The Chief Executive Officer (CEO) of the Ghana Association of Bankers, John Awuah, has revealed that banks don’t make money from higher interest rate.

However, he indicated that banks receive profit on the net interest and not the entire income associated with the interest charged on monies lent out.

“Banks don’t make money from higher interest rate, actually we get worried. Because the higher the interest rate the higher the interest burden and the higher probability of default. Banks make money from the middle. So, if you have taken money from say a pension house and you have given the money to somebody, your profit is not the interest income. Your profit is the net interest income.”
John Awuah

During an interview, Mr. John Awuah disclosed that currently, the lending rate stands at 20 percent as compared to about 28 percent, 5 years ago. This, according to him, is about 800 basis points off the current lending rate.

Still speaking on the interest rate, the CEO of Ghana Association of Bankers explained that the interest rate depends on three underlying factors. Per his explanation, the interest rate depends on the Treasury Bill (T-Bill), the Interbank Lending Rate and the Monetary Policy Rate (MPR).

Mr. Awuah indicated that the three combined factors make the Ghana Reference Rate, upon which banks add their premiums before setting the lending rate.

The CEO averred that, “today if you are a bank and you go to a place like SSNIT, a pension company to take deposits, SSNIT will be taking Treasury bill rate plus either 1 percent or 1 point something percent. In addition to that you have to pledge Treasury bills in support.

Subsequently, Mr. John Awuah cited that, “assuming you go there and you take 1 million cedis at 14.5 percent plus 1 percent that is 15.5 percent. Because it’s T-Bill plus 1. That 1 million you have taken, you have not taken account of your cash reserve requirement which means 8 percent of that 1 million, you are not going to use which brings you to about 920,000 out of that 1 million for you to use. If you do the effective interest rate on that deposit you have taken from SSNIT you are in a region of about 16.5 percent.”

As a result, Mr. Awuah noted that the bank’s baseline interest rate will be standing at approximately 16.5 percent. This, according to him, does not include staff, infrastructure and default cost.

Meanwhile, he indicated that before the banks factor all these costs in setting their lending rate, it will already be positioned at 20 percent.

“What rate do you want the bank to lend?”
John Awuah

He further advised that attention should be paid to the economic indicators because those are what drive the interest rate, especially the Monetary Policy Rate.

“The thing that drives the base is what we have to work on. So, the economic variables is where I think a lot of focus must be because that affects the interest rate particularly the policy rate.”
John Awuah