The Monetary Pricing Policy (MPC) has once again reduced the policy rate to 20%.  This brings it down to 550 basis points from January 2017.  This is good news, as the trend would influence other macroeconomic indicators to improve as well.

Some financial indicators have responded accordingly to the repeated drops in policy rates from January to date.  Most significant being the inflation rate.  Treasury bill rates have also followed the trend and have also dropped from 16.16% in January to 13.26% in November for the 91-day bills.  The 182-day and 365-days bills have also dropped from 17.38% to 13.83% and 19 .5% to 15.00% respectively.

Repeated calls from business community and analysts for bank lending rates to drop significantly would continue.  Putting the year into perspective, one would notice that though the policy rate has dropped 550 basis points (5.5%), borrowing rates has declined by a disproportionate 270 basis points from 31.8% to 29.1%.  The business community and individuals maintain that the average borrowing rate of 29.1% for universal banks and 38% for Savings and Loans and other lower tier financial institutions is still high.   The truth is, lending rates in Ghana is high.  Obviously there is an expectation for the banks’ lending rates to equally decline in tandem with the policy rate.  This expectation may never be, and these are the reasons.

Policy Rate vrs Lending Rate

The policy rate is not the sole determinant of the cost of money to the banks.  Therefore it also does not become the sole determinant of the interest rate for borrowing.  Banks are quick to adjust their BASE RATES to commensurate with the going policy rate and broadly advertise as such.  But base rate is nothing like lending rate.  The banks base rates attract borrowers only for them to apply the ‘real’ lending rates which have many other elements, such as, risk premium built into it.  Other cost factors like operational cost of advancing a loan facility all come into play.  And since the cost of doing business is generally high, it feeds into what the borrower ultimately pays;  high lending rate!

In a typical situation, a universal bank that sets their base rate at 21.5% would lend to a borrower (including agric customers) from 28% upwards, again depending on the perceived risk of the borrower and the type of facility.

Unrealistic Indicators

It is also not a secret that the very beautiful economic indicators governments churn out during reviews do not largely reflect realities on the ground due to so many other reasons beyond the scope of this piece, so that can rest. In effect, if the policy rate assumes a very beautiful position it may not necessarily reflect in the final interest rate the client pays on their loan

 Dollarisation of the Economy

The US Dollar pretty much controls everything in the economy.  The extreme dollarisation of the economy is a prime reason why lending rates would still be high relative to policy rates.  As long as the Ghana Cedi (GHS) continues the downward depreciation spiral, cost of doing business would be high.  By the way, there is a personal struggle as to how inflation declines when GHC continues to depreciate against the USD.  The USD drives everything from computers to Waakye (a local rice meal).  The USD component after purchasing a computer is straight forward but what of the Waakye?  One meal of Waakye consists of rice which is imported, Cowhide (Wele) also imported, Cooking oil (possibly imported), spaghetti, also imported.  By the time one eats a bowl of Waakye, he/she has ate a USD-Denominated food.

USD is predominantly in every asset the bank uses for service delivery to the customer.  Factors of service are namely PCs, stationery, staff’s cost, fuel e.t.c., Policy rate is reduced but our cedi continues its downward spiral against the USD, so though savings is made on cost of funds, the general cost of business is increasing.  Where does the bank get cost savings enough to pass on to the borrower in the form of reduced lending rates as expected?

No Regulatory Controls

There have been calls by pressure groups on the central bank to control interest rate set by banks.  Kenya attempted to curb high lending rates by limiting the margins of lending rates to 4% above the central bank rate (CBR).  This may not necessarily be the best option, but there could be other motivational rewards for the financial institution that is able to prove reasonable pricing for their loans.  As there are no forms of regulatory interventions on the limits of lending rates, banks would continue to set rates that makes them ‘profitable’.

Cost of Deposit

The BOG release of deposit rates for universal banks in November actually provided interesting trend.  It was observed that though policy rate is declining, universal banks were still paying quite high rates on deposit at an average 10.4% as at October 2017.  Banks could be seen offering deposit rates as high as 12 – 16%, which traditionally would remain in single digits.  One would have thought that deposit rates should go down as policy rates go down.  Well there is at least one positive trend here where T-Bills are down enough to remain unattractive to depositors, therefore freeing some cash for deposits with returns sometimes higher than T-Bills.  The system is still squeezed with little cash floating around.  Banks therefore have to compete for the ‘squeezed cash’ from potential depositors, something seen through the numerous deposit promotions and rewards and even paying interest on current accounts.  The cost of mobilizing and keeping deposit (interest expense) is therefore high due to the economic squeezing and competitive pressures.  If a bank pays anything like 13% on current account, savings account (CASA), do not expect to pick up a loan at an interest rate of less than 28%, irrespective of decline of policy rate .

What is the case then?  The government and Central Bank have a lot to do.  Government should increase spending in the private sector to push cash into the system.  There should be policies and drives that reduces risk within the broader environment (systemic risk).  The Central bank apart from managing policy rates may introduce some enforceable guidelines to set lending rates, and above all and most importantly, Government should fix the DOLLARISATION OF THE ECONOMY.

Must read: Check the Top 10 Bank Deposit/Lending Rates

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