‘Check High Cost Of Borrowing’

Dr Kwabena Duffuor

GOVERNMENT HAS been asked to intervene and check the stubbornly high commercial banks’ lending rates as well the high cost of borrowing which continue to pose challenges to the business community.

A former Governor of the Bank of Ghana who later became Finance Minister, Dr Kwabena Duffuor, made the call.

Dr Duffuor on Monday delivered a public lecture titled “The Ghanaian Dream: Transforming the Economy through the Creation of Jobs and Opportunities for All.”

He said the high cost of bank credit in Ghana results from the cost of servicing credit in the Ghanaian banking industry, which has also been influenced by the cost of deposits, cost of loan defaults (non-performing loans), cost of overheads (operational cost) and the cost of liquidity.

Noting that the central bank’s policy rate slightly impacts on the cost of funds, he said “The bigger commercial banks with huge demand deposits account (Transaction Account) on which banks virtually pay no interest, enjoy lower cost of funds. This is because the almost zero cost on their huge demand deposit account balances impacts positively on their total cost of funds in the sense that, it doesn’t impose any additional cost to it.”

Furthermore, he noted, “On the other hand, the smaller banks with time and savings deposits with higher interest rates, and who also have small demand deposits account balances, have high cost of funds. This is so because the demand deposit account balances do not have the same positive impact on the cost of funds like the bigger banks and it will be important at this point to explain that, the small banks with high cost of funds outnumber the few larger banks with lower cost of funds. And it is the smaller banks with high cost of funds who have dominated the commercial banks credit market all these years.”

He continued that the larger banks are selling their credit at the same price as the smaller banks even though their cost of funds are lower than the smaller banks. “This explains why the cost of borrowing has been so high and had been a drag on the growth of the economy and on the creation of jobs. The issue surrounding the cost of borrowing in the Ghanaian commercial banking industry is daunting, one whose solution requires sober and critical thinking.”

However, he said any attempt to force banks in Ghana to lend at lower lending rates like our neighbouring countries namely Togo, Burkina Faso and Cote d’Ivoire, will weaken the smaller banks in particular, and the entire economy.

He has, therefore, called for public intervention to create a level playing field in the entire bank credit market for both the larger and smaller banks.

“This will lower their cost of funds and thus be able to lend at a lower lending interest rate to support the growth of businesses in our economy and help generate decent jobs.”

BY Samuel Boadi