eBusiness Weekly
Tawanda Musarurwa
Zimbabwe’s financial services sector can actually benefit from a reduction in the level of market interest rates as borrowers shy away from expensive loans, the Reserve Bank of Zimbabwe has said.
The central bank has been using moral suasion to persuade local banks to reduce the cost of borrowing.
Now the banking sector regulator says banks may actually benefit from a lower market interest rates.
This comes as the central bank concluded comprehensive financial stability stress tests on the banking sector this September 2018 to assess the impact and resilience of their portfolios.
Although highlighting that the current or prospective risk to the banking sector’s capital and earnings arising from adverse movements in the interest rate was low, RBZ governor Dr John Mangudya, said the risk on market interest rates was high.
“All banking institutions were resilient to a major level interest rate risk shock of 10 percent increase or decrease in interest rates as their capital adequacy ratios would remain above the prescribed minimum of 12 percent.
“As at September 30, 2018, 16 (out of 19) banking institutions had liability sensitive books, implying that the banks would benefit from a decrease in market interest rates,” said the governor in the Banking Sector Report for the third quarter (2018).
The “liability sensitive books” point to the fact that borrowers, particularly the institutional type, have pulled back taking local banking sector loans because they are so expensive.
What is market interest rate?
Market interest rate is calculated based on the supply of credit in the market and the demand for that credit. To this extent, high demand means that lenders can charge higher interest rates without losing business to competitors with lower rates, while a decrease in demand means that lenders must offer lower interest rates in order to entice borrowers.
Market interest rate vs interest rate
The market interest rate is different from the interest rate (that is offered ordinarily on deposits in banks, other interest-bearing accounts, as well as on loans) in so far as it is determined by the supply and demand for credit.
According to global data aggregator Trading Economics, the benchmark interest rate in Zimbabwe was last recorded at 9,56 percent.
Interest rate in Zimbabwe averaged 12,19 percent from 2011 until 2018, reaching an all-time high of 16,04 percent in March of 2012 and a record low of 8,86 percent in September of 2017.
The RBZ does not have an official discount rate. The official interest rate is the Weighted Lending Rate. The Weighted Lending Rate is the sum of minimum nominal lending rates weighted by individual bank’s loan book sizes and published by the Reserve Bank of Zimbabwe.
Last year’s Monetary Policy introduced a ceiling of 12 percent per annum on lending rates.
In 2015 the RBZ negotiated with banks to cap interest rates at 18 percent, as part of measures to deal with the prohibitive cost of finance.
Prior to the 2015 intervention by regulator, local banks were charging interest rates as high as 35 percent per annum, excluding default rates of equal or higher threshold.
But it is the market interest rates that are of greater concern as they highlight constrained local financing for corporates.
Reduced market interest rates would reduce the cost of borrowing and encourage credit-starved companies to borrow.
Official figures from the RBZ show that the loans to deposits ratio for the local banking sector declined from 43,53 percent to 41,8 percent over the quarter to September 30, 2018.
The Confederation of Zimbabwe Industries (CZI) has said financial products for local industry should have low-interest rates and reasonable terms to match.
Most financial institution cited the short-term nature (transitory) of local deposits for their incapacity to structure longer term financing for borrowers.
However, Bankers Association of Zimbabwe (BAZ) president Webster Rusere is on record saying that to the extent that the local financial services sector can get support from regional and global financiers, it is looking to restructuring at least 70 percent of the $6,5 billion it has in loans into long-term financing.
