Dr. John Kwakye, the Director of Research and Senior Economist at the Institute of Economic Affairs (IEA), disclosed that the high-cost lending by the banks can be attributed to their operational inefficiencies.

Not only must the commercial banks be held responsible, the Government of Ghana (GOG) and the central bank of Ghana (BOG) also have their part to play in this high lending rate menace, Dr. Kwakye revealed.

As disclosed by the Senior Economist, “banks contribution to high lending rates which emanates from their inefficiencies, and government continuous borrowing from banks to finance the budget are major causes of the high cost of loans”.

“Banks contribution to high lending rates emanates from their inefficiencies, high operating costs, poor appraisal of projects, collusive practices and customer capture.
“Government responsibility for high lending rates emanating from borrowing from banks to finance the budget, macroeconomic instability associated with high budget deficits, and high and multiple taxes imposed on banks.”
Dr. John Kwakye

Additionally, regarding the Bank of Ghana, the Senior Economist attributed the causes of high lending rate to the BOG’s monetary policies.

“The role of the central bank in high lending rates emanates from the inherently upward bias of monetary policy on interest rates, cost of high and currency-differentiated reserve requirements and lack of well-functioning Credit Reference Bureaux”.
Dr. John Kwakye

Rectifying interest rate disparities

Dr. Kwakye while speaking in his capacity as a Senior Economist and Director of Research at the IEA, outlined some prudent measures that when adopted can help address the high lending rates.

The Senior Economist admonished government to streamline bank taxes to help reduce their costs. He also disclosed that the government should “provide a level playing field in respect of their corporate tax”.

Dr. Kwakye further called on the government to reduce its level of borrowing from the domestic market.

Similarly, the Director of Research, encouraged the Bank of Ghana to reduce the primary reserve ratio from the current level of 8% to 5% to reduce the associated costs to government.

He also urged the Bank of Ghana to ensure that the fight against inflation does not by itself fuel high lending rates.

This, Dr. Kwakye explained, required a broader approach to fighting inflation, including paying attention to the supply-side causes.

“Reduce the primary reserve ratio from the current level of 8% to 5% to reduce the associated costs to banks. Further, allow banks to cover their dollar deposits with dollar reserves to avoid their exposure to exchange risk and its passage on to lending rates.”
Dr. John Kwakye

Also advising on the participatory role of the commercial banks, he urged the financial intermediaries to reduce their operating and overhead costs.

“Addressing operational inefficiencies to reduce costs so that they are not passed on to consumers. Improve working processes and systems through modernization and more digitization.
“Strengthen customers’ project appraisal capacity to reduce incidence of loan defaults and the effect on costs.”
Dr. John Kwakye

Studies have also shown that factors such as cost of credit, Treasury bills rate, non-performing loans and inflation are among the major contributing factors to the high lending rates.

Furthermore, the debate over high lending rates in the country will likely not end anytime soon, as the Institute of Economic Affairs is blaming the high cost of credit on government, banks and the Bank of Ghana.