Call Banks to Order, IEA Urges Parliament

A senior economist of the Institute of Economic Affairs (IEA), Dr John Kwakye has accused banks of failing to whip up public interest in savings in the country and has therefore called on Parliament to call them to order.

He said banks operating in the country are rather making so much profit by paying very low interest on savings whilst charging exorbitant interest on loans given customers. “Ask them to explain why the spread is so wide,” he demanded.

Dr. Kwakye was speaking at a roundtable discussion organized by IEA in collaboration with the Center for International Private Enterprise (CIPE) in Accra, last Thursday. The theme for the discussion was “Developing a Framework/Policy for the Private Sector in Ghana.”

According to Dr. Kwakye, high interest rates do not encourage economic growth and therefore private businesses cannot thrive in such environments and wondered how many projects can be economically viable at such a high level of interest, over 30%? “High level interest rate itself can fuel high inflation,” he said.

Ghana’s interest rate is one of the highest in the West African Sub-Region, igniting several debates among the public and industry. Many businesses have failed or are not able to expand because of lack of funds. By the end of June 2010, lending rates in the industry ranged from 23.5% to 37.5%, with an industry average of 30.63%. On the other hand, savings and deposit rates ranged from 2.0% to 11%, with an industry average of 7.25%.

Dr. Kwakye stated that high interest rates reduce incentives to invest and slow down private sector growth as well as economic growth. Ghana’s high interest rates make it less competitive in attracting investments. It also results in high prices of goods and services.

He noted that one of the factors that have sustained the high level of interest rates in Ghana is government’s borrowing to finance budget deficits. These are in the form of Treasury bills and notes/bonds. Other factors are the fears of lenders who will demand higher interest rates because of perceived risks associated with their lending and currency depreciation and inflation, among others.

He blamed the banks for failing to innovate to make room for competition, thereby relying on lenders for a chunk of their resources which they have to pay interest on.

According to the economist, even though the Central Bank has been reducing policy rate occasionally, the real policy rate has gone up and not reduced “as they made us believe.”

The reserve requirements of banks, in Dr Kwakye’s view, are high and should be lowered or the Central Bank pay returns on them so as not to overburden the commercial banks because the commercial banks pay returns on the 9% reserves that is kept at the Central Bank.

He also advised the banks to take measures to reduce their overhead and operational cost, and also pay commensurate returns on savings to encourage more savings. “The culture of not enough money in the system is not true. The problem is the banks are not able to come up with products to tap the resource in the economy,” he observed.

“The onus is a collective one, the government, the banks, and the Central Bank should find solution to the problem,” he said.

In response, the President of the Ghana Bankers Association, Mr Asare Akuffo, rather blamed the situation on the prevailing economic environment, which according to him, is not conducive for banking operations in the country.

He said, as a result, most of the banks did not perform well last year except one bank which was able to achieve a turnover of over 35% and and a few others which achieved a percentage of between 21 to 25 %. The rest performed poorly falling below 20 %.

“What the public should be concerned about is greater access to credit and not high lending cost. What is important is the management of the economy,” he said.

A former Deputy Minister of Finance, Professor George Gyan-Baffour, was of the view that there should be a radical look at the banking sector to identify what the real problem is.

He was also against the view that the blame should be put entirely on the banks. Rather they should be left alone because interference from the legislature could cause problems in the financial sector.

Prof Gyan-Baffour also noted that Ghanaians have the erroneous notion that agriculture is the key to national development. To him, it could be industrialization or something else. “There is interface between the government and the private sector. The government cannot do much; it needs the support of the private sector.”

In his closing remarks, the Chairman of the forum, Dr. Osei Boeh-Ocansey, Director-General, Private Enterprise Foundation(PEF), said graduates complete their courses with only certificates and not skills; ICT has taken over the work load of humans and there is not much do be done by way of manual approach. Therefore the economy has to be viable to enable expansion of the private sector to absorbed graduates from school.

According to him, the potential of the economy has not been fully harnessed. Many Ghanaians have been trained outside the country, some in the Bretton Woods Institutions, the United Nations and other world class institution but have not been able to change or transform the nation, he added.

He noted that the monitory authority should engage a cap on the spread to prevent its widening. In his view there should be a strong partnership between the public and private sectors. Whiles the public sector provide the environment, the private sector also takes control of the economy

Public Agenda
credit: Irene J Mensah