‘Interest rate cap won’t stifle bank profitability’
THE Reserve Bank of Zimbabwe says banks will have enough latitude for profitability under the interest rate cap of 12 percent per annum given they do not pay much for deposits.
The central bank chief said local banks do not offer good interest on deposits, as such; he said the lending rate of 12 percent would still allow banks to make healthy profit margins.
“Look at Standard Chartered, Barclays, Stanbic, MBCA; do they have offshore lines of credit for Zimbabwe? No. (The only) banks giving us external funding are Afreximbank and PTA Bank. Where else are banks getting money from?”
“PTA Bank (recently renamed Trade and Development Bank) and African Export and Import Bank are the major lenders to this country and we know what they are lending at; they are not lending at 12 percent per annum. When you are determining interest rates, you consider cost of funding and add a margin to get the rate of interest. The cost of funding in Zimbabwe (tracks) deposit rates and what is the interest on deposits; 1 to 2 percent,” said the Reserve Bank of Zimbabwe governor, Dr John Mangudya.
The central bank chief’s remarks come after he recently directed banking institutions to reduce annual lending rates to a maximum 12 percent effective April 1, 2017. Some banks have claimed lower lending rates diminished profits for the financial period to December 2016.
Statistics from the central bank, however, show that while most sectors of the economy were struggling, the banking sector registered massive growth in profitability last year, which many feel is largely aided by high interest rates.
The banking sector remained profitable during the year-ended December 31, 2016, with an aggregate net profit of $181,06 million, an increase of 42,36 percent from $127,47 million reported for the corresponding period in 2015. Interest income continued to be the major income driver constituting 58,40 percent of total income of $1,05 billion for the period to December 31, 2016 while salaries and employment benefits dominated total costs for banks as they accounted for 42 percent of total banking sector costs.
Finance and Economic Development Minister Patrick Chinamasa said in his 2017 National Budget statement that the issue of 15 percent lending rates from banks, coupled with shorter lending periods, which banks say is due to transitory nature of deposits, continued to negatively impact on the competitiveness of borrower businesses.
Prior to the recent announcement, bank lending interest rates were determined by a framework allowing banks to charge between 6 percent and 18 percent, depending on the risk level. Risk level gauge ranged from low, moderate to high. Dr Mangudya said the lower lending rates will not discourage credit extension, as recently insinuated by bankers association, to the productive sectors noting that banks’ lending was instead being stifled by high cost of funding.
Bankers’ Association of Zimbabwe president Charity Jinya told the Parliamentary Portfolio Committee for Finance this week that if the ceiling for banking lending rates continued to fall, banks may cut lending to productive sectors in favour of TBs.
“The banks were not lending because at high interest rates you increase non-performing loans. The chances of getting your money back at 25 percent per annum (are slim). What will (one) be selling to get a 30 percent margins?”
It is also believed punitive interest rates led to growth in loan default rates. The level of non-performing loans has declined from a peak of 20,45 percent in the ratio of NPLs to total loans to 7,87 percent as at December 31, 2016 after the RBZ took over bad loans and initiatives by banks.
The Governor said in the monetary policy statement that while the banks had made progress in reducing cost of lending, interest rates remained above thresholds that support borrowing to finance productive sectors of the economy.
“We are in a dollarised economy; we need to make sure that our interest rates reflect the currency that we are using. The problem in Zimbabwe is that (banks) are using the Zimbabwe dollar based regime to determine interest rates,” he said.
He said banks need to ensure that interest rates in Zimbabwe are (US) dollar based not Zim dollar based. He added that banks cannot use cost of funding as an excuse considering that none were getting offshore lines of credit. Zimbabwe uses a multi-currency regime dominated by the US dollar as the reporting currency also includes other foreign currencies of Britain, Australia, South Africa, Japan and China. It scrapped its local currency in 2009 due to inflation.