BoG to crack the whip with final directives to banks

Dr Henry Kofi Wampah -BoG GovenorDr Henry Kofi Wampah -BoG GovenorThe Bank of Ghana may be forced to crack the whip if commercial banks continue to levy high interest charges despite growth-enhancing reforms introduced by the regulator.

“These are early days yet and we are monitoring to see how they adhere to our directives and if we have to institute some punitive measures, we will if they do not comply. But for now let’s wait and see”, the Bank of Ghana source said.

Until recently, the Monetary Policy Committee (MPC) of the Bank of Ghana had maintained a fairly stable prime rate bank to comply with its guidelines in computing their interest rates charges or else it will issue further measures to make the banks adhere, a source at the Bank of Ghana told the Graphic Business.

“These are early days yet and we are monitoring to see how they adhere to our directives and if we have to institute some punitive measures, we will if they do not comply. But for now let’s wait and see”, the Bank of Ghana source said.

The revised rate was designed to bring uniformity in the determination of interest rates by commercial banks in the country and to ensure transparency in the pricing mechanism. Banks are also required to display the information on their base rates at all branches and also on their websites. Changes in the banks’ base rates are to be conveyed to the public through publication in leading Ghanaian newspapers.

Ghana has the highest spread and lending rates in Africa and is second only to Brazil globally. Historically, it also has the highest lending rates in Africa, averaging 32.2 per cent in April 2013. While the Policy Rate is pegged at 16, lending rates have shot beyond the 30 per cent mark.

The final warning by the Bank of Ghana has compelled some banks to drop their base rates in compliance, though the spread, which the interest rate charged by banks on loans to prime customers minus the interest rate paid by commercial banks for customers savings deposits.

This means that when a customer deposits money with a commercial bank in Ghana, he or she will an average annual interest of as low as 3.7 per cent, but the same customer will pay as high as over 30 per cent on consumer loan from the same bank.

Standard Chartered Bank (Stanchart) Ghana pays the least on depositors’ funds but charged costly rate on loans, according to the Bank of Ghana April Annual Percentage Rate (APR). Stanchart pays annual average interest rates of 3.95 per cent on depositor’s funds but charged an annual rate of 28.67 per cent on consumer credit.

Barclays Bank follows closely on the heels of Stanchart with an average interest paid on deposits at 4.88 per cent and charging 32.36 on consumer credit.

This has got people talking about the huge spread between the interest rates on funds paid by the commercial banks to clients deposits and  interest charges on loans by the banks and even for those who know the implications, some still go ahead to borrow   because of their dire need for cash.

The APR is the true rate banks and non-bank financial institutions charge the public on loans and advances. It reflects the true cost of borrowing and includes charges and commissions levied by banks. Average interest paid on deposits is the average interest paid by banks on deposits of savers.

The Bank of Africa for instance pays the highest rate of interest on deposits but recorded a high of 35.96 per cent on borrowing cost with a base rate of 24.95 per cent. State -owned Ghana Commercial Bank (GCB) pegged its average interest on deposits at 4.60 per cent but charges a 27.30 per cent on consumer credit.

Another state-owned bank, the National Investment Bank, paid 8.93 per cent interest on deposits but charged a 35.0 per cent on loans. Fifteen of the 27 banks in the country pay an average interest on deposit of between 9.0 to 11.5 per cent with SG-SSB having the lowest base rate of 17.28 per cent.

Base rates for lending are typically used by banks in their dealings with high net worth clients. Therefore, advances to new clientele and other risk-prone customers are made on higher interest rate terms.

According to the BoG, the new formula had become neccessary 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.

Base rates for lending are typically used by banks in their dealings with high net worth clients. Therefore, advances to new clientele and other risk-prone customers are made on higher interest rate terms.

But despite the directive from the central bank, commercial banks are rather responding sluggishly – even with the current Bank of Ghana policy rate at 16 per cent.

By Suleiman Mustapha/Graphic Business/Ghana


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