Business leaders are concerned that banks are refusing to lower their interest rates despite the stabilisation of key macro-economic indicators. By Mustapha Samed

The commercial banks in Ghana have refused to lower their lending rates despite the stability in the economy. The situation is affecting
investment and growth of the economy

Long before monthly inflation rates eased to their current single digits to prompt the Bank of Ghana (BoG) to lower its policy rate to an all time low of 12.5 per cent, commercial banks and other lending institutions relied on the unstabilised nature of monetary policy indicators to hold on to their high lending rates.

It led the borrowing community to conclude that a stabilised macro-economy encourages commercial banks to ease their ‘overkill rates’ to allow businesses to borrow and invest more. The current stability in the economy is, however, causing many to regard the banks as being greedy and inimical to business growth. And they may be right. After all, the commercial banks have failed to respond to the lowering of the BoG’s rate, not to mention even monthly inflation figures, improved reserves and a fairly improved exchange rate regime.

As the president of the Association of Ghana Industries (AGI), Nana Owusu Afari, commented, “The banks are not helping the development of industry and by extension the economy at all. Why have they refused to lower their rates despite the stability in the economy which we all are seeing?” This did not “encourage investment and growth in the economy” and could  “cripple the national economy if left to flourish”, he warned.

For the banks, however, the improved economic outlook, resulting mainly from a squeezed fiscal policy and rising food production, is not enough to lower lending rates.

Although the president of the Ghana Association of Bankers (GAB), Asare Akuffo, believes that interest rates will eventually fall, he doesn’t expect this to happen soon.

Akuffo, who is also MD of the HFC Bank, urged the business community “to understand that lending rates will definitely decline in line with the stability achieved. But that doesn’t mean that there will be a free fall in the rates. In fact, banks will have to study the situation in the country to be sure that loan demand will continue for long enough for interest rates to go down. Otherwise, any attempt to lower interest rates could lead to banks operating in rather difficult situations.”

In effect, banks’ trust in the continuity of the current macro-economic environment is tempered. And with 2012 being an election year, such trust can easily waver as the government loosens its expenditure belt in a bid for extra votes.

It must, however, be mentioned that some commercial banks have responded positively by lowering their rates on an average of five basis points, but this is not enough for the business community.

Yet with inflation now at 8.5 per cent and the central bank’s policy rate pegged at 12.5 per cent, commercial banks’ continuing to charge borrowers between 20-25 per cent on loans is seen as punitive because it deters them from investing borrowed funds in long and medium term projects that could yield substantial dividends.

That notwithstanding, one needs to understand that the fixing of lending rates goes beyond national macro economic indicators. Indeed, the dynamics surrounding lending rates the world over go beyond basic money supply indicators such as inflation, policy rate, prevailing exchange rate and the general performance of an economy.

Nana Owusu Afari, president of AGI

According to the executive director of Ghana’s Centre for Policy Analysis (Cepa) think-tank, Joseph Abbey, the root cause of the problem is the liquid-stressed nature of the country’s dominant bank, Ghana Commercial Bank (GCB). GCB, he said, has been forced by indebtedness to ‘widen its margins, not to make profit but to cover its overheads resulting from liabilities from state-owned enterprises (SOEs) and wide branch networks’.

He further observed, ‘But the situation in the banking sector is such that if you have your dominant bank charging higher margins, then the likelihood is that the other banks will do same - not to cover overheads as the later is doing - but to make profits at the expense of industry.’

“The banks are not helping the development of industry and by extension the economy at all. Why have they refused to lower their rates despite the stability in the economy which we all are seeing? This did not encourage investment and growth in the economy and could  cripple the national economy if left to flourish” Nana Owusu Afari president of AGI

With GCB still battling with debts resulting from its forced lending to entities like the Tema Oil Refinery, Abbey believes the issue of high interest rates will persist, at least for the time being.

“The ministry of finance and economic planning [MoFEP] will have to take a bold step as far as this issue is concern; they should restructure the operations of GCB, inject funds into it and cause it to make real profits,” he added. And once that happens, he said GCB would no longer be compelled to widen its margins for any of its peers to copy.

Abbey revealed that he had advised the BoG and the MoFEP on the issue, but he was “yet to see them do anything in that regard”, he pointed out.

That notwithstanding, the issue of high lending rates continue to pinch both the regulator and the government. Central bank governor, Kwesi Arthur-Amissah, observed late last year that “consumer confidence has improved, expectations about macro-economic conditions are positive and the exchange rate remains stable”. He concluded, “The banks should [therefore] respond by reducing their lending rates appropriately”. “This will allow for a restoration of credit growth and ensure a steady growth in output.”

The BoG has also constituted a committee made up of GAB representatives to look into the high interest rates. It has so far ruled out the idea of returning to a regulatory regime of setting interest rates, as was the case sometime ago, explained Francklin Bengle, BoG’s acting head of banking supervision. Instead, the committee was aiming at bringing more “transparency into the setting of the rates”.

He hinted at BoG’s willingness to compel the banks to lend below their respective base rates, unlike the current situation in which some banks are said to be lending to certain clients at above their published base rates.

The committee is also considering introducing a Ghana interbank lending offer rate (GAIBOR), a replica of the London interbank offer rate (LIBOR) that is seen as an industry benchmark for the calculation of interest rates by banks. Once that benchmark takes effect in the country, “banks can then lend GAIBOR plus. The plus will now be determined by the lender’s risks and that will also be published for all to see”, explained Bengle.

But as these measures take shape, Abbey still believes the cause of the high interest rate regime is traceable to GCB.

“I will really want to be told to shut up on this issue because our analysis at Cepa show that interest rates will not ease anytime soon if GCB is not recapitalised to operate in a debt-free environment,” he noted.

Before the introduction of the universal banking system into the country, specialist banks such as the National Investment Bank, the then National Bank for Reconstruction and Home Finance Company, now HFC bank, provided their customers with loans that could be repaid over a long period of time.

According to AGI chief Nana Owusu Afari, these days most banks are busy chasing profit instead of looking at how to support the business community or the economy for that matter.

“The easiest way to make a profit in the banking sector is to engage in deposit mobilisation and trade finance to the neglect of financing industry,” he added. The banks, he said “are more willing to give a loan to a businessman to import goods into the country and sell rather than finance somebody to set up a factory or invest in his/her existing business for it to grow. And that is not good for an economy like ours.”

As the arguments over interest rates continue to rage, Nana Afari believes a revisit to the now abandoned specialised banking concept will not be misplaced.

“Why can’t we have a specialised bank to finance industry to give long term funds to the business person to invest and wait for it to be repaid in say 10 to 15 years time? I think that concept was good for business development in Ghana and it would be good if we reconsider it especially now that the banks are not willing to finance industry,” he stated.