Banking customers angry at current high interest rates

Businesses in the country have intensified calls on commercial banks to reduce their lending rates to reflect the recent cut in the Bank of Ghana’s policy rate.

The Monetary Policy Committee (MPC) of the Bank of Ghana, a fortnight ago, reduced its policy rate by 200 basis points to bring the policy rate down to 18 percent, the lowest in the last 36months.

However, the local banks are yet to reduce their interest rates at which they lend to the businesses and households.

The businesses are keen to see that commercial banks respond accordingly by also cutting their rates at which they lend to businesses which will in turn cut the cost of doing business in the country and enable growth and job creation.

The President of the Ghana National Chamber of Commerce and Industry (GNCCI), Nana Appiagyei Dankawoso I, registering their worry at the situation said, access to cheap credit is fundamental to the growth and development of businesses, particularly SMEs and start-ups, which are encouraged by low-interest rates to increase their level of investments over a certain period of time.

“It is for this reason that the Chamber gladly welcomes the Bank of Ghana’s 200 basis points reduction in the monetary policy rate to 18% on 26th March 2018 following the investment-led recovery at the domestic and international fronts. However, the lagged effect of the reduction in the monetary policy rate, which reflects the cost of banking and efficiency in the banking sector, is a major concern to the private sector.”

Ghana is noted as having the highest average banking lending rate (35.5%) in Africa and second to Brazil (55.06%) in the world according to Trading Economics. Businesses are compelled to access short-term credit with high-interest rates for their long-term investment.

“We cannot continue undermining the competitiveness of these businesses and eroding their profits with high interest rates. It is the Chamber’s express view that the goodwill demonstrated by the Bank of Ghana will be reciprocated by the commercial banks.”

Meanwhile, the Bank of Ghana (BoG) has set its maiden Ghana Reference Rate at 16.82%, this means,
businesses and domestic consumers from this month are likely to have their interest charged on facilities they access from commercial banks in the country reduced.

This will see the cost of borrowing by businesses, especially the SME’s drop, reducing the cost of doing business for such entities.

BoG, in a release, explained that the new Ghana Reference Rate will be the new module for calculating interest rates and begins this April.

The GRR according to the Central Bank, was done in consultation with the with the Ghana Association of Bankers re-constituted Working Group which reviewed the existing Base Rate model and developed a new framework for base rate determination.

A reference rate is an interest rate benchmark, which is used to set other interest rates.

Introduction of the Ghana Bank’s Reference Rate (GBRR) to replace banks setting their own base rates is expected to increase transparency in credit lending and enhance the transmission between the Central Bank Rate and banks’ lending rates.

It will be calculated as the weighted average of the central bank rate and the weighted 2 month moving average of the 91-day Treasury bill rates” and should be adjusted every six months barring any extreme conditions in the markets.

It can be calculated depending on the type of transaction, as some use different reference rate benchmarks, but the most common are the LIBOR, the prime rate, and benchmark Treasury securities.

Per the statement, “the objective of the review among others is to fulfil BoG’s commitment to move towards a more market-based model of base rate setting, in the medium to long-term.”

Even though the central bank’s policy rate is currently set at 18%, with the GRR coming to force, a bank shall price its Flexible and Fixed term loans by adding or subtracting its risk premium the notice said.

While Flexible or floating term loan for any tenure granted by a bank during the implementation period will reset after each month’s publication of the GRR, Fixed term loan rates granted by a bank in its normal course of business from the implementation date will run until maturity.

“The ‘Base Rate’ emanating from this model is now a Reference Rate rather than a Minimum Lending Rate for all banks as was the case with the previous model,” the Bank of Ghana stated in the notice to the public.

In spite of this, members of the GNCCI wants the Bank of Ghana to expedite action on the realization of the Ghana Bank’s Reference Rate.

They believe, the Ghana Reference Rate will help address the persistent high sticky interest rates in the country. “The need for improved access to long-term funds cannot be overemphasized in the wake of intense business competition”, the GNCCI President said.

By: Adnan Adams Mohammed