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Take The Bull By The Horns – BoG Urged   
 
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07-Nov-2011  
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The Institute of Economic Affairs (IEA) says the persistent high cost of credit is unjustified while banks reap huge profits, and has asked the Central Bank to begin to regulate interest rates.

A senior economist, Dr. John K. Kwakye, speaking on behalf of the Institute, suggested that the Bank of Ghana impose a cap on interest-rate spreads to curb the industry’s profits, and take further regulatory action to induce banks to lower their lending rates and spreads.

“We think that spreads of 20 percent or more are unacceptable. We are therefore imploring the monetary authorities to exercise their mandate to regulate interest rates. In particular, we have suggested that, for a start, they impose a cap on interest-rate spreads of, say, 10 percentage points.”

Though the Institute’s suggestion could be seen as a call for interest-rate controls, Dr. Kwakye said it is not the equivalent of a control-regime, which is an environment nobody wants to return to.

“This is done everywhere, even in the US. We are not asking for a fixation of lending or deposit rates. We are saying that if banks lend at 30 percent, for instance, then they should pay at least 20 percent on deposits.”

He blamed the high lending rates on a mix of factors, including banks’ high operational costs, the levels of bad debts and costs related to lending risks.

But he added: “The continued high profitability of banks in spite of these costs, however, suggests that the high cost of credit is unjustified and is propped up by an uncompetitive, oligopolistic industry.”

Despite low inflation and continued signals to ease sent by the Central Bank through the setting of its benchmark policy rate, lending rates have remained close to a 30 percent average with tight collateral conditions.

One of the IEA’s other proposals is that the regulator considers reducing the reserve requirement from 9 to 5 percent to lower bank’s cost of funds, which has also been linked to the expensive cost of credit in the industry.

The newly-established Credit Reference Bureau should also be supported to collect the needed information on borrowers to reduce credit risks and, consequently, credit costs, the Institute urged.

The Central Bank’s latest survey of credit conditions revealed an easing of credit stance towards large enterprises, but a net tightening towards small and medium-sized enterprises, which lenders find riskier to do business with because of their structural and operational deficiencies.

The survey also found that the share of net loans and advances in banks’ assets declined to 35 percent in June 2011 from 41 percent in June 2010. Meanwhile, the proportion of investment (in both bills and securities) in total assets increased from 25.4 percent to 31.4 percent within the same period.

The industry’s profit performance was more bullish as at June 2011 compared to 12 months before. Pre-tax earnings were up by 70 percent within the period, and after-tax income jumped by 66 percent.

In July, Central Bank Governor Kwesi Amissah-Arthur announced the formation of an independent ad hoc committee to look into how banks determine their base rates as a first step to unravelling the industry’s high lending rates.

The report of the committee has been received by the Governor, who says he is still studying its findings and recommendations.

It is expected that the outcome of this effort will bring standardisation and transparency into the determination of banks’ base and lending rates.
 
 
Source: B&FT
 
 

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