BoG Sets New Base Rate Guidelines
5/15/2012 10:48:49 PM -
Mr Amissah-Arthur - Governor of BoG The Bank of Ghana (BoG) has set a new formula for determining base rates, the minimum interest rate charged by banks, with effect from April 2, 2012.
While the old formula allowed banks the free hand to include variables such as risk premium that they deemed appropriate, the new regime has a set of agreed variables which will be included in the computation of base rates.
The base rate is the minimum interest charged by the banks on loans.
The President of the Ghana Association of Bankers (GAB), Mr Asare Akuffo, has welcomed the move as necessary to bring uniformity in base rates, but a renowned economist, Dr Joe Abbey, thinks the new formula can prevent credible and self-acquitted borrowers from paying lower rates for loans.
According to the BoG, the formula had become important because the current system had not been able to bring about uniformity in the determination of interest rates and transparency in the regime.
One of the shortfalls in the old formula was banks lending below the base rate, thereby bringing distortions into the regime, a situation which undermined the central bank’s policy rate which is supposed to influence the behaviour of interest rates in the banking industry.
Guidelines on base rate computation signed by the Secretary to the BoG, Mr Andrew Boye-Doe, and issued by the bank explained that “banks are required to apply the new base rate system to all loans and advances with reference to the base rate and may include other customer-specific charges as considered appropriate.”
They added that the actual lending rate charged by a bank should be transparent and consistent with its base rate and made available for supervisory review upon demand.
In the previous regime when the banks were allowed a free hand to determine their base rates, the BoG found that “some banks continue to lend below their base rates” and made it difficult for the central bank to establish how its policies on interest rates transmitted into the banking system.
Industry players also said banks used different variables in determining the base rates, such as using the 91-day treasury bill, while others used the policy rate. Other banks also infused unique types of risks into the computation of what their base rates should be.
With the new guidelines, the BoG also wants banks to review their base rates monthly based on the previous month’s “prudential returns” which should be approved by the board of directors or what is called ‘the Asset Liability Management Committees (ALCOs)’ as per a particular bank’s policy.
“Banks are required to display the information on their base rates at all branches and also on their websites,” the BoG guidelines stated, adding that “changes in the rates are to be conveyed to the public through publication in leading Ghanaian newspapers”.
Mr Akuffo said “it is a positive development. The guidelines were arrived at following consultation with bankers and we all agree that it should be the way forward”.
He, however, made it clear that the new formula was “aimed at achieving uniformity in base rates and not to cause a reduction in base rates”, adding that rates would only come down when the general economy was more stable and the usual factors that contributed to high interest rates were removed.
Mr Akuffo, who is also the Managing Director of the HFC Bank, pointed out that the banks agreed, during the consultations, that it was wrong for banks to publish base rates and lend below them.
By definition, base rates are supposed to be the best lending rates.
However, Dr Abbey has cautioned that the uniformity may end up forcing credible customers to pay more for credits for the bad credit behaviour of other borrowers.
“Regulations matter, as no market can regulate itself, but when it gets to the practice, we should be a little careful. Banks are supposed to intermediate — take people’s deposits, give them reward and lend to others — and it is an important role they play,” Dr Abbey, who is also the Executive Director of the Centre for Policy Analysis (CEPA), told the Daily Graphic.
He explained that while he considered the regulation as useful, the BoG must understand that there were some borrowers seen by the banks as so credible that they did not give them rates at the base rate.
That, he said, was because banks were in business and price risk and would like to lend in a way that would keep their customers with them.
“So I will not encourage the BoG to be populist and demand that everybody should be treated the same. We should be able to have people aspire to be the type that their banks would want to lend to at very low rates,” Dr Abbey stressed.