Nation’s Interest Rate Highest in Africa

By: Irene Janice Mensah and Gifty Mensah

In 2004 the Bank of Ghana (BoG) directed all commercial banks in the country, to abolish and in some instances reduce, what it described as unfair bank charges and fees being charged by the various commercial banks operating in the country.

The directive also required the banks to bridge the gap between lending and savings rates. The BoG’s directive was described at the time by sections of the Ghanaian public as a feeble attempt to clear a mess it has created through its own ineffective supervision of the banks. Some bankers Public Agenda interviewed at the time, expressed the view that the BoG’s directive, like the several that had preceded it, will only be another whirlwind that subsides just as quickly as it swirls. Six years on, the BoG has been urged to conduct a thorough investigation into the high lending rate charged by banks in Ghana as against low deposit rates, suggesting that a major anomaly that the 2004 directive had sought to cure still persists.

Speaking at a forum on interest rates, an Economist, Prof Cletus Dordunoo, observed that, it is difficult to find reasons for Ghana’s high lending rate as against very low deposit rate. According to him the wide spread is incomprehensible. He described the situation as unfair, arguing that, the banks are the only ones benefiting, leaving the poor masses to languish in poverty.

"The spread between lending rate and deposit rate in Ghana has been widening over the years and has earned Ghana the reputation of having the highest lending rate in sub-Sahara African," Prof. Dordunoo disclosed.

He noted that, the situation accounts for the slow growth rate of the economy, as private businesses are unable to borrow at the current interest rate to expand their businesses so as to create employment to absorb the unemployed masses.

The forum, organised by Citi FM, an Accra-based radio station, was under the theme, "The Interest Rate Debate, Dancing to Whose Tune?" It attracted participants from the public service, the private sector and the banking sector.

Prof. Dordunoo recalled that whereas European countries and the US reduced their rates in order to absorb the shocks during the financial crunch, noting with regret that Ghana rather increased its rates creating a rather difficult situation for businesses.

He urged government to use other measures rather than monetary instruments to control inflation since monetary instruments end up aggravating the situation.

Prof. Dordunoo revealed that the banking population of Ghana is about 15% to 20% and regretted that many Ghanaians do not save with the banks because of the low interest returns.

He explained interest rate to mean the cost incurred when one borrows money from the bank, non-banking institution or a person.

Mr. Fiifi Kwetey, the Deputy Minister of Finance and Economic Planning, revealed that at a meeting between government and the banks to deliberate on the issue, the banks claimed that challenges such as treasury bill rate, default in payments, high overhead cost, and inflation among others, account for the high interest rates they charge.

"But their major problem was the rate of the treasury bills. Lenders to banks will not accept anything less than the treasury bill rates and sometimes more". Last week the treasury bill rate dropped from 25% to 16% giving course for hope that interest rates will come down.

He explained that, the effect of high interest rates on agriculture which within the Ghanaian context is the largest employer is debilitating. The low income that characterize the agricultural sector, in his view, makes the sector unattractive to lending, especially during periods of interest rate surges, and this he said stifles growth in the agricultural sector.

Mr. Kwetey urged banking institutions to create more facilities and opportunities to promote the Agricultural sector. He explained that the demands for collateral as well as the high interest rates charged on loans scare the poor farmers from accessing credit and this impact negatively on the agricultural sector.

The Managing, Director of Zenith Bank, Mr. Dan Asiedu argued that proper identification will help drop the high rate of default which is a major problem for the banks. He hoped the on-going National Identification Scheme would reduce default in loan payment to the barest minimum.

With regards to the private sector, he mentioned that most of the small scale and medium enterprises are not well organised, for example in the areas of documentation, record keeping and planning. He lamented that such imprudent practices are not innovative to encourage the banks to assist them financially.

Some participants at the forum wondered why government should borrow at a high rate to develop the nation and not about 5% rate. In response, Hon. Fiifi Kwetey said government does not generate enough funds from taxes and therefore has to borrow more funds for development, at a rate that will encourage the general public to invest in government bonds.

In an interview with a private entrepreneur, Mr. Jem Mensah, he suggested that government should force banks to reduce the lending rates and increase the deposit rate.

He alleged the banks are reaping off the poor mass to pay their staff with fat salaries. "If the interest rate should drop, the banks would have to lay off some of their workers because they have set certain standards for themselves they have to keep".

He claimed the overheads of the banks are very huge because of the fat salaries, the car loans, the building loans and other loans that they offer their staff, and which will not permit them to reduce the interest rate.

Touching on the deposit rate, he alleged only the rich few who are able to lend money to the banks are able to determine the rate of interest on their money, but the poor man who saves only a fraction of his salary rather looses.

Ghana’s interest rate currently ranges between 23.5% and 41.6% compared with an average rate of 3.18% in the developed countries, 3.34% for Asia’s emerging economies and an estimated 14% for sub-Saharan African countries.

The Minister of Finance and Economic Planning, Dr. Kwabena Duffuor, assured government will engage banks in the country to deliberate on an acceptable interest rate structure that will provide a platform for competition among banks.

The minister said his Ministry was currently using moral suasion to encourage the commercial banks to respond to the diminishing inflationary expectation and the reduction in the prime rate by reducing their lending rate.

However, he said the moral suasion has its own limitation, especially in a deregulated-interest rate environment.

The claim that, the bane of BoG has been its ineffective supervision of the commercial banks is pervasive. Experts say the situation constitute a carte blanche for the banks, and this is exactly what has led to the intransigence on the part of the banks to BoG’s promptings, and the Ministry’s moral suasion.

The wake-up call to the BoG, according to some participants, is to be up and doing, and to ensure that the commercial banks do not constitute themselves into cartels, ripping off customers, and putting very little back into the economy