Trade Minister wants interest rates capped

The Minister of Trade and Industry, Ekwow Spio-Garbrah, has asked the central bank to place a cap on the rate of interest financial institutions can give out to their customers on deposits made.

His call follows recent happenings in the microfinance sector, where some companies have defaulted in payment of deposited money and promised interest to clients.

According to the Trade Minister, the Bank of Ghana should learn from other best practices taking place in some advanced countries, where banks and other financial institutions can neither lend nor pay interest beyond certain rates in a bid to protect the interests of clients.

“I think the Bank of Ghana can do what countries like Canada are doing, where it is a crime to charge interests rates above a certain amount so that customers will not be deceived and be given certain rates when they make deposits with such financial institutions,” he said in an interview with the B&FT during the Ghana Economic Outlook and Business Strategy Conference held in Accra.

However, commenting on this, Joseph Donkor -- Executive Secretary, Ghana Association of Microfinance Companies (GAMC) -- thinks if such policies are implemented by the central bank it will create unfair competition in the financial industry.

“In Ghana we have a free market where prices are determined by demand and supply forces, and so interest rate issues are also affected by the forces of demand and supply. All the players in the industry access funds from the capital market. And the investor lends to them based on their risk level.

“So if a cap is placed on their lending and the interest they can give to their customers, then you will not be fair to them because you first have to determine how much interest they were charged on the funds they accessed -- in addition to some operational costs incurred. So, since the funds are not accessed by the financial institutions under the same circumstances, placing a cap on the interest rate they can lend or give to customers will not be fair,” he said.

He further stated that proper education for the citizenry will help address the situation better since it will create awareness about the sector’s operations.

The central bank earlier this month refused to approve the operating licence of 70 microfinance institutions and one money-lending company in the country.

The affected institutions were unable to meet the mandatory requirements precedent to the issuance of a final licence, after exhausting their six-month ‘approval in principle’ grace period.

According to the statement copied to the B&FT, the licences of these microfinance and money-lending companies were revoked after several reminders to get them to meet the mandatory requirements failed.

The move from the Bank reaffirms its commitment to protect the investing public from the frequent lock-up of depositors’ funds -- and subsequent folding-up of some microfinance firms that fail to survive the stiff market environment.

Microfinance companies in the country are challenged by the issues of poor loan recovery resulting from granting credit to customers without proper credit appraisals, weak corporate governance structures, and inexperienced personnel.

To protect the interest of depositors and iron out these limiting factors, the Bank of Ghana (BoG) in its supervisory role quadrupled the minimum capital requirement of microfinance companies and rural banks.