The average lending rate for banks in Ghana for the month of April has dropped from 23.09 in the previous year to 22.38 percent.
This is contained in the Bank of Ghana (BoG) Summary of Macroeconomic and Financial Data for May, 2020.
Lending rates are the rate at which banks advance credits to their clients. This has reduced by 3 percent.
Confidence in ability to repay loans
Aside from this, total monies given out by the banks in the form of loans grew from GH₵ 44.6 billion recorded in March 2019 to GH₵51.9 billion in the same period this year with annual growth rate of 16.5 percent.
This means that the confidence of the banks in the ability of the population to repay loans advanced to them is on the rise.
Also, according to the report, Non-Performing Loans (NPLs), that is loans not paid or bad loans, have dropped by 22%. with excluding loss category of 5.7 percent for March 2020.
What this also means is that banks are recovering more of the loans they give out to their clients. As compared to the rate of recoveries a year ago.
In addition to this, the central bank has also revised the Ghana Reference Rate, which is the rate at which banks borrow to each other, downwards to 15.12 percent for April this year from the 16.14 percent recorded in April 2019.
Also, the BoG at the end of its Monetary Policy Committee meeting for this month, took the decision to maintain the Policy Rate at 14.5 percent.
Impact on cost of borrowing
All indicators mentioned above are favorable for lending and the private sector gaining access to financing. But this was before the covid-19 which has since increased the risk again.
Also, the 14.5 percent Policy rate is aimed at reducing cost of borrowing in the country, but the reality is that the banks would charge more than what has been stated by the BoG and this is due to a number of reasons.
Lending rate derive its basis from the policy rate. That is, the rate at which the BoG borrows to the banks.
And so, once policy rate is reduced it is expected that there would be a commensurate reflection in interest charges on loans.
However, because the central bank hardly borrows to the financial institutions, the banks have had to rely on deposits from clients and interbank lending to put themselves in better liquidity positions.
This then leaves the banks to rely on the Ghana Reference Rate to determine the charges on interest on loans, hence why interest rates are always on the high in Ghana despite reductions in policy rate.
By Salifu B.B Moro