Is There a Link Between the Ghana Reference Rate and Lending Rates of Banks in Ghana?

Abstract

This thesis examined the macrodynamic hyperlink between the Ghana Reference Rate (GRR) model and interest rates in Ghana. Although other studies abound, both in Ghana and abroad, that explored interest rates and its impacts on commercial bank lending rates, none of these studies specifically studied addressed the question of whether the GRR has any link with commercial bank lending rates. This study employs the non-experimental, quantitative-correlational, ex-post-facto design within a time series framework. Besides, it utilises secondary, quantitative data lending rates, the GRR, and the control variables collected from the website of the Bank of Ghana (BoG), representing monthly time series data spanning the period April 2018 to January 2020, capturing only the post-GRR introduction period in Ghana. The data was analyzed using descriptive statistics and inferential statistics. After performing individual unit root tests and the Engle-Granger single equation cointegration tests coupled with graphical representations, a multivariate linear regression model was employed to examine the effects of the Ghana reference rate (GRR), bank-specific variables of profitability, liquidity, interest expenses, and the macroeconomic factors of the exchange rate, money supply, and inflation rates on commercial bank lending rates in Ghana. The parameters of the multivariate regression model were estimated using the Fully Modified Ordinary Least Squares (FMOLS). Moreover, a pairwise Granger causality test was performed to test the causal link between the GRR and lending rates in Ghana. The robustness of the FMOLS multivariate regression findings, in terms of the consistency of the statistical significance and effects of the parameter estimates, were checked using three estimators, namely, 1) Dynamic OLS (DOLS) Estimator; 2) Two-Stage Least Squares (TSLS); and 3) Generalized Methods of Moments (GMM). The predictive ability of the FMOLS model was further ascertained using the bias proportion, variance proportion, andcovariance proportions. The FMOLS model is further tested for serial correlation and asymptotic normality. The study pursued five main research questions and below is a summary of the findings. Concerning the first research question, what is the causal effect of the GRR on commercial bank lending rates in Ghana, the analysis revealed that the Ghana Reference Rate has a positive and statistically significant causal effect on commercial bank lending rates in Ghana based on the FMOLS and Granger causality results. The finding implies that the introduction of the GRR has caused commercial bank lending rates to increase substantially, hence the two variables are temporally related. Concerning the second research question was, what are the effects of the bank profitability or financial performance indicators of ROA and ROE on lending rates of commercial banks in Ghana, the results revealed that the bank profitability variable of ROA exerts a statistically significant positive effect on lending rates, whiles the effect of ROE on lending rates is negatively significant. In relation to the third research question, to what extent does the bank liquidity variable of Core Liquid Assets to Total Assets (CLATTA) ratio influence lending rates of commercial banks in Ghana, the analysis indicated that banks liquidity (CLATTA) has an insignificant positive relationship with lending rates. When it comes to the fourth research question, what are the effects of bank interest expense variables of savings deposit interest (SDR) rates and 3 months’ Time Deposits Rates (TDR) on commercial bank lending rates in Ghana, the results reveal that positively significant effect of the Savings Deposit rate (SDR) on lending rates, whereas the 3-Month-Time Deposit rates (TDR) have a significant negative effect on lending rates in Ghana. Regarding the fifth and final research question, do the macroeconomic factors of the exchange rate, money supply, and inflation rates significantly impact commercial bank lending rates in Ghana, the findings reveal that all the macroeconomic variables of inflation, and exchange rates and money supply. influence commercial bank lending rates negatively and significantly. The study recommends, amongst other things, that future studies focus on the determinants of credit risk premium of commercial banks as the findings from that study could help banks properly determine interest rates in Ghana.