The biggest concerns of businesses in Ghana are usually lending rates from banks because it is very high and very counterproductive for growing a business or even investing. Lending rates by definition is the rate of interest a person or a business pays a bank or a financial institution for the money borrowed. Ghana’s current lending rate is pegged around 35.50% which is one of the highest in the world and Africa. Comparatively countries like Angola, Egypt and Kenya have their interest rates around 21.0%, 19.70%, 13.64% respectively. People keep wondering why Ghana’s lending rates so high yet we keep boasting about a stable economy (inflation rates slowing and growth rates increasing steadily). Experts believe that high lending rates can be attributed to activities of borrowers, lenders, banks and the monetary authorities.
When it comes to the borrowers they have their activities affecting the demand side of the financial game. They borrow to finance investment, for consumption and servicing deficits and debts. The major player is often Government of Ghana the other players such as individuals and companies usually suffer from the might of Government. Government usually crowd out other fund users by pegging interest rates on T. Bills, Bonds and others high to aid them attract more funds to service high deficits and excessive government borrowing. Though Government’s activity of increasing interest rate is not to cause lending rates to go up but Government’s tweaking interest rates turn to have an indirect impact on lending rates.
The lenders are players that work in a world of limited resources as such are also in the game to maximize profit by minimizing their cost as well as minimizing risks. Lenders value their price of acquiring their funds based on so many factors such as Political risks and Economic risks. Lenders want to be compensated for economic risks like currency depreciation and inflation and political risks such as political instability, corruption, and lack of effective institutional mechanisms for protection of invested funds. Therefore to earn their compensation for taking the risk, lenders charge high lending rates to ensure they are protected and rewarded for their gamble in risking their funds in Ghana.
Our other player in the high lending rate game that is the Commercial bank is usually considered the major contributor to the predicament. In Ghana it is deemed that our financial system is not well-developed and is inefficient and uncompetitive. Rightly so banks usually are suspected of tweaking deposits rates and lending rates in their favour; currently deposit rates linger around 13.3% while lending rates are walking around 35.50%. One wonders how does one borrow to the bank at 13.3% and the bank goes to lend that same money at 35.50%. Banks have been lobbied by Government, and other private bodies to adjust lending rates but it seems moral suasion is not a path that Commercial Banks in Ghana adhere to. Commercial banks always find great excuses to back their claim some founded some not.
The last player in our game is the monetary authorities. Maybe they should take the greater blame for the high level of lending rates. They have the mandate to regulate these financial institutions and also make the financial environment conducive for commercial banks who are major lenders in the finance industry. Monetary Authorities turn to charge high Policy Rate (PR) which ripples through the financial market. Though the idea of high PR is to manage inflation, the exchange rate, and economic activities in the country, Commercial banks react to the situation by putting the burden on the borrowers by increasing lending rates. Though in recent times Monetary authorities have been adjusting PR and are finding alternative ways to manage inflation and other macroeconomic factors they can still work at ensuring the lending rates are adjusted for companies and individuals alike.
To cap this debate some economists believe that high interest rates reduce the incentive to invest and thereby slow down not only industrial growth but also economic growth. Indeed, Ghana’s relatively high interest rates and high cost of credit make the country less competitive in attracting investments, which inhibits its growth. High cost of credit is among the key concerns of investors as impeding business in Ghana. If lending rates are brought down significantly, Ghana would be able to attract higher levels of investments which would help grow our economy.
Papa Mensah Kwegyir-Aggrey
High Interest Rates In Ghana, A Critical Analysis by DR. J. K. KWAKYE