ECONOMISTS and bankers this week dismissed claims that banks are not paying a fair interest rate on savings deposits, arguing that the seemingly high costs of borrowing have more to do with poor economic fundamentals than profiteering on the part of banks.
Report by Clive Mphambela
These comments come amid growing public outcry against low deposit rates being paid on savings, high loan interest rates and bank charges being levied on customers.
The central bank recently came under pressure to introduce controls to keep borrowing interest rates low to encourage business to borrow capital and ultimately spur economy growth.
A senior banker interviewed by businessdigest put forward various arguments against interest rate controls.
“First, controlling the rate at which banks can lend wrongly puts all banks in one basket,” the banker said. “Different banks have different costs of funds and controlling lending rates will necessarily punish banks with higher costs.
Typically, it’s the smaller banks that would suffer and ultimately competition will be reduced in the market, disadvantaging consumers.”
Another banking expert said banks would find creative but more costly ways of circumventing the controls resulting in more hidden costs and non-interest charges for customers.
“Banks will simply hike costs such as arrangement and drawdown fees and insurance charges in order to make up for lost interest income. In such cases customers will end up paying more than they would pay without the attempts to control rates and charges.”
The overall impact of controls will be a reduction in lending in a capital-hungry economy.
Establishing a lower-than-market interest rate will reduce the quantity of credit supplied at the controlled interest rates. The other risk of controlling interest rates is that credit rationing will have to occur, giving rise to a situation where corrupt practices may manifest themselves or lenders will move resources to informal markets to seek superior returns.
There have been accusations that interest rates and bank charges are too high. Banks are also accused of fleecing depositors and borrowers through unfair interest rates and charge structures.
Prominent economist Eric Bloch says the interest rate regime in the economy is reflective of the economic conditions prevailing in the country and any attempts by the authorities to control rates and charges may force the collapse of some banks.
“It is completely unrealistic to even think of controlling bank charges in the economy,” said Bloch. “The hard facts are that banks are so illiquid and grossly undercapitalised since dollarisation (multi-currency regime) and some have been trying to raise liquidity and increase or protect their small capital bases through revenues raised via interest and other charges.”
“However, opportunities for income generation are limited by the fact that most banks are inadequately funded. Raising bank capital thresholds will not only increase the ability of banks to meet customer needs as far as credit is concerned but contribute to the restoration of public confidence in the banks, resulting in the banks attracting more of the deposits that are still sitting outside the banking sector.”
Bloch said the public was still scared of banks, adding there are also fears of the sudden return to the defunct Zimbabwe dollar. Such fears, he said, restricted the lending power of banks and made long term credit decisions more difficult.
“On one hand, we have the Minister of Finance (Tendai Biti) indicating that we have fully demonetised the Zimbabwe dollar and we will not see a return of any form of local currency until the economy has stabilised. On the other hand, we have a Zanu PF conference passing a resolution for the return of the Zimbabwe dollar. This creates confusion and uncertainty,” he said.
Chartered financial analyst and head of research at MMC Capital, Itayi Chirume says that high interest rates being charged on loans and low deposit rates are reflective of the high risk premium to doing banking business in Zimbabwe at the moment.
“Yes inflation is low in the economy having benefitted from dollarisation, but it faces significant downside risks on the credit side, which must be priced into the cost of money,” Chirume said.
He said the transition to a multi-currency system has not been properly managed in that the country did not properly demonetise the Zimbabwe currency.
“Companies woke up overnight with overheads and other costs to finance but with no money in the bank. So they resorted to borrowing and initially a lot of the credit was consumptive.
“Banks lent to companies and a lot of this credit is going bad as reflected by the high incidence of non-performing loans in the economy. Banks are now pricing some of the risk into current loans translating into relatively high rates,” he said.
On the funding side, as long as the country’s debt situation remains unresolved, it will be difficult for local banks to attract meaningful external lines of credit at lower rates of interest that will lower the cost of credit to the local market.
However, bank customers interviewed by businessdigest said the attitude of banks gives customers very little incentive to keep their money in the formal banking system.
Raymond Makombe, a client of a multinational bank, said: “It is quite frustrating that even if you get your salary through the bank you cannot spend it bit by bit, you are forced to withdraw all of it in one fell swoop because the banks are not paying anything by way of interest on the money. In fact there is a penalty for saving money in the end because the bank will levy one charge after another and the balance will quickly dwindle.”
“If I had a choice I would get all my money paid to me in cash; the only reason I get my salary through the bank is sometimes you can get to apply for a loan and even then, the conditions for loans are very stringent and the interest rates are quite high.”