Interest rates to remain stable - Banks

Current developments in the financial sector suggest that the problems of limited funding from financial institutions to businesses could worsen into the year. Maxwell Adombila Akalaare writes




INTEREST rates charged on loans taken from commercial banks are unlikely to climb up despite the Bank of Ghana (BoG) pulling its policy rate up by a 100 per cent basis points.

That is as a result of most commercial banks’ less reliance on BoG funds to support their individual loan portfolios.

The president of the Ghana Association of Bankers (GAB), Mr Asare Akuffo, who confirmed this to the GRAPHIC BUSINESS in an interview, however, added that the rates could firm up in the long run.

His comments trail an earlier decision by the Monetary Policy Committee (MPC) of the BoG to hike its policy rate from 12.50 per cent to 13.50 per cent, citing pressures on inflation and its long term effects on the economy.

The policy rate is the rate at which BoG lend cash to financial institutions in the country to enable them (the financial institutions) carry on with their respective financial intermediations with the business community and individuals.

A high policy rate, in most cases, always correspond to hiking cost of credit to businesses as more banks will very likely pass on the extra cost incurred on the BoG funds to their loan customers.

The hike in BoG’s policy rate came at the back of a harsher credit regime as revealed by the 2011 quarter four findings of the Association of Ghana Industries (AGI) Business Barometer Survey (BBS) which was released last month. As result, many business executives feared the difficulties in accessing credit could worsen as interest rates will quicken up.

The Executive Secretary of the AGI, Mr Seth Twum-Akwaboah said in an interview that the association was “not very happy with the BoG decision to increase the policy rate.”

He said his outfit rather expected the bank to have reduced the rate to ease the various credit issues facing businesses in the country

With the policy rate now hiked by a 100 basis points, Mr Twum-Akwaboah said anxiety among the business community that interest rates will go up could heighten as Central Bank funds to banks get costly.

For now, the AGI Executive Secretary said the association was “cautiously looking at BoG’s current action on cost of credit” saying that previous trends suggest that the policy rate has “some implications on the cost of and access to credit in the country.”

President of the GAB however said the situation in the country was different as a few banks relied on BoG funds to loan to prospective loan seekers.

He explained that while the base rate (the rates at which banks are supposed to charge all loan customers) of small banks are calculated base on the cost of their individual funds and a customer’s assessed risk, those of the bigger banks with large pool of funds is heavily influenced by treasury (T) bill rates.

Thus, should T-bill rates be pegged higher, bigger banks will very likely pull their base rates up vice versa.

Consequently, Mr Akuffo said “the base rates of some banks are unlikely to go up” in line with the upward adjustment of the policy rate.

“We would have to wait a little longer to see what the effect will be on the cost of borrowing to the banks first,” he said.

Unless the hike in the policy rate filters into the cost of bank’s funds, the GAB president said businesses can be expected to borrow at the current rates from their banks.

Mr Asare Akuffo, President, GAB

In the long run however, Mr Akuffo who doubles as the Managing Director of HFC Bank Limited and president of the Private Enterprise Foundation (PEF) said interest rates will pull up in response to the various economic challenges that an election year like this comes with.

“It is true that interest rates will go up but not in the short run. The rates may start going up after two or three months time when all these factors have started causing ripples to banks’ operations and cost of funds in particular,” he said.

Despite the unexpected short term rise in cost of credit to businesses as assured by the GAB president, the issue of banks charging higher rates to make astronomical profits still remains.

The AGI, the umbrella body of businesses in the country, last month accused the country’s financial sector of inefficiency; a trait the association said is heavily influencing the cost of credit to businesses nation-wide.

If banks were efficient, the association said they would have mobilised more funds at cheaper costs and lent them back to businesses at competitive rates.