Managing Interest Rate Spreads in Ghana: Some Policy Discussion

Abstract

This paper attempted to investigate the key determinants of high interest rate spread in Ghana and what policy measures authorities can implement to address this inherent problem facing the domestic market. The study suggested that interest rate spread in Ghana remains one of the highest when compared to peer-countries across the globe and particularly, prevailing spreads in sub-regional economies. It was further observed that real deposit rate has remained negative over the years while at the same time lending rates and other rates in the market have firmed up strongly in line with developments and trends in policy rate decisions in all segments of the loanable markets. Also, the paper revealed that high interest rate spread in Ghana is determined primarily by risk-aversion attitude of banks, the rate of inflation, the level of provision for bad debts, credit risk, exchange rate risk, cost of bank operations, scale of bank operations and finally, the level of economic activities(GDP). There is therefore the need to fashion out pragmatic policies aimed at reducing the high interest rate spread currently prevailing in the market as perceived by corporate bodies and the general business environment. Banks need to innovate and develop corporate strategies and capacities which aim at reducing their general costs of operation and other related overhead cost among others.

Keywords: Spread, interest rate, fully modified least squares, policy, narrow and broad definitions