The net interest rate spreads, a key determinant of banks profitability, and a crucial factor in their effectiveness as financial intermediaries has continued its easing for the third consecutive year as end-2018 recorded a drop to 15.4 percent, according to Bank of Ghana’s (BoG) first monetary policy report for 2019. In effect, the narrowing of the bank interest spreads means customers are getting a better deal from the banks than hitherto, albeit at the expense of the bank’s profitability
Crucially, it also means that enterprises that both borrow from and deposit with banks stand to enjoy better financial results.
The lending-deposit spread is the difference between the average yield that a financial institution receives from loans, along with other interest-accruing activities, and the average rate it pays on deposits and borrowings. The narrowing interest rate margin is resulting from a faster drop in average lending rates than in average deposit rates, during the current era of falling bank interest rates which began in late 2016.
The spread at the end of 2016 was 18.7 percent but it fell to 16.3 percent by December 2017 and further to 15.4 percent by December 2018.
The drop recorded between 2017 and 2018 represents a 0.9 percentage point decrease, compared with the 2.4 percentage points drop between 2016 and 2017. This indicates that 2018 had a slower pace in the narrowing compared to 2017.
Several factors drive interest rates including monetary policy set by the central bank, among others. The monetary policy rate as determined by the central bank has reduced from a peak of 26.0 percent in 2016 to 17 percent by the end of 2018, representing a 900 basis points reduction.
The MPR was further reduced by 100 basis points to 16 percent in January 2019.
According to analysts, while the monetary policy rate plays a large role in determining the rate at which an institution lends immediate funds, open market activities ultimately shape the rate spread.
At a time when the spread is seen to be reducing, the average lending rate demanded by the banks also continued to ease from 31.7 percent in 2016 to 29.3 percent and 26.9 percent recorded in 2017 and 2018 respectively.
Banks’ deposit rates continued to ease too over the 12-month period to December 2018. The average three-month time deposit rate declined from 13.0 percent in December 2017 to 11.5 percent at the end of 2018.
However the savings rate remained unchanged at 7.55 percent at the end of 2018. This means though that most customers operating savings accounts are suffering negative interest rates in real terms as inflation, currently at over nine percent completely erodes the financial gains derived from the interest they receive on their holdings.
Ghana’s banking industry demands some of the widest interest rate spreads in sub Saharan Africa, a fact initially revealed by World Bank research about a decade ago. Bank chieftains have defended this by pointing to the relatively high risk incurred they incur in their lending activities as evidenced by the industry’s non- performing loans ratio of over 20 percent. However the banking industry meltdown that has occurred over the past one and a half years has shown that poor risk management is just as much a factor behind the poor loan repayment records of banks in Ghana as is the bad behavior of their borrowing customers.
Banking sector regulators want bigger banks that make their profits more from the size of their business volumes than from their interest margins, thereby supporting lower lending rates and higher deposit rates. Indeed this is a major objective of the recently concluded banks recapitalization exercise.
By Joshua W. Amlanu