Group Chief Executive Officer for Databank Kwadwo Addae-Mensah has indicated that bank interest rates will remain high so long as the Treasury bill rates do not decrease.
Currently, banks lend money to borrowers at rates above 30 per cent, which is one of the highest in Africa. The banks have, therefore, come under criticism for keeping their rates high when the central bank’s policy rate is low.
But Mr Addae-Mensah, speaking to Class Business on the sidelines of the 2016 edition of the Ishmael Yamson and Associates Business Roundtable series in Accra, said the Treasury bill rate is a crucial factor influencing the rate at which banks lend money, since it is considered to be risk-free.
“I go and borrow from the central bank and it’s at 26 per cent and, of course, if I borrow that money from the central bank and I am going to lend it to you, definitely I am going to lend at a higher rate. But for me, more importantly is how the Treasury bill rate is set, because it is perceived to be risk free. So you come to me, you want me to lend you money. If I lend that money to government free, I mean without any risk, and I just fold my arms, I will get 23 or 24 percent depending on the tenure. So if the Treasury bill rate, which is risk-free, is 24 per cent and A and B company come to me with very little collateral, with a very high cost of production because power is high, with a not-so-good human resource base, I [will] factor all that into his risk, I will definitely price the loan I am going to give to that person – 24 per cent plus a certain factor which will usually be a 10-percentage point and that is how come you are now beginning to see interest rates being lent to businesses in the north of 30 per cent,” Mr Addae-Mensah explained.
He noted that interest rates will come down once government stops borrowing from the banks.
“I think it takes a bit of political will and a more fiscal discipline and so if government is not desirable to let the borrowing be among the banks and borrow too much from the general public, I think that will work. Recently, they floated another bond, which for me was an indication that they are preparing to try and drop the policy rate and to drop general rate because what they may be doing is to be refinancing their short-term notes with longer term cheaper notes, then they can start bringing the rates down so I think steps have been initiated towards that direction.
Source: ClassFMonline
