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THE HIGH INTEREST RATE SPREAD IN GHANA: COULD
POTENTIAL INCOME OPTIMIZE CONSUMER CREDIT RISK
PROFILE AND MINIMIZE LENDING RATES?


Charles K. Addo
Catholic University College, Ghana


ABSTRACT

The Basel III Committee on Banking Supervision recently proposed that banks should
address the problem of financial and economic shocks by moderating credit growth,
and adjusting their capital buffer range immediately credit begins to show signs of high
growth levels. The committee noted that losses in the banking sector spillover to the
entire economy. This proposal was in response to the worldwide financial crises that
witnessed general credit freeze-up. In Ghana, there is widespread perception of high
interest rate spread, and lenders frequently attribute this state of affairs to high
consumer credit risk profile that results in lagged nonperforming loans. The
committee‟s proposal has the potential to further exacerbate the high interest rate
spread in Ghana; through some kind of banks‟ self-imposed increase in „reserve
requirements.‟ This study, therefore, examined whether potential income could
complement credit history in optimizing the consumer credit risk factor and bring the
lending rate down. Results were significant, F (2, 143) = 83.13, p < .001; and credit
history and potential income predicted 53.1% of the variance in loan repayment. This
study contributes to the literature on credit risk management. This will permit a better
assessment of lending policy implications, and ultimately stimulate macroeconomic
activities.


Key words: Credit growth, interest rate spread, consumer credit risk profile, credit
evaluation.

 
JEL Codes: E4, E5