Interest Rates 'Killing' Economy: Interest Rates Charged by Ghana's Commercial Banks Are the Highest in Africa and Second Only in the World. This Is Stifling Economic Development and Inflating the Cost of Doing Business. What Is the Solution? Stephen Gyasi Jnr Reports from Accra

By Gyasi, Stephen, Jr. | African Business, May 2010 | Go to article overview

Interest Rates 'Killing' Economy: Interest Rates Charged by Ghana's Commercial Banks Are the Highest in Africa and Second Only in the World. This Is Stifling Economic Development and Inflating the Cost of Doing Business. What Is the Solution? Stephen Gyasi Jnr Reports from Accra


Gyasi, Stephen, Jr., African Business


Ghana's central bank may be forced to crack the whip if commercial banks continue to levy high interest charges despite growth-enhancing reforms introduced by the regulator, a source close to the Bank of Ghana (BoG) has hinted.

The regulator recently announced a new base rate of 16% down from 18%, but most of the commercial banks charge almost twice that rate on commercial loans, raising concerns about the central bank's ability to whip them into line.

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"Banks should respond [to the new base rate] by reducing their lending rates appropriately. This will allow for a restoration of credit growth in the economy and ensure a steady increase in output", the governor of the Bank of Ghana, Kwesi Amissah-Arthur, commented.

[ILLUSTRATION OMITTED]

Ghana's central bank cut its benchmark lending rate for the second time in three years, increasing pressure on domestic lenders to also lower borrowing costs.

[ILLUSTRATION OMITTED]

Ghanaian commercial-bank lending rates are currently about 30%, well above the African average, economists say. According to Central Bank data, the ratio of non-performing loans to gross loans rose to 14.9% in December 2009, from 7.7% in December 2008.

Ghana has the highest spread and lending rates in Africa and is second only to Brazil globally. Historically, it also has the highest lending rates in Africa, averaging 37.2% in November 2009. While the Prime Rate was 18% in November 2009, lending rates were 37%, and 31% in June 2006 when the base rate was 14%.

The Bank of Ghana is exploring means to bring down the cost of borrowing in the country, including the possibility of placing a legal cap on interest rates, a practice that has been employed in other jurisdictions such as Nigeria.

This is in line with the regulator's dissatisfaction with the current situation in the country's financial sector, where commercial banks prevent many from benefiting from the fruits of effective financial intermediation, blocking the free flow of resources with unacceptably large spreads.

"The banks have always justified their high interest rates by saying that the rates are determined by factors beyond their control, including the high Central Bank prime rate, high Treasury Bill rates and the need for a higher risk premium as a result of operating in a risky environment," another source at the Central Bank said.

The base rate is the interest charged by the Central Bank to commercial banks.

"It is therefore difficult to understand why the banks fail to adjust their rates downward when these factors turn favourable. The current management of the Central Bank has vowed to bring down the cost of borrowing in the country and nothing should stop us in this regard", the source concluded, wondering why, despite the growing competition in the sector, banks still looked to the big players to decide the level of interest charges.

Under the leadership of Amissah-Arthur, the Central Bank made its first interest rate reduction in November, signalling a reverse in three years of tight monetary control.

Credit should be a right

Ghana's Finance Minister, Dr Kwabena Duffuor, has indicated that government is considering engaging the banks to deliberate on an acceptable interest rate structure that would benefit all stakeholders and promote healthy competition among the banks. This, he said, had become necessary because, although the Central Bank had reduced the prime rate, the cost of borrowing at the various commercial banks remained very high.

His deputy, Fiifi Kwetey, also reiterated the call for a reduction in commercial bank interest rates, stressing that it was high time banks became more innovative in their operations by making a paradigm shift away from the focus of continuing to borrow at high rates from their key lenders, i.e. savers, to offering lower interest rates to businesses working within the productive sectors of the economy such as agriculture and manufacturing. …

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Interest Rates 'Killing' Economy: Interest Rates Charged by Ghana's Commercial Banks Are the Highest in Africa and Second Only in the World. This Is Stifling Economic Development and Inflating the Cost of Doing Business. What Is the Solution? Stephen Gyasi Jnr Reports from Accra
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