Issues in Business Management and Economics
Vol.1 (3), pp. 061-075, July 2013
Article ID BM018, 015 pages
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Original Research Paper
Central bank’s policy rate on the cost of borrowing from some selected commercial banks in Ghana
Accepted 13 July, 2013
*Augustine Addo and Anthony Zu Kwame Seyram
Institute of Entrepreneurship and Finance,Department of Entrepreneurship and Finance,Kumasi Polytechnic,P. O.Box 845 Kumasi,Ghana.
*Corresponding author Email: firstname.lastname@example.org
Tel: +233 263928024
High cost of borrowing has been a source of distress to individuals and organizations in Ghana. There has been raising concerns on the reluctance of commercial banks to lower their lending rates upon decrease in the Central Bank’s policy rate. The aim of this study therefore, is to examine the problem of high interest rates in Ghana and establish the strength of association between the Central Bank’s policy rate and the lending rate of commercial banks. Also, the study considers the determinants of interest rate of commercial banks in Ghana. Ten commercial banks were randomly sampled for the study, which covers the period of March 2007 and December 2011. Using a linear regression model, the study establishes a statistically significant strong positive relationship between policy rate and lending rates of the sampled banks; indicating that commercial banks’ lending rate behaviour is affected by the Central Bank’s policy rate and inflation rate. The study further discovered that the lending behaviour of the commercial banking institutions has been influenced by the monetary policies of the Central Bank. Efforts made by the Central Bank of Ghana to implement strict monetary policies resulted in reduction in policy rates and inflation. This indirectly minimized the cost of borrowing and managed macroeconomic instability to ensure growth and development. Again, Central Bank reduced the mandatory primary reserves ratio to help banks reduce their cost and interest rates. Also, government reduced its domestic debt arrears to banks, and this helped to reduce their Non-Performing Loan (NPL). On the other hand, commercial banks managed their structural weaknesses and inefficiencies, high operating cost, outrageous charges and fees in granting credit in the banking system that prevent rapid transmission of lower rates of borrowing in their services in general.
Key words: Central bank, policy rate, interest rate, inflation, commercial banking, Ghana