Interest rate jumps to more than a decade high

The average lending rate of banks has hit 33 percent as at the end of August this year, the highest since 2003, the latest central bank’s macroeconomic and financial data has shown.

This is a significant increase over the 28.2 percent average interest demanded by the banks in January this year.

This means that businesses and consumers should expect a sharp spike in the Annual Percentage Rate of banks, which is the true interest rate banks charge borrowers on loans and advances as it reflects the true cost of borrowings and includes charges and commissions levied by the banks.

Information available to the B&FT indicates that the interest rate of the banks has risen on the back of the deteriorating non-performing loans portfolio on banks books.

The risk in lending in the country is thus seen as the reason behind banks decision to cut credit lines to consumers with the total advances in the banking sector dropping, albeit marginally, from GHC32.4 billion in June to GHC32.1 billion at the end of July this year when the central bank last assessed the credit conditions in the country.

It has been strongly argued in the circles of the Association of Ghana Industries (AGI) - the umbrella organization of businesses in the country- that the high interest rate regime is one of the major factors behind the rising non-performing loans, and that the demands on borrowers by banks has created a cyclical situation that has compounded challenges in the business operating environment.

Some observers have thus interpreted the high interest rate and rising non performing loans regime as well as reduction in advances as an indication that the economy has not been responding well to the policies underlying the fiscal and monetary policy framework and improved market expectations.

For the banks, however, the tightened credit condition is a preemptive measure to contain loses as the quantum of non-performing loans has impacted negatively of their solvency and profitability position.

The increasing risks in providing consumer and business loans have also pushed the banks to prioritise investments in Treasury bills and other securities over interest income.

According to a Bank of Ghana’s recent report, the firm stance taken by financial institutions in granting loans to businesses and consumers has been exacerbated by lower expectations of banks regarding the economic environment, reduced access to market finance, increased cost of funds, and balance sheet constraints.

Some analysts have, however, opined that the decision by the Bank of Ghana to keep its policy rate at 26 percent since July last year has also triggered an increase in the risk of banks incurring higher non-performing loans due to the potential for default among borrowers exposed to high interest rate regime.