The head of GN Research spells out some issues that Ghana is likely to encounter, following the introduction of the Ghana Reference Rate (GRR).
According to Mr. Ampah in his article, Kenya adopted this measure, which saw the banks profiting at the expense of its central bank. This, Mr. Ampah, explains in his article, is likely to happen in this country.
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The experience of Kenya shows that using a compulsory base rate (reference rate) will not necessarily cause a reduction in lending rate due to banking sector challenges such as high cost of funds, the high cost of operation, high non-performing loans among others. Despite the introduction of a common base rate, banks were controlling the risk premium to their advantage, hence its failure to achieve the desired impact. This is likely to happen in Ghana following the introduction of the Ghana Reference Rate (GRR) if the issue of information asymmetry which results in high-risk premium is not resolved.
In 2014, Kenya introduced the Kenya Bank’s Reference Rate (KBRR) as a benchmark rate set by the Central Bank of Kenya for pricing all floating credit facilities. The objective for this decision is similar to that of Ghana. Nonetheless, researches have shown that the lending rates in Kenya
have been rising because the KBRR could not solve completely the information asymmetry problem within the Kenyan credit market. As a result, the Kenyan authorities decided to cap interest rates in 2016 amidst criticisms.
Ghana’s lending rates are among the highest in the world and are affecting the health of the economy. However, the influence of the policy rate of the Bank of Ghana (BoG) on the lending rates of commercial banks has been negligible. Aside this challenge, there is the need to move the determination of interest rates towards a more market base model to enhance transparency, hence the introduction of the GRR.
With coming into force of the GRR, lending rates can broadly be divided into two; the GRR and the risk premium. While the commercial banks take the GRR as given by the BoG, they determine the risk premium. Though the banks are required to inform their customers about the factors considered in the determination of the risk premium, there is the tendency to manipulate the risk premium to cover themselves and for profit purposes thereby keeping lending rates high.
While interest rates are unlikely to be capped in Ghana in the opinion of GN Research analysts, the GRR may fail to achieve the desired impact on lending until there is a comprehensive database or information on every Ghanaian that the banks can use to do a proper risk profiling of their customers.