Issues concerning Ghana’s Interest Rate amid this Covid-19 Pandemic

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Businesses impacted by Covid-19 want banks in Ghana to revise their lending rates, to reflect the reduction in policy rates.

This will in turn bridge the shortfalls caused by Corona virus that has affected supply of some goods in the country. The Bank of Ghana (BOG) Monetary Policy Committee had reduced the policy rate. This is the rate at which banks borrow from the Apex bank, it was reduced by 150 points; 16-14.5%.  The BOG also intervened to increase liquidity for more lending

Businessmen what the adjustment to reflect on banks interest rates by making loans affordable notably is Mr. Seth Yeboah; President of Car Rental Association Ghana (CRAG). He made the remarks while speaking to Citi Business News.

“You have a facility with the banks and you expect that the agreement is set. But the banks don’t respond to that and I am not sure who is supposed to enforce to make sure that, once the policy rate drops, the banks also drop their interest charges. So, we hear them, but for us it is nothing new. All this goes to them as everything is imported. We buy fuel, spare parts for the vehicles, insurance, or it is a direct cost that you can’t do away with. So, we are pleading that yes, the policy rate has dropped, but who enforces it to make sure the banks respond to it,” he noted.

In Ghana, the novel coronavirus is also having a huge impact on economic activities as different sectors have been shut down in support of health and safety measures to curb the spread. Supplies of many companies have been seriously affected.

The trend could also be attributed to economic activities in foreign trading partners battling with Covid-19 and an ailing economy. The pandemic globally is forecasted by economic experts to negatively affect the oil earnings of Ghana. Exports restrictions are expected from some foreign trading partners while emerging markets after the pandemic would lead to foreign earnings shortfalls.

The reduction in interest rate heralded by many in the business and banking sector as a step in the right direction is however a dark cloud as most banks are yet to adjust their lending rates.

The announcement of the bankers association (GAB) of a 200basis point (2%)reduction in the interest rate applicable on outstanding and new loans in the country. Most banks prefer servicing high valued clients; safest clients/customers are expected to get credit till the pandemic is over or subside.

Even as the new rates enjoy government backing, since it aims at alleviating the negatives of Corona virus lockdown. The banks argue over the economic uncertainty ongoing. Banks would still want to deal with customers that have strong liquid base to safe guard against more shocks that are expected to come due to Covid-19.

Days before the rate cut, the Ghana Reference Rate which now serves as the base rate for banks, had been set for April at 15.12 percent, it lowest level since it was first introduced in April 2018. This was in response to the 150 basis point cut in the Bank of Ghana’s benchmark Monetary Policy Rate in late March, to 14.50 percent. The subsequent industry wide rate cut reduces this further to a long term base lending rate low of 13.12 percent.

normal actual effective average lending rate of banks (including loan related fees) has been hovering at between 26 and 28 percent over the past year and this is expected to fall commensurately, to between 24 and 26 percent.

The crux is that aside from the perceived known  risk banks now see in new lending, the risk premium on lending to customers rather than investing in risk free government securities has narrowed too. Although the recent MPR cut has lowered both coupon rates on new government debt issuances and the secondary market yields on already issued securities, increased demand by government for cedi debt, has meant coupon rates and yields are falling only marginally.  For instance, last week, the prevailing 91 day treasury bill rate was 14.44 percent, just 80 basis points lower than the 14.64 percent prevailing during the previous week. Similarly, secondary market yields on medium term treasury notes and bonds have hardly fallen.

Coupled with government’s inevitable increased appetite for debt, this is persuading banks to invest in both short and long dated debt securities rather than book new loans, because the risk in the latter is not worth the narrowed risk premium over doing the former.

The news is disappointing for Ghana’s heavily credit-dependent private sector, as it reverses the rebound in direly needed credit growth enjoyed since the BoG completed its universal banking sector reforms at the end of 2019. In that year, the industry’s cumulative gross loan portfolio grew by 23.8 percent to GHc45.17 billion after contracting by 3.5 percent in 2018. Last year, banks provided gross new advances of GHc29.7 billion, up from GHc23.2 billion in the previous year.

Businesses that desperately need credit financing to stay operational are now having to look towards alternative genres of financial intermediaries such as savings and loans and microfinance institutions, as well as other deposit taking finance houses for financing. However what is available is paltry compared with the banks’ lending capacities and the applicable interest rates are much higher, often computed on monthly basis that translates into a range of between 60 and 120 percent per annum

 

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