Even as businesses and households in Ghana celebrate last week’s announcement by the Ghana Association of Bankers of a 200 basis points (two percent) reduction in the interest rates applicable on both outstanding and new loans booked by banks in the country, the banks themselves are turning off the lending taps. Only their most highly valued, safest, customers can still expect to get credit between now and when the coronavirus outbreak and its consequent effects on economic activity subside.
While the rate cut – persuaded by government itself – aims at making credit cheaper, as part of wider efforts to ameliorate the extensive negative effects of COVID 19 on the economic fortunes of businesses and households, the inadvertent effect is that it is making lending even more unattractive. Even prior to the rate cut bankers had privately admitted that there was too much economic uncertainty, brought about by the pandemic, for banks to feel comfortable providing credit to businesses other than large corporations with the biggest revenues and their employees; and enterprises with huge and consistent cash flows such as petroleum product marketers.
The new industry-wide rate cut has further dampened the enthusiasm of the banks by significantly narrowing the interest margins they can earn on lending to customers. Just days before the rate cut, the Ghana Reference Rate which now serves as the base rate for banks, had been set for April at 15.12 percent, it lowest level since it was first introduced in April 2018. This was in response to the 150 basis point cut in the Bank of Ghana’s benchmark Monetary Policy Rate in late March, to 14.50 percent. The subsequent industry wide rate cut reduces this further to a long term base lending rate low of 13.12 percent.
The actual effective average lending rate of banks (including loan related fees) has been hovering at between 26 and 28 percent over the past year and this is expected to fall commensurately, to between 24 and 26 percent.
The snag is that aside from the perceived inordinate risk banks now see in new lending, the risk premium on lending to customers rather than investing in risk free government securities has narrowed too. Although the recent MPR cut has lowered both coupon rates on new government debt issuances and the secondary market yields on already issued securities, increased demand by government for cedi debt, has meant coupon rates and yields are falling only marginally. For instance, last week, the prevailing 91 day treasury bill rate was 14.44 percent, just 80 basis points lower than the 14.64 percent prevailing during the previous week. Similarly, secondary market yields on medium term treasury notes and bonds have hardly fallen.
Coupled with government’s inevitable increased appetite for debt, this is persuading banks to invest in both short and long dated debt securities rather than book new loans, because the risk in the latter is not worth the narrowed risk premium over doing the former.
The emergent trend is disappointing for Ghana’s heavily credit-dependent private sector, as it reverses the rebound in direly needed credit growth enjoyed since the BoG completed its universal banking sector reforms at the end of 2019. In that year, the industry’s cumulative gross loan portfolio grew by 23.8 percent to GHc45.17 billion after contracting by 3.5 percent in 2018. Last year, banks provided gross new advances of GHc29.7 billion, up from GHc23.2 billion in the previous year.
Businesses that desperately need credit financing to stay operational are now having to look towards alternative genres of financial intermediaries such as savings and loans and microfinance institutions, as well as other deposit taking finance houses for financing. However what is available is paltry compared with the banks’ lending capacities and the applicable interest rates are much higher, often computed on monthly basis that translates into a range of between 60 and 120 percent per annum.