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Understanding the cost of credit in Ghana
There have been calls for the Bank of Ghana and Commercial banks to cut down the cost of credit, as the country's new framework for calculating interest rates takes shape. The Ghana Association of Bankers and the Bank of Ghana worked on this framework to influence the determination of interest rates by commercial banks. Sulemana Mohammed, CEO of Doobia joins CNBC Africa from Ghana to discuss this and other developments in Ghana’s banking sector.
Wed, 18 Apr 2018 08:12:33 GMT
Disclaimer: The following content is generated automatically by a GPT AI and may not be accurate. To verify the details, please watch the video
AI Generated Summary
- The government has implemented monetary policies to reduce the policy rate to 18%, but the cost of credit remains high for commercial loans.
- The high risk environment in Ghana, characterized by non-performing loans, is a significant factor contributing to the high cost of credit in the banking sector.
- There is a time lag between policy movements and their impact on lending rates, with efforts to reduce the cost of credit likely to take one to two years to materialize.
Ghana's banking sector has been under scrutiny as calls for the Bank of Ghana and commercial banks to reduce the cost of credit have increased. The country has been working on a new framework for calculating interest rates in an effort to influence the determination of interest rates by commercial banks. Sulemana Mohammed, CEO of Doobia, recently joined CNBC Africa to discuss the developments in Ghana's banking sector and shed light on the challenges faced in reducing the cost of credit.
Over the past year, the government has implemented monetary policies that have led to a reduction in the policy rate to 18%. The central bank has made significant cuts, with a total of 550 basis points slashed last year and an additional 200 basis points this year. Despite these efforts, there has not been a corresponding downward trend in the cost of credit, particularly for commercial loans. Commercial banks have struggled to transmit monetary policy changes to lending rates, with the high number of non-performing loans in the banking sector being a major challenge.
One of the main factors contributing to the high cost of credit in Ghana is the perceived risk in the environment. While interest rates have come down, the overall risk profile remains high due to the prevalence of non-performing loans. Banks have become more cautious in extending credit, focusing on managing existing risks rather than taking on new ones to boost earnings. The cost of funds for commercial banks, which includes deposits and borrowing from the central bank, also impacts the cost of lending. While the policy rate is one source of borrowing for banks, there are other factors at play that influence the overall cost of funds.
Despite ongoing improvements in the economy, there is a time lag between policy movements and their impact on lending rates in Ghana. This slow transmission mechanism has been a concern for both stakeholders and the central bank. Sulemana Mohammed noted that while efforts are being made to reduce the aggregate cost of borrowing for banks, it is likely to take one to two years to see significant changes in the cost of credit in the country.
In conclusion, addressing the high cost of credit in Ghana's banking sector will require a multi-faceted approach that takes into account the risk environment, non-performing loans, and the overall cost of funds for commercial banks. While the government and the central bank are working towards reducing the cost of credit, stakeholders in the industry will need to collaborate to create a more favorable lending environment for businesses and individuals alike.
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