Why Banks ought to reduce lending rates drastically
……Zambian Banks’s margins highest in region, BOZ should consider capping
By Mwansa Prospery Chalwe
The Zambian economy will not recover quickly enough as long as Commercial banks continue charging unjustifiable and exorbitant lending rates. Zambia commercial Banks interest rates continue to be high despite improvements in other economic fundamentals. The finance Minister, Felix Mutati was recently quoted in the Zambia Daily mail of 18th February, 2017 that high interest rates are constraining private sector growth and the economy as a whole.
In the last twelve months or so, the major determinants of lending rates have all being going down but there has not been any significant change in the lending rates of the roughly eighteen Commercial banks in Zambia. Inflation rate has dropped from a high of 22.5% to 6.8%, the monetary policy rate has gone down from 15.5% to 14.0%, the Bank of Zambia Statutory reserve ratio has reduced from 18% to 15.5% and the government Treasury bill rates has reduced from a high of 27% to 21% in February,2017.
The Zambian private sector and households have borne the blunt of the high interest rates in the last couple of years resulting in massive repossessions of farms, vehicles, houses, reduction in disposable income of households with loans as loan and mortgage repayments have more than double. There have also been numerous closures of businesses resulting in loss of jobs. Private sector borrowing has declined tremendously in past few years due to high interest rates resulting in low economic activity. The so much talked about growth and diversification will remain a pipe dream in this economic environment of limited and expensive capital to expand or start up a business.
In order to put the argument that Zambian Commercial banks are overcharging its customers, risk considerations notwithstanding, we should consider two economies in the SADC regions – Botswana and South Africa- and ask questions as to why the interest rate margins are so high compared to these two countries. The margins for the purpose of this article are the difference between what the banks charges its customers and the four major determinants of lending rates: The risk free interest rates as represented by Government Treasury bills, Bank of Zambia Policy rate, the inflation rate and the term deposit rates paid to customers saving with banks.
The current average Commercial bank lending rate is about 44% but there are banks that have been charging as high as 48%. The current Government Treasury bill rate averages around 21% which means the premium on risk free rate is 23% which gives a margin of 109%. Zambian inflation has dropped from a high of 22.5% to 7% in January,2017 and this means that banks’ positive interest rates which is the difference between inflation and commercial bank lending rate is 33% which is 417% above inflation. The Bank of Zambia’s old policy rate was 15.5% (revised to 14% last week). The difference between the policy rate and what commercial banks are charging customers is 24.5% which is 158% above the old policy rate. Commercial Banks mobilize deposits from customers for onward lending and prime customers are currently being paid interest on their savings on average about 25% which gives the banks a margin of 76% above term deposit.
According to the latest information available, the average commercial Bank interest rates in South Africa is 10.5% and the inflation rate is 6.9% which gives a positive interest rate of 3.6% which is 52% above inflation compared to Zambian banks’ 417% above inflation. The South Africa Reserve Bank’s repo rate which is the equivalent our Bank of Zambia Policy rate is 7.0% which means commercial banks are charging 3.55% margin above the repo rate and compare this with our banks’ 24.5% above policy rate or 158% above the policy rate. The South African Government bond rates which we can compare with our Treasury bills though the latter is more short term than the former is 8.97%. Commercial banks are charging 1.53% above the risk free rate.
In Botswana, the average commercial Bank interest rates in is 7.5% , the inflation rate is 2.7% which gives a positive interest rate of 4.8% which is 177% above inflation compared to Zambian banks’ 417% above inflation. The Bank of Botswana prime rate which is the equivalent our Bank of Zambia Policy rate is 5.5% which means commercial banks are charging 2.0% margin above the prime rate and compare this with our banks’ 24.5% above policy rate or 158% above the policy rate. The Botswana Government bond rates which we can compare with our Treasury bills though the latter is more short term than the former is 8.0%. Commercial banks are charging 2.5% above the risk free rate.
In neighbouring Zimbabwe, where the economy is in tatters, the average lending rate has been averaging about 18%.The Zambia Daily Nation of February 23, 2017 quoting the Zimbabwe Daily News reported an outcry in Zimbabwe about the super profits made by banks whose profits had increased by 42% year on year t because of charging “unacceptable charges” and “extortionist fees”.
“The super profits announcement was immediately followed by an announcement by Reserve Bank of Zimbabwe (RBZ) governor John Mangudya in his 2017 monetary policy statement that he had capped interest rates at 12% per annum from 18% and further reduced bank charges,” The Daily Nation reported.
Although we are liberalized economy, there is need to ensure that oligopoly and monopolistic tendencies are kept in check for the sake of the economy as a whole. It is rather disappointing that even after the Bank Of Zambia’s goodwill gesture of removing the capping of interest rates a few years ago to ensure economic stability and bank profitability, Commercial banks have abused the gesture by charging “extortionist” interest rates, fees and other bank charges. Zambian banks are giving a role deal to its customers. How does one, for example, justify a charge of K110 per page for a duplicate bank statement by one of the South African Banks as this writer was charged by his bank recently? In the light of the fact they are only about eighteen commercial banks in Zambia and most of them foreign owned, allegations by some observers that there is some collusion in interest rate pricing by our banks may have some credence.
The recent example in South Africa where banks were found by the Competition Commission to be involved in price fixing and market allocation regarding the South African rand and the US dollar since April 2015 is a case in point. The commission found that banks had a gentleman’s agreement dating back to at least 2007 to collude on prices for bids, offers and bid-offer spreads for spot trades on rand-to-dollar exchanges. This is a major red flag for Zambian regulators like Bank of Zambia and the Competition Commission of Zambia.
It is imperative that the Bank of Zambia should revisit the re-introduction of capping interest rates because Zambian Banks like those in Zimbabwe have failed to self regulate. This is also a lesson to Zambian government that multinationals including mines cannot be trusted to act in the best interests of the host country or the World economy as the 2008 financial crisis proved. They serve the interests of managers and shareholders. There is need to for reasonable regulation and oversight.
The Author is a former financial Advisor to Botswana Confederation of Commerce, Industry and Manpower (BOCCIM) under the USAID FINANCED Botswana Private Sector Development Project (BPED)- a Tripartite Project between the Government of Botswana, USAID and the Private Sector.