Capping Interest rates would be disastrous – Otuo Acheampong

A banking consultant Nana Otuo Acheampong has warned of disaster should there be capping of interest rate on loans in Ghana.

According to Nana Otuo Acheampoong once the country has decided to practice the free market economy, capping of interest rate defeats that purpose, suggesting that prices should be allowed to find their levels as it happens in free markets economies.

His comment comes after the President Mahama is reported to have suggested that he has asked for advice on a legislation looking at capping interest rates on loans. According to the President though he admits interest rates cannot be controlled by the government, some countries have passed legislation to cap interest rates hence his quest to seek advice.

But speaking in an interview with thebftonline.com Nana Otuo Acheampong said it will be disastrous to cap interest rates at a certain rate while leaving all other variables constant.

“let me sum up what the likely impact of capping interest rate in one word. It will be a disaster to cap interest rate while living all other variables open. If you are capping interest rate, then go back to the 70’s for price controls and cap everything because at the end of the day interest rates has a direct correlation with inflation and inflation is the movement of prices.”

“So if you decide that you are going to cap interest rates as one of the commodities that have prices then go the full hurl to cap everything and then give notice that we are no longer in a free market economy but you are in a communist type restricted or controlled economy. So it would be a disaster if anybody tries to force this as a piece of law,” he stated.

With Ghana’s prime rate now set at 26% the business groups in the country have always made a strong case for a reduction in the cost of doing business in the country.

According to the business groups like AGI, PEF, GCCI, GUTA among others, the high interest rate regime has deepened the challenge for most businesses especially SMEs, to access credit and expand.

The situation according to the groups has also contributed to the growing unemployment rate in Ghana.

But Nana Otuo Acheampong argued that as long as prime rates remains at 26% as the bench mark, we can’t expect that interest would be lower where it is now.

Kenya’s Central Bank position

Though the President of Kenya in August this year signed into law capping of interest on loans by 400 basis points, that came with opposition from the governor of their central bank of Kenya.

The Governor Patrick Njoroge of the Central Bank of Kenya opposed the proposal which the Parliament capping interest rates terming it as a ‘dangerous development’.

Governor Patrick Njoroge told journalist that the regulator was concerned as the law would have a negative effect on the economy.

“Capping interest rates will be harmful... the proposal will defeat its purpose because the people who will suffer most are the poor. It will also encourage the emergence of informal lending.”

The regulator said it preferred to use its own mechanisms, which were yet to bear fruit, to force commercial banks to lower interest rates. “People without a track record will not access credit. Non-price mechanisms and other fees will spring up,” he said.