Banks, monetary, fiscal authorities blamed for high interest rates

Dr John Kwakye, a senior economist at the Institute of Economic Affairs (IEA), on Wednesday said banks, fiscal and monetary authorities must be held accountable for the high interest rates persistence in Ghana.

“The monetary authorities cannot remained aloof, but must exercise the regulatory authority to correct an obvious market failure in the credit system by capping interest rate spreads at the minimum,” he said.

In addition, Dr Kwakye said high bank lending rates and large spread could not be justified in terms of costs and risks in the industry, but a reflection of industrial inefficiencies, low competition and collusive practices.

These were contained in a paper titled: “The Problem of Interest Rates in Ghana” Dr Kwakye presented and issued to the Ghana News Agency (GNA).

“Even though some measure of macroeconomic stability has been achieved, interest rates have shown exceptional downward rigidity.

“High bank lending rates in particular have been a source of worry as they inhibit investment and economic growth,” he said.

He said currently lending rates in the country had gone up by 30 per cent, while deposit rates was less than 10 percent, which according to Dr Kwakye, the Central Bank’s Bench Mark Policy Rate (PR) had fallen to 13.5 per cent and inflation to below nine per cent.

“Obviously there is a disconnection between banks lending rates and policy rate which impedes the transmission and effectiveness of monetary policy.

“To a great extent we will attribute the high lending rates to spread to bank’s operational inefficiencies and high cost, inadequate infrastructure and high internal operation costs,” he said

He said admittedly that banks face high lending risks including inadequate collateral, inadequate borrower identification and generally high loan default rates.

These according to him, led to high non performing loans (NPLs) on the banks books and increase their costs.

“Surprisingly the proliferation of banks in the country does not appear to have brought about increased competition and lower costs,” adding that the rapid growth in the industry did not seem to have been matched by capacity building.

Dr Kwakye explained that this had led to excessive competition for the few skilled personnel and escalation of their pay rates.

He said the concentration of the banks in the urban centres had degenerated into excessive competition for limited depositor fund by increasing the cost of such funds.

Dr Kwakye noted that the monetary contribution to high interest rate emanated in part from their long preoccupation with fighting inflation which until recently had necessitated higher policy rate.

“The recent policy easing in line with declining inflation appears to have been halted as we speak of interest rates still being high,” he said.

Dr Kwakye noted that it was not only bank lending rates that were outrageously high but various charges and fees were equally out of line.

He stated that since the banks, the fiscal and the monetary authorities had a collective responsibility for the causes of high interest rates they also have collective responsibility to address the problem.

Dr Kwakye called on them to play a more active role in keeping interest rates in line by adopting measures such as the imposition of initial cap of 10 per cent point on lending-deposits rate spreads.