Financial Consultant, Sydney Casely Hayford believes the current policy rate of Bank of Ghana (BoG) still makes it very difficult for commercial banks to reduce lending rates.

Speaking to Goldstreet Business, Mr. Casely Hayford noted the current economic environment does not make it favourable enough for commercial banks to reduce lending rates. He mentioned that more needs to be done because the Central Bank’s policy rates still remain high for banks to comply.

“There is little left to be done because Bank of Ghana’s policy rate is still too high. That is the rate at which the banks borrow from the Central Bank when they are in trouble. If the policy rate continues to remain high, then it’s costing the banks some money every time they have to raise funds from the central bank”, he explained.

The Financial consultant added “until and unless the monetary policy rate comes down, banks will still find it increasingly difficult to reduce interest rate”.

In March 2018, the Monetary Policy Committee (MPC) of the Central Bank reduced its policy rate to commercial banks by 200 basis points to 18%. The Governor of BoG Dr. Ernest Addison noted that this was due to positive economic measures which have positively impacted the economy.

During the commissioning of the new Standard Chartered Bank Headquarters in Accra, President Akufo-Addo used the occasion to appeal to banks to reduce lending rate. He stated that despite the drop-in inflation from 15.6% in 2016 to 10.3% as at end of January 2018, interest rates still continue to remain high.

It is estimated that policy rate is usually guided by what the Central Bank’s feels the economic environment is like and it is usually guided by components such as inflation, Gross Domestic Product (GDP) inputs, and the growth of some important sectors of the economy.

Consumer confidence

According to Casely Hayford, the growth of the economy and consumer confidence is very essential in the banking sector of every economy. He explained that if the commercial banks are confident that people they lend money to are able to pay without any reservations and difficulties, they will go ahead and lend money even at a lower rate.

He, however, indicated where the banks feel that people will default, they will tend to raise interest rate.

“In case the person does not default, then at least they have got some money back. If the person defaults then they know they have to prosecute. But generally, it’s the overriding cloud of the economy”, the analyst noted.

Minimum capital requirement

Following UT and Capital Banks insolvency in 2017, the BoG increased minimum capital requirement for commercial banks to Ghc400 million from Ghc120 million. The Central Bank then directed all banks to recapitalize before December 2018.

Asked if the increment will lead to sanity in the banking sector which has been bedeviled with some serious challenges, Casely Hayford said the BoG implemented this banking policy decision to give opportunities to banks do engage in bigger deals to generate more capital to improve the economy.

He stressed that the banks are in crisis as a result of their own in-house policies as they gave loans to “cronies and family members” without taking due care as to whether or not the individuals or the businesses can repay.