A cynic may say, there is clearly a conspiracy by the nation?s financial institutions against the overriding national interest to develop. What else could explain the current situation whereby, with year-on-year inflation standing at 15.7 per cent, when you deposit your money in a savings account it earns you interest of 9 percent and when you go to the same bank for a loan it charges you 19.75 percent?

Investigations made by The Statesman show that currently the average spread between interest rates on saving and lending stand at 19.75 percentage points. This is in spite of the fact that commercial bank base rates have declined from an average of 25% in December 2004 to 22.5% in June 2005. Break it down further, and what you discover is that the average interest rate on saving has been kept firmly at 9% since February this year, almost 8 percentage points above the headline consumer price inflation. Moreoever, the average lending rate which the banks charge their clients have in fact remained at 28.75% since December 2004.

The situation suggests that the reported combined pressure from the Bank of Ghana and the Ministry of Finance over the last few months has failed to persuade the banks to ease the cost of borrowing, especially to the private sector.

On Monday, the Governor of the Bank of Ghana, Paul Acquah noted that the benchmark 91-day Treasury bill had gradually declined from 17.20% in March 2005 to 15.55 by mid-July.

?Similarly,? he said, ?interbank overnight money market rates,? the rate at which the banks lend short-term funds to each other, ?had moved from 16.21% in March 2005 to 15.8% by June, and fell further by 60 basis points in mid-July.? While observing that the commercial bank base rates have also followed the downward pattern, the Governor admitted that the decline has been contrasted with ?rigidly large common average real interest rate spreads being maintained by the financial institutions.?

A recent World Bank survey puts Ghana as a haven for the most profitable banks south of the Sahara. ?The banking system as a whole continues to remain well capitalised, profitable, fairly liquid and stable,? said Dr Acquah, with the non-bank financial intermediaries, like the fast-growing, innovative Unique Trust Financial Services, registering strong growth in asset with improved liquidity.

It is arguably the golden age of banking in Ghana. The unusually low capital requirement of $7 million to set up a bank in Ghana is attracting more banks, mainly from Nigeria, to our shores. Yet, this surge in service providers has not been matched by a coterminous rise in competitive rates.

This has meant that in spite of positive macroeconomic indicators, including record stability and reduction in the currency market and T-bill yields, respectively, bank credit to the private sector as a percentage of gross domestic product (GDP or value of all final goods and services produced within a nation in a given year) registered a marginal increase ? from 11.3% in May 2004 to 12.7% in May 2005. While this may the highest in the last five years, in 2000, the vision of a middle-income status was conservatively perched at the year 2020, not 2010, 2012 or 2015, as ambiguously envisaged by the present administration.

There is a growing worry that President Kufuor?s well-meaning vision to accelerate economic growth and create wealth as a means of reducing poverty is being frustrated by the financial sector. This is because, the unusually low level of equity financing in our economy means that businesses have to rely more on debt financing to grow. Furthermore, regardless of how accommodating Government policies to the private sector may be, without the requisite cooperation of the banks in providing affordable loans, the economy is very likely to either remain fundamentally stagnant or grow at a far slower pace than desirable.

Unfortunately, Government and the central bank appear disturbingly helpless by their text-book appreciation of a free market economy.

Figures released Monday by the MPC, for example, show that ?the cedi exchange rate has appreciated in nominal and real terms against the British Pound and Euro while remaining stable against the US dollar.? Unlike the past, where local banks saw their foreign exchange accounting and trading seriously affected by high depreciation of the cedi, the current stability has helped the sector in the foreign exchange market, with a 53% year-on-year increase in total purchases and sales of foreign exchange, amounting to $2.9 billion by June 2005, from $1.9 billion.

A survey by the central bank on credit to small and medium scale enterprises over the 2001-2004 period shows that the relatively low inflation environment has ?spurred growth in real credit to SMEs especially in 2004.? What the figures do not show, however, is what great leaps the SMEs could have made were they spurred on to higher expansion drive by a more listening commercial banking environment.

The figures speak volumes: While SMEs are known to constitute anything between 75% and 90% of economic activity, their share of advances from the banks has increased from a mere 0.95% of GDP in 2001 to 1.54% of GDP by 2004 - figure Dr Acquah admits to be unacceptably low. This is approximately $150 million. In an economy that is hazardously steep in the informal sector, the scantiness of lending to the SMEs becomes even more glaring when measured against the country?s estimated purchasing power parity of $48.27 billion for 2004. Total credit to the private sector increased from 11.85 to 13.05% of GDP over the same period, according the BoG.

The survey findings also indicate that the swings in lending in favour of SMEs are ?more pronounced in commerce, less so for agriculture, services and manufacturing, and weakest for the transport and other sectors.? On Monday, Dr Acquah rejected the call from EMPRETEC for the central bank to fix a quota for financial institutions to lend to SMEs. (See P.9, col. 1, for full story).

As argued in our editorial today, the significance of the rigidly maintained large interest spreads to the economy cannot be overstated. When the Government or central bank is restricting money and credit, firms find loans difficult to obtain and investment tumbles. Small business is especially hard hit because the larger firms tend to have their credit needs catered to first. The economy pays for high interest in income not earned and in output not produced. When investment is cut by high interest, industry slows down the rate of expansion of the total output capacity of the country?s producers and service providers. In effect, the rate of growth of output slackens when high interest prevails.