Dalex CEO's take on ways to tackle high interest rates

Chief Executive Officer of Dalex Finance, Kenneth Thompson, has said the most efficient way of fighting high interest rates on lending by Trade Minister Ekwow Spio-Garbrah is to call a cabinet meeting to tackle government’s over-borrowing and expenditure.

“I think it is a fantastic idea by Dr. Spio-Garbrah to wage a war on high lending rates by banks, because for the first time we have a senior government minister who is interested in the cost of borrowing; but what he really needs to do is convene an emergency cabinet meeting.

“He and his colleagues must find innovative ways of controlling government expenditure and borrowing. The moment you control expenditure and government does not borrow too much, interest rates will come down,” he said.

Trade and Industry Minister Ekwow Spio-Garbrah recently declared a war on interest rates in an effort to drive down the cost of borrowing within the banking and financial sector.

Banks are currently lending to businesses and individuals at between 28 to 35 percent while Non Bank Financial Institutions (NBFIs) lend at between 45 and 120 percent.

Mr. Thompson noted that high interest rates are the result of persistent government over-expenditure and the inability of the Bank of Ghana to control it.

“As we all compete to borrow, it is the government that pushes up interest rates. The challenge we have is that more should be done to increase revenue. The metropolitan and district assemblies should raise more revenue and then use that to fund their expenditure. As soon as government borrowing reduces, interest rates will fall. It is a simple supply and demand issue,” he added.

He said one factor contributing to the high interest rates by NBFIs is the rate at which they also borrow. “Most NBFIs borrow at over 30 percent and so if you are borrowing at that rate, and in addition to your cost and inflation, then interest rates will go up.”

He also believes that one sure way government can increase revenue is to involve the private sector. “The private sector is the game-changer. In all sectors of the economy, the private sector has shown it can perform because the incentives structure is right. Look at banking, insurance, telcos, transport, health. Wherever the private sector is, it performs.”

He added that government can decentralise it systems and structures and give more autonomy to Metropolitan, Municipal District Assemblies (MMDAs).

“The MMDAs rely on government rather than focusing on what they have to do. Part of the reason they also focus on the central government is that most of the decisions are centralised.

“District assemblies should decide who does the cleaning, pay teachers, roads to build -- but once it is controlled centrally there is no connection between the projects being done and the people that it affects. So a proper decentralisation of the system will do more to transform the country.”

In citing an example, Mr. Thompson noted that all district assemblies are given a budget for cleaning, but who does the cleaning is decided centrally and the money is taken out.

“There is no connection between the people that benefit from the service, people that provide it -- and that reduces the level of accountability and responsibility.”

Touching interest on deposits, Mr. Thompson said NBFIs pay much higher interest rates on deposits than banks do.

“We have always paid much higher than the banks. It is all a matter of education to let people know what options are available so that they can invest. A bank can give you only about 5 or 6 percent on your deposits, but an NBFI can give you at least 28 or 29 percent.

“Asking the banks to pay higher is good, but I don’t think it will work instantly. It will require more education on the options that are available, then the banks will be forced to increase the rates on deposits.”