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IEA Bashes High Interest Rates
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- Parent Category: Our Country
- Category: Business & Finance
- Created on Wednesday, 21 March 2012 20:06
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Some measurable macro-economic stability has been achieved in the last few years in the areas of inflation and the exchange rate however the intractable high bank lending rates, among others, inhibit investment flows and impact negatively on economic growth.
The Institute of Economic Affairs (IEA), in its monthly journal – Legislative Alert called on government “to regulate the current high interest rates but not control it.”
According to Dr John Kwakye, a fellow of the institute, the persistence of high interest rates in Ghana was the collective responsibility of banks, fiscal as well as monetary authorities.
“High bank lending rates and large spreads are of particular concern. Not only can they not be justified in terms of the costs and risks in the industry, they also reflect industry inefficiencies, low and ineffective competition and collusive practices.”Noting that the monetary authorities cannot remain aloof, he said they must exercise their regulatory authority to correct an obvious market failure in the credit system by capping interest rate spreads at the minimum level.
“Banks’ lending rates could go as high 30 percent or more, while deposit rates remain below 10 percent. To place these rates in context, note that the Central Bank’s benchmark policy rate has fallen to 13.5 percent and inflation is below 9 percent. Obviously, there is a disconnect between banks’ lending rates and the policy rate, which impedes the transmission and effectiveness of monetary policy.”Dr Kwakye revealed that lending deposit rate spreads of the order of 20 percentage points are unacceptably high by industry standards.
“To a great extent, the high lending rates and spreads can be attributed to banks’ operational inefficiencies and high costs. Here cognizance is taken of inadequate infrastructure, including technology infrastructure, high operating costs including administrative and other overhead costs.”
However, the economist noted that banks face high lending risks such as inadequate collateral, inadequate borrower identification and generally high loan default.
“These factors lead to non-performing loans on the banks’ books and increase their costs. Surprisingly, the proliferation of banks in the country does not appear to have brought about increased competition and lower costs.”
He added that the rapid growth of the industry does not seem to have been matched by capacity building. As a result of this, excessive competition for the few skilled personnel and the escalation of their wage rates has been witnessed.
The proliferation and concentration of banks in urban areas has led to excessive competition for limited depositor funds, thereby increasing the cost of such funds.
By Samuel Boadi
Daily Guide/Ghana
