A former Governor of the Bank of Ghana, Dr Kwabena Duffuor, has said that commercial banks’ lending rate in Ghana has remained stubbornly high for
A former Governor of the Bank of Ghana, Dr Kwabena Duffuor, has said that commercial banks’ lending rate in Ghana has remained stubbornly high for decades.
He also said the high cost of borrowing, has continued to pose a real challenge to Ghanaian business community.
Delivering a public lecture in Accra on Monday November 29, the former Finance Minister said “The Bank of Ghana’s policy rate is now 14.5%. Meanwhile the lending interest rate for commercial banks in Ghana stays at 22% whereas the lending interest rate for neighboring Countries namely: Burkina Faso, Cote d’Ivoire and Togo all stay at 5.1%.
“The main issue is that the commercial banks’ lending rate in Ghana has remained stubbornly high for decades and the high cost of borrowing, has continued to pose a real challenge to Ghanaian business community.
“The high cost of bank credit in Ghana results from the cost of servicing credit in the Ghanaian banking industry which has also been influenced all these years by the following main determinants namely: Cost of Deposits, Cost of Loan Defaults (non-performing loans), Cost of Overheads (operational cost), Cost of Liquidity.”
He added “It will be pertinent to point out that, the central bank’s policy rate impacts slightly on the cost of funds. Precisely, the central bank policy rate impacts slightly only on Cost of Deposits. It is the combination of these costs which determines the cost of funds in a bank and not the policy rate of the Bank of Ghana.
“The bigger commercial banks with huge demand Deposits Account (Transaction Account) on which these banks virtually pay no interest, enjoy lower cost of funds. This is because the almost zero cost on their huge demand deposit account balances impacts positively on their total cost of funds in the sense that, it doesn’t impose any additional cost to it.
“On the other hand, the smaller banks with huge Time and Savings Deposits with high interest rates and who also have small demand deposits account balances have high cost of funds.
“This is so because the demand deposit account balances do not have the same positive impact on the cost of funds like the bigger banks and it will be important at this point to explain that, the small banks with high cost of funds outnumber the few larger banks with lower cost of funds. And it is the smaller banks with high cost of funds who have dominated the commercial banks credit market all these years.
“The larger banks are selling their credit at the same price like the smaller banks even though their cost of funds are lower than the smaller banks. This explains why the cost of borrowing has been so high and had been a drag on the growth of the economy and on the creation of jobs.
“The issue surrounding the cost of borrowing in the Ghanaian commercial banking industry is daunting one whose solution requires sober and critical thinking. Any attempt to force the Ghanaian banks to lend at lower lending rates like our neighboring countries namely Togo, Burkina Faso and Cote d’Ivoire will weaken the smaller banks in particular and the entire economy in general.
“There is a need for public intervention to create a level playing field in the entire bank credit market for both the larger and smaller banks.
“This will lower their cost of funds and thus be able to lend at a lower lending interest rate to support the growth of businesses in our economy and help generate decent jobs. We want to be a nation of entrepreneurs and in order to achieve that, we have to give people a realistic chance to start and maintain businesses, and the first step in doing so is lowering the cost of borrowing.”
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