interest rates, translate the disinflation gains achieved so far to the market, and reinforce the fiscal consolidation process by easing the burden of interest payments on the budget”.

Prof. Peter Quartey said a reduction in lending rates would also be in line with the government’s agenda of stimulating the private sector.

“And if the private sector grows, banks can generate more revenue. So, they should not just think about the immediate effect but rather think about the future – and know that when they reduce lending rates businesses will pick up, and the issue about non-recovery of loans will be reduced,” he said.

Dr. Ebo Turkson, also of the Economics Department at Legon said: “The economy is relatively doing well. It is projected to grow at a very high rate; so, it is in the interest of the banks to reduce their lending rates to attract a lot of investment into the country. If that happens, business will be good for them in the long-term”.

He said inflationary expectations are low, while the economy is projected to be the fastest-growing in the world this year – all of which show ‘clearly’ that lending rates should be reduced.

“There’s no reason banks should keep their lending rates where they are. Everything points out clearly that lending rates should be reduced. The monetary policy committee is clearly indicating that it expects inflation to decline, even to meet the target of 8±2, and so all the indicators show interest rates should fall,” Dr. Turkson also told the B&FT.

New formula needed

Speaking on behalf of the private sector, CEO of the Private Enterprise Federation (PEF) Nana Osei Bonsu blamed high lending rates on the reference formula for calculating them, urging the central bank to speed up the process of coming out with a new formula that will compel banks to reduce their lending rates.

“There is a formula approved by the Bank of Ghana that the banks are allowed to use in calculating lending rates, and that formula has defects from different angles. It includes the policy rate, but the policy rate constitutes just a minor portion of the formula. So, the movement of the policy doesn’t correlate with the base rate calculation.

“So, in that case, when there is a change in policy rate, it will have a direct impact and make a big difference to the lending rates. We have been advocating the formula should be amended and the Bank of Ghana has said it is working on that. But what we want is that once the formula is amended, the Bank of Ghana should place a limit on how much interest rates can exceed the policy rate,” Nana Osei Bonsu told the B&FT.