The responsiveness of commercial banks’ lending rates to Bank of Ghana’s prime rates – the signal of monetary conditions in Ghana.
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Date
2008-10-21
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Abstract
To test the strength of the Bank of Ghana’s Prime rate as a signal of monetary conditions in Ghana, this study examines the strength of the relationship between the prime rate and the commercial bank’s interest rates. The Bank of Ghana’s Prime Rate aims at signaling to the financial market the central bank’s assessment of monetary conditions. From this perspective, it is expected that the commercial banks would respond appropriately to the movements of the Prime Rate.
Using regression techniques, tests of significance, trends and volatilities, the study establishes the strength of relationships among inflation and interest rates in Ghana. It was found that the Treasury bill rate is more powerful as a benchmark for the commercial banks when determining their lending interest rates than the banks of Ghana’s Prime Rate and inflation. Also, interest rates on savings deposits are too low. Real interest rates o savings deposits have been negative for a long time. That is why the savings habit of Ghanaians is poor and people prefer to buy Treasury bill instead of saving with the banks.
The practical recommendations are that policy makers should work harder to reduce government’s borrowing through the Treasury bills so that the banks’ lending interest rates would be reduced. Also, the commercial banks must be impressed upon to increase interests on savings deposits so that they can mop up idle funds from the unbanked. This would enable the private sector, which is the “engine of growth” in this “Golden Age of Business” to have access to credit so as to expand employment and output.
Description
A thesis submitted to KNUST School of Business in partial fulfilment of the requirements for the degree of Master of Business Administration, 2008