Interest rates spike causes rise in bad loans

Interest rates offered by commercial banks in the country have risen significantly since beginning of the year, reflecting an increase in the stock of non-performing loans on banks’ books, central bank data have shown.

The latest Bank of Ghana macroeconomic and financial data report released on Friday shows that the average lending rate in the banking sector was 27.5 percent at the start of the year, which has increased to 32.1 percent at the end of April.

The increase in the interest rate environment is despite the fact that the central bank’s policy rate, which is expected to be the primary determinant of interest rates, has remained the same at 26 percent for the past six months -- indicating that perhaps the cost of funds and heightened risk of loan default have gone up considerably, driving interest rate trends.

According to the central bank, banks are suffering from a rise in non-performing loans with the ratio of bad loans jumping from 14.6 percent in January to 16.2 percent at the end of the first quarter of the year; underscoring nerves surrounding a slowdown in the country’s economic activities.

The rising non-performing loans have sparked concern among economists, spurring the International Monetary Fund (IMF) to warn that banks in the country are facing huge credit risks and declining liquidity.

Information on the increased cost of borrowing and non-performing loans comes as the Monetary Policy Committee of the Bank of Ghana is today expected to announce the policy rate, with calls for the central bank to at worse maintain the policy as furthering tightening the policy rate could cause non-performing loans to rise through the roof and also make access to financing facilities harder.

Total credit and advances to both the private and public sector was GH?30.2billion in January this year, which remained unchanged at the end of the first three months of the year as banks continue to remain reluctant in lending money -- especially to the real sector of the economy against a backdrop of government’s three-year austerity programme with the International Monetary Fund (IMF).

The problem of obtaining bank loans has also been aggravated by the high tax regime in the country, which has impacted negatively on the input costs and production output of firms -- putting substantial pressure on profit margins.

The tight credit situation aligns with the concerns of the Association of Ghana Industries, the umbrella-arm of industries which has continually found access to credit as one of the most important challenges facing businesses in the country.