Policy rate cuts must reflect in lending rates — Expert

CUTS in the Bank of Ghana’s (BoG) monetary policy rate will only boost economic growth if commercial banks pass on the reductions to businesses and the private sector through lower lending rates, a UK banking expert, Dr Sajid Chaudhry, has said.

He said the persistent high lending rates continue to constrain borrowing, investment and business expansion despite recent policy easing by the central bank.

Therefore, he said, affordable and accessible credit was critical to stimulating private sector activity and driving Gross Domestic Product (GDP) growth.

“The important thing is that the monetary policy rate cut should be translated into lending rate cuts because this is where credit goes to productive sectors, businesses and the private sector, and that is what translates into GDP growth,” he said.

Dr Chaudhry, who is from Aston University in the United Kingdom and an International Fellow of the Institute of Economic Affairs (IEA), made the remarks while presenting highlights of a report titled “Interest Rates and Economic Development in Ghana” in Accra on Tuesday.

He commended the BoG for reducing the policy rate in response to declining inflation but stressed the need for commercial banks to transmit the reductions into lower lending rates.

“I think the Bank of Ghana is doing the right thing in terms of reducing the policy rate because inflation has been declining. 

However, the important thing is for these reductions to be transmitted into lower lending rates by banks so that credit can flow into productive sectors of the economy,” he added.

Recommendations

Touching on the losses recorded by the BoG following measures introduced to control inflation, Dr Chaudhry advised that the central bank consider regulatory interventions to encourage banks to pass on policy rate cuts to customers through reduced lending rates.

He also proposed that banks should respond to policy rate increases by offering higher deposit rates to customers.

According to him, banks were often slow in adjusting lending and deposit rates in line with changes in monetary policy, leading to persistently high net interest margins and strong profitability.

While acknowledging that Ghana operated a free market economy where direct controls may not be ideal, he said regulators and stakeholders could still engage banks to ensure a fairer transmission of monetary policy decisions.

NPLs

On non-performing loans (NPLs), Dr Chaudhry attributed the challenge partly to difficult macroeconomic conditions, including high inflation, elevated interest rates and weak demand in the economy.

He, however, stressed that banks also had a responsibility to strengthen loan screening and monitoring systems to reduce defaults.

“It is understandable that in difficult economic conditions some businesses struggle to repay loans, but banks must improve their screening and monitoring systems to reduce non-performing loans,” he stated.

Bank tax proposal

A doctoral student at Aston University, Epiphany Anaba, proposed the introduction of a bank tax in Ghana to generate sustainable revenue and reduce banks’ reliance on short-term funding.

“Many countries have introduced a bank tax and the last country to do so was Australia in May 2017 to help tackle its budget deficit,” he said.

Mr Anaba said that Ghanaian banks remained “too profitable beyond what is socially optimal”, noting that a significant portion of their profits was derived from investments in treasury securities rather than lending to the productive sector.

He said the high net interest margins, return on assets and return on equity recorded by banks, particularly the top 10 banks, justified the introduction of such a tax.

According to him, a bank tax would provide Ghana with a sustainable source of revenue while encouraging banks to reduce dependence on short-term funding.

Mr Anaba therefore proposed a long-term tax of two per cent on total liabilities net of equity and insured deposits, or 10 per cent of profit before tax, whichever was higher.

He also suggested a short-term one per cent tax on investments in treasury securities.