Commercial Banks in the country are expected to start using a new formula for interest rates calculation from April this year. The Ghana Reference Rate as it is referred to is already being described by industry watchers as revolutionary because it could deal with this age-old problem of lack of transparency in determining interest rates.  Why Ghana Reference Rate? Sources tell JoyBusiness the introduction has been influenced by challenges with the current module for interest rate calculations and attempts to move towards a more market-friendly and relevant structure. The Bank of Ghana (BoG) is also looking at moving towards a system where there is a laid-down procedure of calculating interest rates among various commercial banks to ensure equity and high level of transparency. History The Central Bank in 2012 came up with some guidelines on base rate computation. This was later revised in 2013, however, five years after its implementation, a number of challenges have been identified by some key stakeholders within the industry. The BoG in consultation with the Ghana Bankers’ Association (GBA) reconstituted the working group to review the existing base rate model and develop a new framework for base rate determination. The objective of this review was to ensure the fulfilment of central bank’s commitment to move towards a more market-based model of base rate setting in the medium to long-term.  Implementation of Ghana Reference Rate JoyBusiness understands the Ghana Reference Rate is expected to take effect from April 4 this year. The implementation of this rate is supposed to replace the current base rate model. This means that Commercial Banks are not expected to adapt to their own Base rate, but rather, price their credit upon implementation of the Ghana Reference Rate by adding or subtracting risk premium.  How would the Ghana Reference Rate Work? The Ghana Reference Rate, which would be influenced by current treasury bills rate, the Bank of Ghana Policy rate, Inter-bank lending rates and inflation rate, would replace the current base rate setting for commercial banks. GBA in collaboration with the Bank of Ghana is expected to come out with the Ghana Reference Rate on the first Wednesday after the end of each month based on data from the last working day of previous month. The rate shall be published by the Bank of Ghana and also made available on its Website. Each bank is required to disclose to its customer in a facility, fees and charges, the size of the spread around Ghana Reference Rate that is offered to lend less than the Ghana Reference Rate and the factors responsible for the spread. The Spread may be unique and also depend on factors like customer risk profile, cash flow and facility available. Benefits to loan seekers JoyBusiness also understand that the Ghana Reference Rate would be applicable to any fresh loan that would be closed by a customer from next month. It is believed that this module would also help address the challenge of static rates when all the variables are going down. Reactions from industry players On her part, Managing Director of Barclays Bank, Patience Akyianu, said the Ghana Reference Rate would bring about some transparency in the determination of interest rates in the country. “There was just too much divergence in base rates across banks, one base rate is 17 percent, another is 26/25 percent, what can possibly account for that except that we are allowed to use our own parameters and variables like return on equity and stuff like that,” she added. Mrs Akyianu believes getting one consistent rate which factors in the development of T-bills rates and policy rates is the right way to proceed. President of the Ghana Bankers Association Alhassan Andani is also optimistic that implementation the of new formula for interest rate calculation would help reduce cost of credit in the country. Chief Executive of Dalex Finance, Ken Thompson, on his part, argued that if this initiative is meant to cap interest rates, then it might not work. He, however, welcomes the move by Bank of Ghana to implement this new formula.