The decision of the Bank of Ghana to have banks in the country shore up their capital base barely two years ago was to get them in a more resourceful position to lower their lending rates in the near term, Governor of the Bank of Ghana, Dr. Ernest Addison, has said.
“We believe that over time reforms and recapitalisation should provide a strong basis for enhancing competition and efficiency in the sector, which will help lower lending rates,” he said in an interview captured in the Oxford Business Group’s The Report 2020.
The Bank of Ghana (BoG), in accordance with Section 28 (1) of the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930), revised upward the minimum paid-up capital for existing banks and new entrants from GH¢120 million to a new level of GH¢400 million from the effective date of December 31, 2018.
The aim of the recapitalization, according to the BoG, was to “further develop, strengthen and modernise the financial sector to support the government’s economic vision and transformational agenda”.
Also responsible for the directive were the high non-performing loans (NPL) and the relatively high level of exposures in a few banks, as per the governor’s assertion.
Banks’ lending rates remain an albatross on the necks of borrowers, especially with private sector businesses that have continually lamented the harsh impact of the high cost of credit on their bottom line.
From a high of 33percent in 2016, the rates have dropped to between 22 to 24 percent as at December 2019 but it still remains high, with the policy rate pegged at 16 percent.
Characterising the high lending rates in the banking sector is the relatedly high ratio of non-performing loans (NPLs), which quite impressively, has seen some decline over the last couple of years.
Banks’ NPL ratio stood at 18.2percent in 2018, it declined further to 17.3percent in October 2019 and subsequently ended the year at 13.9percent.
According to the central bank governor, the development could further strengthen the banks to cut down their lending rates even further.
“In addition, the gradual reduction in NPLs through loan write-offs, ongoing recovery efforts and the strengthening of banks’ risk management systems should help reduce risk premiums and further lower lending rates,” Dr. Addison said.
He added: “We anticipate that with macro stability and a reduction in NPLs, banks will be in a better position to lower lending rates and increase credit.”