Recalcitrant banks to face punitive actions

From October 1, the Bank of Ghana (BoG) will begin to enforce punitive actions against commercial banks that fail to implement the new formula for calculating the base rate, Dr. Settor Kwabla Amediku, ‎an economist at the BoG told B&FT. 
 

“Now the Central bank can track the calculation of the base rate by various commercial banks, and they will be required to implement the new formula for calculating their base rates -- which will serve as the starting-point for loan negotiations. 

“This means banks will no longer have different ways of working out lending rates for borrowers.

“The Central Bank believes this should bring about some transparency in lending rates of banks and possibly drive down rates,” Dr. Amediku told B&FT on the sidelines of a two-day workshop on economic and financial reporting for some selected business journalists in Accra.

The workshop was organised by the BoG, aimed at equipping journalists and deepening their understanding of the finance and economic reporting skills needed to enhance public discussion. 

Dr. Amediku explained that the new formula is based on four modules: namely cost of funds, return on equity, provision for bad debt, and risk premium. Banks are also required not to lend below the advertised base rates.

The review comes after the Bank of Ghana established a stakeholder committee to look into the determination of bank lending-rates, he told the B&FT.

According to BoG, the formula has become important because the previous system had not been able to bring about uniformity in determination of interest rates and transparency in the regime.

“One of the shortfalls in the old formula was banks lending below the base rate, thereby bringing distortions into the regime -- a situation that undermined the central bank’s policy rate which is supposed to influence the behaviour of interest rates in the banking industry.”

He stated that the actual lending rate charged by a bank should be transparent and consistent with its base rate, and made available for supervisory review upon demand.

In the previous regime when the banks were allowed a free hand to determine their base rates, the BoG found that “some banks continued to lend below their base rates” and made it difficult for the central bank to establish how its policies on interest rates transmitted into the banking system.

Banks used different variables in determining the base rates, such as using the 91-day Treasury bill, while others used the policy rate. Other banks also infused unique types of risks into the computation of what their base rates should be.

Some analysts have however argued the new system is not an answer to the high interest rates regime. This is because banks, especially the small ones, are still having difficulties in getting cheaper funds to lend at lower rates. They also argue the new system will continue to solely benefit the big institutions.

With the new guidelines, BoG will ensure that commercial banks review their base rates monthly based on the previous month’s returns as per a particular bank’s policy.

“Banks are required to display the information on their base rates at all branches and also on their websites,” the BoG guidelines stated; adding that “changes in the rates are to be conveyed to the public through publication in leading local publications”.

A senior official at the Financial Stability Department of the BoG, Fiifi Blankson -- presenting a paper on the overview of monetary policy management in Ghana -- said introduction of the inflation-targetting (IT) regime a few years ago by the BoG has helped to reduce inflation, and stabilise the exchange rate and general growth of Ghana’s economy.

He said the bank, since its declaration in 2007 as an IT central bank, has been able to guide the bank’s monetary policy management -- which enhances the overall growth and development of the country.

“The revolution of monetary policy management in the country points to the bank’s efforts at delivery of its mandate.

 “Since monetary policy depends on a whole set of information, as well as underlying models of the economy, the adoption of a framework at any point in time has been driven by the needs of the real economy -- including the depth and level of sophistication of financial institutions and financial instruments, and international best practice.

“Like other central banks, BoG continues to fine-tune its framework while assessing its performance,” Mr. Blankson stated.

Dr. Benjamin Amoah, Head of Policy at the BoG, delivering a paper on ‘Inflation Targetting: A Tool for Monetary Policy in Ghana’, revealed that the current framework was designed to engineer a switch to low inflation and exchange rate stability through increased coordination with the fiscal regime.

He added that the fiscal policy is set to deliver sound public finances anchored on domestic debt reduction to deal with the problem of fiscal dominance, but also crowd-in the private sector.

“The focus of monetary policy within the new macroeconomic framework is to achieve price stability, operationalised through the adoption of the IT.

“The policy arena was primarily characterised by fiscal dominance with persistent fiscal deficits which were financed by monetary accommodation; and strong inflation expectations became embedded in the economy due to past high inflation and exchange rate volatility,” Dr. Amoah remarked.