BoG Introduces 4 New Measures to Lower Lending Rates

The Bank of Ghana has initiated a number of new prudential and market conduct regulatory measures to help foster more competition in the banking sector, in order to help lower lending rates.

This has become necessary since for many years, the monetary policy transmission process has remained subdued with policy failing to adequately impact on loan pricing.

The decision was made known by the Governor of the BoG, Dr. Ernest Addison at the press briefing of the 91st Monetary Policy Committee meeting on Monday.

The subdued transmission process of monetary policy over the years has resulted in limited access to credit, high cost of credit to households and businesses, and has posed challenges to the attainment of higher economic growth.

“Data presented to the Committee revealed that factors such as high operating costs of banks stemming from operational inefficiencies, inadequate disclosures of the risk premium factors in the cost of credit determination, the existence of high Non Performing  Loans and government’s appetite for domestic borrowing would have to be addressed comprehensively to help lower lending rates and improve on the transmission of policy changes to the real economy in support of higher and robust economic activity,” the Governor said.

The new measures being put in place to address high lending rates, include the setting aside of two percent of the central banks’ primary reserve, which is about GHc 2 billion, to support targeted lending to SMEs as part of the Enterprise Credit Scheme announced in the 2020 budget. These funds will be held at BoG and will be available to banks that participate in the scheme.

The Bank of Ghana will also explore the possibility of setting a minimum loan to deposits ratio to ensure that more deposits mobilized by banks are channeled to viable private sector projects.

In view of this, the Governor stated that the Bank will hold further consultations with the banking industry to determine the impact of such a regulatory measure, and if warranted, determine the level of such a ratio and appropriate monitoring and enforcement mechanisms to promote its effectiveness.

The central bank is further expected to work closely with banks to ensure that banks do not pass on their operational inefficiencies and overhead costs to their clients.

To do this, Dr. Addison said that steps will be taken to align bank managements compensation with overall bank performance by linking it to clear parameters including the quality of a bank’s assets.

The BoG is expected to scrutinize compensation policies for Chief Executive Officers and key management personnel as well as Board of Directors of universal banks.

To further deepen transparency in the determination of lending rates, the Governor stated that banks will be required to develop and publish a clear framework on the risk premium build-up that impacts on an individual borrowers’ credit profile.

This is expected to provide borrowers with a more-informed basis for negotiating lending rates with their banks, and enhance transparency in the credit delivery process as well as promote responsible credit behaviour from borrowers.