University of Ghana http://ugspace.ug.edu.gh UNIVERSITY OF GHANA EFFECTS OF MONETARY POLICY RATE ON INTEREST RATE AND LEVEL OF CUSTOMER BORROWING BY JOSEPH BOAMAH (10700605) THIS LONG ESSAY PRESENTED IS SUBMITTED TO THE UNIVERSITY OF GHANA LEGON IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF MASTER OF SCIENCE IN ACCOUNTING AND FINANCE AUGUST, 2019 University of Ghana http://ugspace.ug.edu.gh DECLARATION 1 the undersigned hereby declare that this Long Essay is the result of my own original work towards the degree of Master of Science in Accounting and Finance and that no part of it to the best of my knowledge has been presented for another degree in this university or elsewhere except where acknowledgement has been made in the text. ……………………………………. …………………………… JOSEPH BOAMAH DATE (10700605) i University of Ghana http://ugspace.ug.edu.gh CERTIFICATION I hereby certify that this long essay was supervised in accordance with the procedures laid down by the University. …………………………………………………………. ………………………………… DR. CLETUS AGYENIM-BOATENG DATE (SUPERVISOR) ii University of Ghana http://ugspace.ug.edu.gh DEDICATION I devote this project to Almighty God for Bestowing on me the grace, favour, opportunity and making this project a success. I dedicate this work also to my family especially my parents, Mr. Samuel Kofi Adu (late), Deaconess Comfort Yaa Asor, Mr. Nimako Siaw Richard and Mr. Adu Reynolds Addo and to all sundries whose names could not be mentioned for their profound love and support throughout my stay in school. iii University of Ghana http://ugspace.ug.edu.gh ACKNOWLEDGEMENT I express my heartfelt gratitude to God Almighty for giving me the grace to commence and complete this thesis successfully. Appreciation and gratitude goes to my supervisor, Dr. Cletus Agyenim Boateng, whose awesome supervision coupled with his constructive criticisms have helped reshaped the entire work. This project would not have been successful without the support and assistance of the following Deaconess Comfort Yaa Asor, Mr. Nimako Richard Siaw, Mr. Adu Reynolds, Ms. Mary Boamah, Ms. Beatrice Oppomeah, Mrs. Vida Adjeiwa and Mr. Alexander Akyeampong Boateng whose encouragement and support in diverse ways brought my goal of climbing higher on the academic lather to fruition. I am also thankful to all my lecturers and colleague students for their guidance, critics and sustenance which has helped me come this far. Even though the research is centered largely on the result of my study, I have obtained a great deal of guidance from a wide range of personalities, books and publications, the sources of which are acknowledged in the text. iv University of Ghana http://ugspace.ug.edu.gh TABLE OF CONTENTS DECLARATION............................................................................................................................ i CERTIFICATION ........................................................................................................................ ii DEDICATION.............................................................................................................................. iii ACKNOWLEDGEMENT ........................................................................................................... iv TABLE OF CONTENTS ............................................................................................................. v LIST OF TABLES ........................................................................... 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ABSTRACT .................................................................................................................................. ix CHAPTER ONE ........................................................................................................................... 1 INTRODUCTION......................................................................................................................... 1 1.1: Background of the study .......................................................................................................1 1.2 Statement of the Problem .......................................................................................................4 1.3 Objectives of the study ...........................................................................................................5 1.4 Research Questions ................................................................................................................5 1.5 Scope of the study ..................................................................................................................5 1.6 Significance of the Study .......................................................................................................6 1.7 Organization of the Study ......................................................................................................6 CHAPTER TWO .......................................................................................................................... 7 LITERATURE REVIEW ............................................................................................................ 7 2.1 Theoretical Literature .............................................................................................................7 2.1.2 Traditional Theory: ......................................................................................................... 7 v University of Ghana http://ugspace.ug.edu.gh 2.1.3 Rational Expectations Theory ........................................................................................ 7 2.2 The Effects of MPR Fluctuation on Interest Rate of the Commercial Banks ........................8 2.2.1 Evolution of monetary policy frame work in Ghana ...................................................... 8 2.2.2 Monetary Policy Regimes .............................................................................................. 9 2.3 The Effects of Monetary Policy Rate on Interest Rates of Commercial Banks ...................10 2.3.1 The effects of high lending rates on the bank ............................................................... 12 2.3.2 The effects of high lending rates on the economy ........................................................ 12 2.4 Factors Which Account for High Lending Rate...................................................................13 2.4.1 The impact of inflation on interest rates ....................................................................... 13 2.4.2 The impact of risk of investment on interest rate ......................................................... 14 2.4.3 The impact of taxes on interest rates ............................................................................ 14 2.4.4 The influence of the central bank’s Polices on the lending rate ................................... 14 2.5 Interest Rate Risk .................................................................................................................14 2.5.1 Sources of interest rate risk .......................................................................................... 15 2.5.2 Effectss of interest rate risk .......................................................................................... 16 2.6 Monetary Policy and Bank Lending.....................................................................................18 2.6.1 Bank portfolio behavior ................................................................................................ 18 2.6.2 Terms of bank lending .................................................................................................. 20 2.6.3 The impact of high lending rates on borrowers. ........................................................... 21 2.7 The effects of high lending rates on the borrowers ..............................................................21 vi University of Ghana http://ugspace.ug.edu.gh 2.7.1 The effects of high lending rates on the bank ............................................................... 22 2.7.2 The effects of high lending rates on the economy ........................................................ 23 2.7.3 Stock Price Effectss ...................................................................................................... 23 2.7.4 Investment Effectss ....................................................................................................... 24 2.7.5 The General Population ................................................................................................ 24 2.8 Ways to Address the Effectss of High Lending Rates on Borrowers, Banks and The Economy.....................................................................................................................................24 2.8.2 Reduction of the interest rate ........................................................................................ 25 2.8.2 Usury laws .................................................................................................................... 25 2.8.3 Credit rationing ............................................................................................................. 25 CHAPTER THREE .................................................................................................................... 27 METHODOLOGY ..................................................................................................................... 27 3.0 Introduction