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04.11.2010 Feature Article


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" Deposit your money with a commercial bank in Ghana and the interest you earn on it can be as low as 7%. Borrow money from a commercial bank in Ghana and you will be faced with an interest rate of 30% or higher." This was how a friend recently put it. Why are interest rates in Ghana so outrageously high and the Bank of Ghana and the government not doing anything about it?

I had a discussion with a friend about this ridiculously high interest rates charged in Ghana "legally" by the banks operating in Ghana and we were both shocked to realise that Ghana has the highest interest rates in Africa and the second highest interest rates in the World second only to Brazil. Even loan sharks don't charge that much in many countries across the globe.

For exa mple, six months ago Standard Chartered Bank was paying 8.13% interest to depositors and giving out loans with 29.5% interest. Figures released by the Central Bank of Ghana in February show that the average interest rate on deposits for households was as low as 6.91%. Even more shocking is the mortagage rate on housing loans contracted in Ghana. The average mortgage rate in Ghana now ranges from 35% to 40% on a 10 year mortgage. So if you borrow 100,000 Ghana Cedis for a 10 year period, by the end of the first year alone you owe the bank about 140,000 Ghana Cedis. This is crazy to say the least ! By the end of the 10 year period you might have paid the bank more than 400% of what you originally borrowed. I don't think the property you built would have increased in value by that much. And why is the government and the Bank of Ghana not acting to bring these rates down? Commercial banking has become the fastest way second only to political corruption to make quick money in Gha na no wonder there are all kinds of Banks operating in the country now.

As long as that huge gap between deposit rates and interest rates continues to exist, Ghana's economy will continue to be stifled. Ghana is reported as having the highest interest rate spread in Africa, and the highest lending rates in Africa, coming second only to Brazil globally and this does not prick the conscience of the powers that be. Needless to say, these high lending rates is stifling economic development and causing credit crunch as people cannot afford to borrow. It is time the Central Bank of Ghana stepped in to bring sanity into the banking sector. The government and bank of Ghana are unwittingly condoning and conniving with these unscrupulous banks to rip off Ghanaians by their failure to act.

It was reported recently that the Bank of Ghana as the regulator of banking practices in Ghana announced a new base rate of 16% down from 18% but most commercial banks in the country ch arge twice or even more that much. Has the Bank of Ghana lost its moral authority to keep these commercial banks in line? The commercial banks operating in the country owe it a duty to themselves and to the nation to lower the cost of borrowing. The current state of affairs where Ghana has the highest lending rate in Africa and the second highest in the World is not tenable. The BoG must place a legal cap on interest rates in Ghana and strictly enforce it.

The high interest rates are stifling the productive sectors of the economy as it makes the cost of doing business too ecessive and businessmen can't pass the benefits of their business to consumers in the form of lower prices. Businesses in these sectors such as Agriculture and manufacturing are unable to borrow to expand their businesses and this is worsening the unemployment situation in the country and the few who are employed cannot enjoy the fruits of their labour in the form of higher wages all because of the high cost of doing business. We need to work towards a situation where people who are credit worthy should be able to borrow money to expand their businesses without being unduly restraint by the high cost of borrowing. That's one way the economy can expand and all can benefit from the "better Ghana" agenda.

To make this a reality, the government should put in place economic policies to reduce inflation and stabilise the national currency, in that way the BoG can reduce its prime rate, and that in turn means commercial banks can borrow at a lower cost and be in a position to lend to its customers at a reduced rate. In the past, commercial banks have not responded to the central bank's reduction in the base rate by lowering its own lending rate. Moral suasion alone from the central bank has not been effective. The Bank of Ghana is empowered by law to go beyond this approach towards regulating interest rates and should oblige banks to stay within a limit in terms of int erest rates.A quick and decisive action is needed to bring sanity and fairness into the system.

Ghanaian businesses cannot wait forever for the moral conscience of the commercial banks to trigger a favourable response from the calls for a reduction in the interest rates, the Bank of Ghana may have to crack the whip--or watch helplessly as the banks continue to hold their customers to ransom. Ideally access to credit must be a right and if commercial banks are charging close to 40% as interest rates then how much will non banking institutions charge? At the moment that is close to 100%. It is the responsibility of the government to protect its citizens from the nefarious activities of loan sharks masquerading as commercial banks.

Ben Ofosu-Appiah,
The author is a senior policy strategist and political and social analyst based in Tokyo. he welcomes your comments.

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