| Commercial banks in Ghana have come under attack from all angles including the ministry of finance, bank of Ghana, CEPA and renowned economists and financial experts such as Professor Cletus Dordunoo of ClayDord Consult to reduce to reduce the interest rate spread. The call for the reduction of the interest rate spread among commercial banks started early last year when the Monitory Policy Committee of Bank of Ghana started lowering the Prime Rate. The current spread between the prime rate, which is 14.5%, and the lending rate, which is about 21%, is 6.5%. When the prime rate was 16.5% last year, the difference between the prime rate and the lending rate, 23%, was 6.5% meaning that no matters low the prime rate would be, banks would maintain a spread of 6.5%. The minister of finance in a speech read on his behalf by the Diretor of Dudget, Mr. Samuel Baafi Nyantekyie at the sixth luncheon of the Ghana Association of Bankers said the interest rate spread is quite high and banks must reduce it. Earlier, Professor Dordunoo had also complained of the wide interest rate spread it is not good for the economy and commissioned a search into the reasons why that is so under a Citi FM's advocacy to reduce the gap. The Center for Policy Analysis (CEPA), an independent, non governmental think tank, which provides rigorous analysis and perspectives on economic policy issues has also described the real lending interest rate at about 10% as too high and burdensome for businesses. CEPA explained that with the expected rate of inflation in single digits, the real rate could rise to over 15%. This was contained in CEPA's review and analysis of the government of Ghana's economic policy for 2006. The crusade by the Bank of Ghana (BoG) to reduce the lending rate started earlier with the Governor of the BoG, Dr. Paul Acquah asking banks to reduce their lending rate to reflect the downward trend of the prime rate. However, banks have not heeded to the advice of these stakeholders because there is no legal backing for them to reduce the interest rate spread. As a financial analyst would say, that advice is 'moral suasion' because banks can abide by it or not. It is not by force. Industry is still complaining that cost of capital is still high whiles banks are saying that interests generated from loans are dwindling because of the decreasing interest rate. Some of the major sources of income for the banks, government securities have been threatened because of the much lower interest rates on them as government has deceased her borrowings from the public. It is therefore incumbent upon commercial banks in Ghana to be innovative especially in developing new products to make the necessary income to sustain their operations and make profit. Others however are saying that Ghana should adopt the Nigerian style where lending rate cannot exceed four percentage points (4%) above the prime rate. However, sources at the Central Bank say the time is not ripe for the country to introduce such a measure as the financial market has not been deepened enough and such an imposition would create negative ripples in the market. "The Nigerian financial system is well deepened and can implement it," the source said. The desire among commercial banks to make more profit and the general perception of risk in lending to the private sector has been some of the reasons for the high interest rate spread. Other reasons are the operation and transaction cost involved in securing advances from the central bank. With the secondary reserve requirement reduced from 35.0% to 15.0% whiles the 15.0% of deposits in the form of medium term securities for banks would no longer apply banks are expected to decrease the lending rates even further. Gearing towards a reduction in interest rate spread, would mean engendering keener competition among the banks so to compel modernization in the setting of base rates of banks. Commercial Banks however should device ways of creating innovative products that would enhance huge deposit mobilization and create savings culture among Ghanaians to make profit out of them. The retention of the prime rate at 14.5 % demonstrate a obvious sense of gains made in the macro economy although some financial experts say it should have be further down. They are of the view that with all economic indicators are pointing downwards; it would have been prudent for the BoG to have reduced the rate down. Interest rate spread is paramount in financial intermediation and as such, if the call for its reduction is not heeded to, the only answer one could guess is the crowding out of the private sector that is touted by the government as the engine of growth of the economy, thereby leading to lower Gross Domestic Product. Many people have complained that commercial banks are being exploitative and deviants for charging high lending/ interest rates whilst very low interests are paid on savings in the country. Currently, commercial banks pay a maximum of 9% on savings accounts. "If you put your money into account, you would lose big time". Prof Dordonu of Cleydord Consult has described the current state of the banking industry as a cartel. The motive of banks is to make profit but to do that they must come out with more attractive products to mobilize deposits and channel it to inter-bank.
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