Banks are adjusting their base rates which are now averaging 30 per cent, in reaction to the Bank of Ghana's recent increase in the prime rate. The prime rate adjustment, which saw a whopping jump by 150 basis points, did come as a surprise to many. The bank, at its first Monetary Policy Committee (MPC) meeting this year, announced an upward adjustment in its prime rate to 18.5 per cent. The prime rate is the rate at which the central bank lends to the banks. According to the central bank, its decision was in response to weak underlying economic fundamentals. "Monetary policy tightening is necessary to break this incipient dynamics of price inflation and exchange rate expectations and as well withdraw some stimulus from the economy and to reinforce the anchor for inflation expectation and stability. It should also provide support to the prospective tightening of fiscal policy in the budget for 2009," the bank noted. But even before the ink had dried on the policy document setting out the details, individuals and business executives were at the throat of the central bank, calling for a review. Business executives were worried, quite frankly, that the upward adjustment would have dire consequences on their businesses. Therefore, some businessmen described the decision to up the prime rate as unfortunate and ill-timed. How appropriate. Developments in the financial sector monitored by Graphic Business have revealed that banks are now charging as high as 35 per cent on loans, and that even depends on your relationship with the bank. Some non-bank financial institutions and those with licences to operate loan companies are charging as high as 60 per cent per annum on loans. This development, many argue, makes the cost of doing business in the country too high and has the potential of crippling many business operations in the country. Cost of borrowing Research conducted by Graphic Business reveal that most of the banks have already factored in the 150 basis points prime rate increase in their lending rates. Fidelity Bank, for example, now has a base rate of 30 per cent, which is only indicative because some customers could be charged more, depending on their credit profile. In fact, as indicative base rates do not include upfront loan administration fee or facility fee, which average two per cent, current cost of borrowing could top 32 per cent for most people. First Atlantic Bank now has an indicative base rate of 29.77 per cent; The Trust Bank (TTB), 29.5 per cent; HFC, 29.75 per cent and UBA, 28.5 per cent. BPI Bank has the base rate of 32 per cent, International Commercial Bank 29.40 per cent, Merchant Bank 29.5 per cent. According to an investment banker and chief executive officer of Renaissance Capital, Ms Abena Amoah, "the signal from the Bank of Ghana to raise the base rate was wrong". She believes that the central bank acted in bad faith, considering the difficulties the economy was going through. The investment analyst opined that neighbouring Nigeria had cut interest rates in a bid to stimulate credit to the private sector, and that should have been the line for Ghana. The Graphic Business research also revealed that some local businesses are close to closing shop. There was evidence that some local companies are in genuine difficulties. Blue Skies Company, an exporter of tuna, for example, has had its business operations affected by the global credit crunch and the financial market turmoil, and would have preferred a local "stimulus" package to the interest hike currently going on in the country. Ms Amoah believes that such companies rather need support for their businesses in terms of lower interest rates that could kelp them to expand. "Things are tight," she stressed, adding that the last thing one expected was a further increase in the prime rate and subsequent increase in interest rates in the country. Generally, most analysts believe that the cost of capital would be too high for the average business operations in the country and that there was the need to reduce interest rates. Reports from the central bank indicating that banks were financially strong and robust, according to some business leaders, meant nothing to them if such performance does not translate into credit at competitive rates to help them expand their businesses. Risk profile Investment analysts are worried that considering the general feeling among some financial institutions that every individual in the country is a high risk borrower, some banks could charge as high as 35 per cent on loans. There is a risk build up in charged out lending rates, which could average between five and six per cent, according to analysts. According to the banks, your credit worthiness is highly significant, as that determines the interest they will charge on loans, and other advances to you. But given the fact that information on individuals is scanty, it is only the big companies that are able to borrow at much lower rates, leaving the individual who needs credit the most to pay the higher rates. According to some representatives of the business community in the country, their dire situation is even compounded by the fast depreciating cedi. The general mood is that the business environment is gloomy. The central bank recognizes this problem and believes that its policy initiatives could help to sustain the economy. "The last quarter of 2008 saw increased volatility on the foreign exchange market. Developments in the nominal bilateral exchange rates of the cedi to the three core currencies - the US dollar, the pound sterling and the euro - show that for the year the cedi depreciated cumulatively against the US dollar and the euro by 22.9 per cent and 19.1 per cent respectively. The cedi, however, appreciated by 7.1 per cent against the pound sterling,” the central bank noted in a report. But Ghana is not alone in this dire economic situation. In fact, most industrialized economies are also struggling and need capital injection to stay afloat. "Review of several emerging market economies and some key developing economies also show significant realignments in their exchange rates relative to the US dollar, some along with sharp decline in equity prices, reversal of capital Rows and contraction in output. There were significant depreciations in the following countries: Tanzania (10.7 per cent), South Africa (32 per cent), Zambia (29.2 per cent), Kenya (15.4 per cent), Nigeria (4.8 per cent), Chile (28.5 per cent) and Turkey (33.2 per cent)", the central bank reported. Last quarter of 2008 performance Average lending rates rose by 88 basis points in the fourth quarter of 2008 to 27.25 percent, and were within the range of 19.5 - 35.0 per cent. According to the central bank, credit conditions survey showed a further general tightening of credit conditions for enterprises in the fourth quarter of 2008. MPC reports indicated that banks continued to have a favourable but more selective credit stance for households in the last quarter, and this is bound to be worse in the first two quarters this year. Credit to households for mortgages was much tighter because of rising cost of funds and preference for shorter maturity. The bank’s measure of core inflation (defined to exclude energy and utility) which was 9.4 percent in December 2007, increased steadily to 13.9 per cent in December 2008, and further to 17.5 per cent in January 2009. The economic effects In August last year, as reported in Graphic Business, some non-bank financial institutions were charging as high as 96 per cent on loans. With the current situation, non-banking institutions could be charging even higher interest rates. Again for most companies and individuals who have contracted loons from banks and are on variable rate of interest, the interest hike on such loons could have adverse effects on their finances. Leading analysts are of the view that the high cost of credit administration and the favourable interest on government-dated securities could force the banks to shy away from giving loans to individuals. Currently, a 91-day treasury bill is selling above 24.72 per cent, the 182-day bill is around 26.40 per cent, the one-year note is selling at 20 per cent, while the two-year note is selling at 21 per cent. Experts say this development is likely to tighten credit to the private sector and therefore has the potential to undermine the growth of the sector. Story by Bernard Otabil and Boahene Asamoah Source: Graphic Business