Is the Wide Gap Between the Two Choking Businesses in Ghana?
- A Metro TV Panel Discussion with Industry Experts
His Excellency the President of the Republic of Ghana in his address to the newly constituted board of the Bank of Ghana (BoG), issued a task to this new board to put commercial bank lending rates under the microscope. He intended to draw a focus on the disparity between BoG's monetary policy rate which stands at a nine-year lowest of 13.5%, and the lending rates of the commercial banks in the country still high at an average of 21% according to His Excellency.
According to the World Bank, Mauritius is the highest-ranking Sub-Saharan African economy overall - Ease of doing business. It is also the only economy from this region in the top 20 cohorts. The second-highest ranked economy in the region is Rwanda at 38th. Mauritius (13) and Rwanda (38) are the only two Sub-Saharan African economies in the top 50 on the ease of doing business ranking. South Sudan (185), Eritrea (189), and Somalia (190) are the lowest-ranked economies in the region. Other large economies in the region and their rankings are Kenya (56), South Africa (84), Ghana (118), Nigeria (131), and the Democratic Republic of Congo (183). The region’s economies perform best in the area of getting credit (113). Conversely, the region underperforms in the areas of getting electricity (146), trading across borders (140), and registering property (129). For example, the cost to obtain a permanent electrical connection in Sub-Saharan Africa is 3 times higher than the global average and 52 times higher than in the OECD high-income group.
Sub-Saharan Africa remains one of the weakest-performing regions on the ease of doing business ranking with an average score of 51.8, well below the OECD high-income economy average of 78.4, and the global average of 63. Compared with the previous year, Sub-Saharan African economies increased their average doing business score by 0.9 points.
The host, Mr. Emmanuel Kwasi Afriyie was joined by four panelists, one in-studio and the other three via zoom. The in-studio panelist was Dr. Joseph Obeng, the President of the Ghana Union of Traders Association (UTAG), and the other three were Toluwanimi Adeyefa, a banker and financial analyst from Nigeria; Mr. Daouda Mbaye, the chief editor for the African Business Journal from Morocco; and Dr. Evans Duah, CEO/Chief Consultant of Xtart Biz.
First, we need to understand the primary objective of BoG is to maintain stability in the general level of prices, as stated under section 3 of the Bank of Ghana Act 2002, (Act 612). In addition to price stability, the Bank is enjoined to support the general economic policy of the Government, promote economic growth and development, and ensure effective and efficient operation of the banking and credit system; and contribute to the promotion and maintenance of financial stability.
To determine the stance of monetary policy and anchor short-term market interest rates to achieve the primary objective of price stability, BoG employs the Monetary Policy Rate (MPR). It is an interest rate-oriented monetary policy operation. Thus, the Bank determines its policy rate, the MPR, and keeps the overnight interbank rate closely aligned with the policy rate using its policy instruments. It operates an Interest Rate Corridor (IRC) system to ensure that overnight rates remain in line with the MPR, reduce the volatility of overnight interest rates, and eliminate any chance of persistent swings of market rates. Under the interest rate corridor system, the Bank sets the floor and ceiling of the policy rates and lets the interbank rate move within the floor and ceiling. To oversimplify, MPR is the monetary authority of a country’s benchmark interest rate for banks in their lending business.
At face value, it seems the commercial banks have no fiduciary tenets towards customers in their lending practices, looking at the gap between the monetary policy rate and their lending rates, or do the practices continue unchecked? Is it that until now the Bank of Ghana hadn’t put these commercial banks under scrutiny, or is there more to the story?
Obviously, Metro TV was trying to ascertain a wholistic view of the lending rate situation by calling on experts from different countries. The conversation began with the UTAG president casting his thoughts on the situation at hand. According to him, commercial lending rates should have gone down since the monetary policy rate had gone down too, and he surmised that the commercial banks had formed a league through the national bankers’ association which compels each of them to maintain high extortive lending rates. The plight of inaccessible capital funding through loans for traders was palpable as Dr. Obeng heartily insisted on government scrutiny of commercial banks and the institution of a capped lending rate for all banks in the country.
Next to lend his thoughts on the matter was Dr. Duah, who off the bat, deflated the allegation that there was some cartel controlling bank lending rates with the argument that there are other factors to consider when setting a lending rate than just the monetary policy rate. He hammered on the risk-to-rate relationship of lending agreements. According to him, risk assessment of individuals in the country, for example, is unsavory because there is not a very formidable tracking system in Ghana yet. He did state that the government was doing very well with the onset of the Ghana Digital Property Addressing System, Ghana Card identification, and increased efforts of enrolling more people on the Tax Identification Number system.
Still, though, he maintained that a “trust system” was not concretely in place to offer low-interest premiums. He continued by stating that even though the financial clean-up boosted our trust system, bad or non-performing loans were still in the system even though many customers are repaying some of these loans. He explained that the banks customarily have to extend repayment periods for non-performing loans and so, whiles repayments would happen because repayment installments would reduce, the recovery rate for the bank is still low, therefore interest rates are increased to underwrite that liability.
Toluwanimi buttressed Dr. Duah’s points by adding to the narrative that national inflation rates are considered when giving loans to the public. Lending interest rates have to be increased to overarch the inflation threat. Also, he raised the point that lending cannot be at a fixed rate for all borrowers since different industries bring different risks. He did however support the idea of a cap rate.
Dr. Obeng then countered Dr. Duah’s opinion of the absence of a trust system, saying that the onus is on banks to do their due diligence to rightly assess risk factors like customer location and that the high lending rates themselves compel non-performing loans or the failed repayment of loans. He went further to say that the commercial banks are unbridled by BoG with regards to their lending and so they even commit fraudulent activities when giving loans and charge their negligence to customers by inflating interest rates to cover the loss of non-performing loans.
Show host, Mr. Emmanuel Afriyie who was doing a great job steering the conversation invited Dr. Duah’s thoughts on matters arising. Then Dr. Duah, followed by Toluwanimi discussed the angle of reduced interests on government’s borrowing via treasury bills and bonds. Decreased rates on bills and bonds could allow the government to further decrease the monetary policy rate, which would in turn give room for commercial banks to decrease their lending rates.
On Monday, 23rd August 2021, Metro TVs prime time business show, “The Bottomline” interrogated, which airs the vexed issue, with industry experts, of the high cost of Credit in Ghana and in some parts of Africa and why commercial banks’ lending rates are often at variance with central banks’ monetary policy rate. Discussants also proffered solutions to address the mismatch in the wake of the African continental free trade area.
Dr. Duah further commented that the government being a player and a regulator has the power if they can continue their bold steps which had seen rates of government securities drop from close to 30% down to close to 12%. He further gave an example of the Moroccan system where they have “Maison de crédit” translated as credit houses, which are, essentially institutions that are trusted to verify and validate the credit reporting of individuals and companies, thereby mitigating an overestimation of credit risk by the banks. They also insure loans that these individuals and companies take. He then talked about the fact that Morocco dissolved many small banks until the banks in the country were less than ten.
Mr. Mbaye attested to the assertions of Dr. Duah and proceeded to enlighten listeners on the state of affairs within the Morocco business landscape which fosters the healthier lending rates Morocco records. He then talked about the fact that Morocco dissolved many small banks until the banks in the country were less than ten. Then he listed a number of government funding schemes that the government has innovatively set up to help boost businesses in the country. Lastly, he stressed the role of the national credit bureau in establishing a system for proper credit risk profiling of individuals.
This discussion held in the Metro TV studios clearly shows that we must do a deep dive research for ways to better the economy as a whole and that we need the various players in the economy to be on their A-game. The President’s call to scrutiny must be heeded if any sufficient solutions are going to be offered. BoG should follow up with the Ghana Association of Bankers (GAB) to immediately address the challenges and find corresponding solutions. The banks and lending agencies on the other side must become more innovative with income generation.
This depicts the need for the establishment of more business consultancies that are research and service prone. As the Bottomline episode conclusively suggests, there must be a wholistic introspection into the various players in the lending and credit sphere, and hopefully, we all will rise to that task.
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