Chief Executive Officer of the Association of Ghana Industries (AGI), Seth Twum Akwaboah, has disclosed that, the current interest rate is still high to encourage businesses to borrow from banks. According to him, the number of non-performing assets or loans have gone up and this translates to high cost of capital.

Speaking in an interview with the Vaultz Media, Mr. Akwaboah explained that there is a cause for worry if the reduction does not affect other areas of the economy.

“It is a fact that the current interest rate is still high to encourage SMEs borrowing. If you look at the non-performing assets or loans, it has actually gone up. If you look at it last year, it’s gone up hugely. The ratio used to be 15% but it’s 15.5%, meaning that a lot more enterprises’ loans from the bank are not performing.

“When there’s higher non-performance level, it translates into higher cost of capital if the risk factor is high. Therefore, if the policy rate is coming down and we don’t see improvement in other micro-economic areas that enable the businesses to pay their loans… it cannot translate into significant reduction of interest rate and that’s where our worry is”.

That notwithstanding, the AGI boss welcomed the reduction, stating that, the policy rate is an indicator of the country’s “health”. As a result, a reduction means the country has a healthier microeconomic environment, “which for me is positive”.

“So, that’s why we say generally speaking, we are very positive with the fact that the policy rate is coming down. We want it to achieve the ultimate result of influencing the interest rate”.

Cost of capital to business

Commenting on the policy rate, he noted that, it is supposed to impact on the interest rate, which serves as a benchmark. Mr. Akwaboah further averred that an improved policy rate will likely impact on the cost of capital to business.

“Therefore, if you look at the trend, a high policy rate usually connotes high interest rate. So, when there’s a reduction, it means that there’s a potential improvement in the interest rate level and the interest rate is the cost of capital to businesses; and you want your cost of capital to come down.

“In Ghana, the cost of capital is very high, so a reduction in policy rate is usually welcome. The caution we normally throw though is that, normally when there’s a reduction in policy rate, [there’s no] corresponding reduction or proportionate reduction in interest rate”.

Furthermore, Mr. Akwaboah iterated the fact that the reduction will not necessarily impact the interest rate. This he explained, is a cause for concern.

“So, it is good to have it reduced because if we do not have it reduced; we will definitely have interest rates going up. Therefore, we welcome the reduction in policy rate. We want to believe that this time round efforts will be made to let the reduction in policy rate translate into the reduction of interest rate. Of course, that will require a lot of things to happen in the economy and also at the banking front”.

Expectations from universal banks

Touching on AGI’s expectation from the universal banks, Mr. Akwaboah expressed the need for banks to work towards reducing the rate to businesses. According to him, this will help SMEs gain access to finance.

“Our expectation is that, they will factor this into the formula appropriately and actually work towards reducing the interest rate to the borrower. If you are not borrowing, it means business won’t be expanded that fast. Therefore, our expectation from the financial institution is that, they will actually work towards a reduction in the interest rate so that the best of the policy ratio is positive”.