Members of the Citi FM coalition on Interest Rate Spreads in Ghana have enjoined the Finance Committee of Parliament to strongly urge the Bank of Ghana (BOG) to act to halt the large spreads in interest rates in Ghana, in line with its mandate, which empowers it to determine the rates, and ask Deposit Money Banks (DMBs) to explain their spreads.
The coalition, made up of members of the Association of Ghana Industries (AGI), the Advertising Association of Ghana (AAG), The Ghana National Chamber of Commerce and Industries (GNCCI, The Ghana United Traders Association (GUTA), The Association of Road Contractors (ASROC), The Trades Union Congress (TUC) and other private sector associations, engaged with the committee to present findings from a research work on how the Central Bank of Nigeria managed the Interest Rate issue in that country.
Presenting findings from the Research, Prof Cletus Dordunoo of Claydord Consult and lead researcher, said Ghanaian Deposit Money Banks (DMBs), were making supernormal profits at the expense of customers.
According to the economist, while in the post-liberalisation period, we expect the spread to narrow to reflect efficiency gains and reduced transaction costs with removal of distortionary policies and strengthening of the institutional set up, Ghana's experience indicates a widening spread in the liberalisation period.
He said the Central Bank of Nigeria had legal and executive directives to control the rate of the spread, and had gone ahead to set up a company to manage assets.
The then governor of the Central Bank of Nigeria, Prof Chukwuma Soludo directed in March 2009, that banks "would also observe a lending rate which will be at most seven percent above the deposit rate.
All other charges would be at most 2 percent."
According to him, while this cap was removed by July of the same year, it was immediately replaced with other policy instruments that to a large extent controlled the spread.
He told the committee that in April 2010 the MPC in Nigeria requested all DMBs to submit a risk-based interest rate-pricing model to the Central Bank of Nigeria on a monthly basis, which was expected to justify the reason behind higher interest rates.
He noted that although the cap was removed, after a careful analysis of the interest rate policy management strategy in Nigeria, as well as the interview results, the cap still exists indirectly or de facto.
After discussions with the members of the Finance committee, the advocacy coalition urged parliament to consider legislation for the introduction of a cap on the spread directly.
The coalition called on the Bank of Ghana (BOG), The Ministry of Finance and The Ministry of Economic Planning (MOFEP) to reflect on the imposition of interest rate cap as and when needed, to help control the spread.
They also urged the BOG to conduct regular impact analysis of the spread on the real sector including manufacturing; SME, investment, employment and the yield curve and deploy Interest Rate policies that are sensitive to the real sector.
The coalition further enjoined the legislature to urge the Bank of Ghana to adopt a more realistic policy that narrow the spread, instead of the moral suasion which has proved largely ineffective and called for the use of a system wide macroeconomic model.
They further urged parliament to help reform the legal system to enhance enforcement of financial contracts and ensure the development of capital markets to enhance competitiveness.
Responding to the presentation, The Ranking Member and Former Minister of State at the Ministry of Finance, Dr Anthony Akoto Osei, recommended an integrated approach to dealing with the issue of high interest rate spreads, noting that the Ministry of Finance, Banks, and Citizens all had a role to play in the resolution of the matter.
He noted however that as a county we have to admit that the market is not perfect and we should not shy away from regulating the spreads when necessary.
In his view, one constraint limiting the legislature in dealing with such issues, in his view is the interpretation of article 108 of the constitution, which limits parliament from initiating legislation that would have an effect on the consolidated fund.
The Chairman of the committee James Avedzi, thanked members of the coalition for sharing their findings with the committee and promised to engage with the BOG and other stakeholders to address the issue.
Accra-based Citi FM convened the coalition after two years of advocacy work involving various stakeholders in a BUSAC-funded advocacy project.
Members of the coalition met with the Finance Committee of Parliament, to discuss the matter of high interest rate spreads in Ghana after holding various stakeholder engagements to deliberate on the effects of high interest rates on their business and agree on a way forward to address the issue.
The team that met with the Finance committee included, The Executive Secretary of AGI, Seth Twum Akwaboah, and The Executive Director of the AAG, Mr Francis Dadzie, Economist Prof Cletus Dordunoo of Claydord Consult, Sydney Caseley-Hayford of Bizghana and Samuel Attah-Mensah, the MD of Citi FM.