High interest rates debate rages on

Mr. Daniel Asiedu, Managing Director of Zenith Bank Ghana Limited, has said until government’s Treasury bill rates drop to low levels, it will be difficult for interest rates in Ghana to remain low.

He said the banks are blamed unnecessarily for an issue which they have very little control over; adding, “Banks have consistently been seen as shylocks, which is not the case.”

He was speaking at CITI BUSINESS FOCUS, which is a roundtable discussion under the topic “The Interest Rate Debate, Dancing To Whose Tune?” He spoke from a banking perspective. It was organised by CITI FM in collaboration with B&FT, and was attended by policymakers, captains of industry and bankers, among others.

The roundtable discussion provided a platform for a detailed discussion of the current level of interest charged by deposit money banks in Ghana, with a view to understanding the main issues at stake in getting banks to lower their lending interest rates - and also to gain insights into the effects of the status quo on relevant stakeholders like business groups and traders.

The banks have had to bear the brunt of fierce criticism from the authorities, civil society and advocacy groups, and individuals and institutional bodies for charging very high lending rates.

The concern has been that rates in Ghana are too high to promote financial intermediation between savers and borrowers.

Lending rates for most commercial banks range from 30% to 35% depending on the sectors. Ghana’s official interest rate compares with 7% in South Africa, Africa’s biggest economy, and 6% in Nigeria, Africa’s second-largest.

He said the banks generally borrow from depositors at a high rate which is equal to that 91-day Treasury bill rates, and that explains why banks lending rates are quite high.

“Depositors are becoming smarter by the day; in fact they can forecast over a period and lock in at a certain rate based on their analysis. For instance, they can deposit funds with you and lock in at an interest of 29% by October. In that case, what do you do when interest rates begin to drop?

“It is not in the interest of the banks to charge high interest rates. This is because high interest rates lead to high default, which means that a greater amount of scarce resources have to be set aside as provision for bad debts.

“Last year for instance, Zenith Bank Ghana had to set aside GH¢10 million as provision for bad debts. It is something we are not happy about, putting aside such huge funds which could have been channeled into more productive use.”

He suggested that to help reduce interest rates, government should continue with its macro-economic stabilisation programme, while advising banks to consider floating rates on deposits.

Aside from the high Treasury Bill rates, Mr. Asiedu explained that because only 20 percent of the population save with banks, it makes it access to cheaper funds very difficult.

Another area of concern to the banks, he further explained is the high cost of doing banking, which impacts heavily on their operational costs. He said opening of branch offices is quite expensive; however, it is also necessary in order to dilute the deposit base.

Professor Cletus Dudornu, an Economist, challenged the Bank of Ghana (BoG) to not just use the open market policy tool but also rely on other tools in its management of monetary policy.

He said that the high lending rates impede investors’ confidence, which holds back the growth of the private sector whilst also discouraging a savings culture.

“The current high spread between lending and savings rates has resulted in the decline in industrial growth, which has forced government to borrow from the International Monetary Fund (IMF).”

He observed that the high lending rates have affected the growth of the economy with the productive sectors shrivelling, and the resultant effect of a squeeze on employment.

Fifii Kwetey, Deputy Minister of Finance and Economic Planning, making a submission on the topic “The Implications of High Lending Rates for the Macro-Economy”, made a strong case for a further reduction in banks’ lending rates by following the reduction in the BoG’s Prime rate.

“It is high time banks employed innovative strategies in their operations by making a paradigm shift from the focus on borrowing at high rates from their key lenders to offering lower interest rates to businesses of the productive sectors of the economy.”