The Business of Borrowing And Paying Interest

It would have been a wonderful idea if we didn't have to pay interest on the money we borrow. I am sure every borrower would love that.

That is to say, you go to somebody or to the bank to borrow twenty million cedis to do business. After (say) five years, you keep all the profit you would have made, take the twenty million cedis to the person or the bank and say, "Here is your twenty million cedis. Thank you very much."

Unfortunately, if things were like that, nobody would feel encouraged to lend his or her money to anybody. I mean, if I am going to give you money only for you to return the same amount to me after some years, then I could as well keep my money. After all, it is possible you may not return it. God forbid, but you may even drop dead the following day, and that would be the end of my money.

So, the whole business of lending and borrowing money would not be there if you take away the element of interest. And then, the banks and rich people with money would continue keeping their money, while poor people without money would continue not to have any money to borrow.

Expanding Businesses

Most of the time, people borrow from the banks to do business, which is a good thing, since it is only when more people open up businesses that others can get jobs to do. Of course, we may be able to save some money from our personal income and start modest businesses. That is also good.

But if, as a nation, we want to address our unemployment problem quickly enough, then people must set up more than modest businesses. And to do that, we need the banks to lend to us. Or put in another way, we need to borrow from the banks.

Everybody knows that the way to reduce poverty is for our people to get jobs so that at the end of the month, they can collect their pay and take it to their families. Therefore, anything that allows business to be set up and provide jobs for people has to be taken seriously because that is people's daily bread.

How much interest?

Now, one of the things people look at when they are going to borrow from the banks is the bank lending rate. It is the bank lending rate that determines how much interest business owners would pay on the money they borrow. If the rate is reasonable, businesses are happy to borrow. If the rate is high, businesses can't borrow and expand, and not many jobs would be created.

Sometime ago, bank lending rates were very high. Fortunately, for some time now, they have been coming down. In December 2000 for example, bank lending rates were in the neighbourhood of 47% per year. That is to say, if you borrowed from the bank, you paid about half the amount (or the remaining amount) every year as interest. Obviously, it was difficult for businesses to borrow money, pay this interest and make profit at the same time. Hence, businesses did not expand and very few jobs were created.

Today, bank lending rates dropped to about 24% per year. It is heart-warming to hear that government is still not satisfied with this rate, and is trying hard to let it come down more. That is good news for business and for job creation.

Treasury Bills

Most people don't know; but sometimes, government also borrows from ordinary people like you and me. Government uses this money to meet some of its expenses. When government borrows from individuals, it gives the individuals pieces of paper called treasury bills in return. It is these papers that show that government owes you.

The treasury bills would show how long government intends to keep your money. So, the 91-day treasury bill for instance would allow government to keep your money for 91 days, after which you can go and claim it together with the interest.

The treasury bill rate tells how much interest government is going to pay on the money. If the rate is high, it means government is going to use a lot of the tax-payers money to pay interest on the money it has borrowed, which also means that money that should have gone into health services, education, road construction, and so on, is used to pay interest on treasury bills.

The welcome news though is that, treasury bill rates have come down substantially in recent years. The 91-day treasury bill rate, for example, has reduced from 42.0% in December 2000 to 9.6% today, April 2007.

Attention Students!

Now, with the establishment of the Student Loan Trust, students have to take keen interest in treasury bill rates. Under the Trust, students would repay the loans they take at the treasury bill rate. That is to say, as treasury bill rates go up, the debt of students would also be swelling.

I think every student taking the student loan now has to pray that treasury bill rates remain low. If there is macroeconomic instability and treasury bill rates go up, it will hurt their pockets when they start paying back the loan.

Bank of Ghana Prime Rate

Finally, there is the mother of all interest rates, that is, the Bank of Ghana prime rate. Or simply put, the prime rate. It is also very simple. It shows the interest at which the Bank of Ghana lends money to the banks.

For the avoidance of doubt, the Bank of Ghana is the nation's personal bank. It is also the mother of all banks because it regulates and supervises the work of all the banks in the country. But we need not bother ourselves so much with all those details.

The long and short of it is that the Bank of Ghana prime rate is the point of reference for all the other interest rates. When the prime rate goes down, treasury bill rates and the bank lending rates also go down, so that students won't pay so much on the money they borrow. And businesses can also borrow and expand their businesses so that more people can get jobs to do and have more money in their pockets.

How we have fared

Generally, whether or not interest rates are going to go up or down depends very much on how government manages the economy. If government spends wisely, and allows the Bank of Ghana to pursue the right monetary policies, interest rates will go down.

If government does the opposite, there would be macroeconomic instability and interest rates would run wild. The following table shows how far we have come in the management of our interest rates since December 2000.

Link to allAfrica.com: Ghana: The Business of Borrowing And Paying Interest (Page 1 of 2)