Impose five percentage points to reduce lending rate – AIE to BoG

Dr John K. Kwakye

The Institute of Economic Affairs (IEA) has urged the Bank of Ghana (BoG) to impose a cap of five percentage points on the spread of banks to lower lending rates in the country.

He also asked the Central Bank to introduce a rule so that the spread maintained by banks is equated with the banks’ primary reserve rate to lower the lending rate.

The Institute said the above could “force the hand” of banks to more closely monitor the policy rate and keep the lending rate within limits.

Dr John K. Kwakye, Director of Research, IEA, appealed to the IEA Forum in Accra on, “High Lending Rates in Ghana: What’s the Solution? “

The forum was necessitated by a recent call from President Nana Addo Dankwa Akufo-Addo for the BoG to address the issue of high lending rates, given the negative effect on economic growth.

“This rule will encourage banks to keep the spread to a minimum,” he added.

Dr Kwakye said that banks, government and the Monetary and Regulatory Authority (Bank of Ghana) have a role to play in regulating lending rates and said inefficiencies, high operating costs, the poor appraisal of projects, collusive practices and customer-grabbing behavior of banks have largely contributed to lending rates.
He said government borrowing from banks to finance the budget, macroeconomic instability associated with high budget deficits, and high and multiple taxes imposed on banks were another factor contributing to the high lending rate.

Dr Kwakye said the inherently upward bias in the monetary policy of the Monetary Authority and regulator on interest rates, the cost of high and differentiated foreign exchange reserve requirements, and the lack of reference offices of Well-functioning credit was also a major factor and called on institutions to work to remedy the problem.

He said banks need to address operational inefficiencies to reduce costs so that they are not passed on to customers.

The director said banks need to improve work processes and systems through modernization and digitization and, in general, reduce paper overload, save time and avoid unnecessary location dependency practices.

“Reduce operating and overhead costs, contain labor costs by maintaining the right size of staff and reasonable levels of staff compensation, keep materials, equipment and rental expenses under control; save on utility usage and strengthen clients’ project evaluation capacity to reduce the incidence of defaults and the effect on costs, ”he added.
He also called on the government to restrict borrowing from banks by bringing the budget deficit under control in order to reduce competition for loanable funds and create the stable macroeconomic environment necessary to ease pressure on lending rates.

Dr Kwakye said the government needs to streamline bank taxes to help cut costs and provide a level playing field when it comes to corporate taxes.

“Phase out Ghana’s 5 percent fiscal stabilization tax which has been in place since 2001 and whose introduction was difficult to justify and has lost its usefulness, if at all,” he said.

Regarding the Monetary and Regulatory Authority, he said they should ensure that the fight against inflation does not itself fuel high lending rates.

“It requires a broader approach to tackling inflation… paying attention to the causes on the supply side, as too much emphasis on managing demand tends to weigh on interest rates. “

Dr Kwakye said the Authority should reduce the primary reserve rate from the current level of eight percent to five percent in order to reduce the associated costs for banks.

The director said that the Bank of Ghana should further allow banks to hedge their dollar deposits with dollar reserves to avoid exposure to currency risk and its shift on lending rates.

“To ensure that the deposit insurance system works effectively in order to make unnecessary a high primary reserve requirement for prudential purposes,” he added.

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