Capping interest rates could be 'disastrous' - Frank Adu

The government should not attempt to introduce legislation to cap interest rates because the consequences could be dire, Frank Adu, Managing Director of CAL Bank, has said, agreeing with other industry players that the market should be allowed a free hand.

“You cannot manually determine interest rates. If you control interest rates by an Act or edict, it is like creating a pressure cooker which can at some point explode. If it explodes, it becomes disastrous,” he told the B&FT when CAL Bank took its turn at the Ghana Stock Exchange’s Facts Behind the Figures session.

“If the president asks me for advice, I will tell him don’t do it;don’t go there because it doesn’t work. For example, if the rates are supposed to be at 20percent and you artificially keep it at 2 percent, if it explodes it goes to 40percent. It is like exchange rates,” he said.

Government has had a torrid time trying to tame interest rates, amidst incessant pressure from the business community, with President Mahamahinting recently that he may consider a cap.

Banks in the country are currently lending at between 30-35 percent while Non-Bank Financial Institutions (NBFIs) offer loans at between 35-60percent.

Microfinance institutions, especially, go as high as 75percent per annum, keeping borrowers in a vicious cycle of borrowing for no improvement in their businesses.

These high rates have meant that a lot of individuals and businesses shy away from borrowing, whilst the few who do struggle to pay back, leading to a high default rate.

Non-performing loans currently stands at 19percent in the banking sector, which also makes the banks wary of lending.

President Mahama recently told investors that even though interest rates are not controlled by government, he has noticed that some countries have passed legislation to cap them.

“I do not know if that is the path to go; I have asked for advice on that kind of legislation but my belief is that prudent management of the economy will see interest rates decline continuously,” he said.

Mr. Adu urged the President to take a look at what is happening in nearby Nigeria where exchange rates were capped at US$1 to 159naira for a long time, which led to a boom in forex trading on the black market, and resulting in the rate rising to US$1 to 400naira.

In August, this year, Kenya's President Uhuru Kenyatta also signed into law a bill that capped commercial bank lending rates at 4percentage points above the central bank's benchmark lending rate.

The cap in Kenya has led to criticisms from institutions like the International Monetary Fund (IMF), which said it could cloud the central bank’s monetary policy signals and may undermine efforts to keep inflation within the government’s target range.

CAL Bank’s performance

Speaking at the Fact Behind the Figures, Mr. Adu noted that CAL Bank has faced a challenging year, despite growth in some of the key performance indicators. Profit after tax dropped from GH¢118.5million in the third quarter of 2015 to GH¢90.9million in the third quarter of 2016.

Total assets inched up fromGH¢3billion to GH¢3.3billion in the third quarter of 2016, whislt capital adequacy ratio increased from 20.2percent to 21.1 percent in the same period under review.

The bank’s loans and advances increased by 31percent from GH¢1.53billion to GH¢2 billion, whilst investment in government securities dropped from a high of GH¢956.5million to GH¢386.2million in the third quarter of 2016.