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Banks hike interest rates amid liquidity crunch, rising credit risk

31 Jan, 2025 - 00:01 0 Views
Banks hike interest rates amid liquidity crunch, rising credit risk Local banks have reportedly hiked USD interest rates to above 20 percent from approximately 16 percent as the liquid squeez makes the forex pricey.

Business Writer

Businesses and consumers in Zimbabwe are facing a new wave of financial pressure as several banks have increased their lending rates to as high as 20 percent per annum, according to industry insiders and executives who shared letters from their banks.

This comes as access to credit continues to be a significant hurdle for businesses across Zimbabwe, as highlighted in the 3rd Quarter 2024 Business Tendency Survey (BTS) conducted by the Zimbabwe National Statistics Agency (ZimStat). The survey, which covered key sectors including construction, transportation, wholesale and retail trade, financial services, and accommodation, revealed that a majority of businesses perceive access to bank credit as difficult.

The survey findings indicate that at least 50 percent of respondents in all five sectors under review reported difficulties in accessing credit. The transportation and storage sector was the most affected, with 75 percent of respondents citing challenges in securing bank loans.

Similarly, 70.2 percent of businesses in the accommodation and food services sector and 67.3 percent in the wholesale and retail trade sector faced similar difficulties. Even the financial and insurance sector, which one might expect to have better access to credit, reported that 50 percent of its respondents found it challenging to obtain loans. These figures underscore the widespread nature of the liquidity crunch in the country which is  stifling growth and expansion.

This sharp rise in interest rates comes amid a worsening liquidity crunch, growing credit risk and a challenging economic environment that is forcing banks to adjust their lending practices to stay afloat.

The Bankers Association of Zimbabwe (BAZ) President, Lawrence Nyazema, confirmed that liquidity constraints are a major factor behind the rate hikes. He noted that while rates above 20 percent are steep, banks are left with little choice given the current economic climate.

“Yes, liquidity constraints would be the main issue, plus the credit quality of the borrower. I would hesitate to lend USD above 20 percent as that level of prices increases default risk. Not many projects generate such high margins,” Nyazema said.

The liquidity crunch has been exacerbated by the central bank’s tight monetary policy, which has reduced the amount of money available for lending. Despite the Reserve Bank of Zimbabwe’s (RBZ) assurances, bankers argue that the liquidity situation remains dire.

The current statutory reserve requirement by the central bank requires banks to hold a greater percentage of their deposits as reserves with the central bank—30 percent for local currency and 15 percent for foreign currency. These reserves represent a portion of the bank’s deposits that cannot be lent or invested. This will raise the cost of doing business for banks, as they will need to hold more reserves that typically do not generate interest and this could result in banks raising interest rates on loans to compensate for the shortfall.

“Things are heating up. That is why we told RBZ that the liquidity crunch is real despite their views,” Nyazema added.

High demand, limited supply

Another bank executive likened the current situation to a classic case of supply and demand. With the demand for US dollar loans far outstripping the available supply, banks are charging a premium for lending.

“When a commodity is scarce, it sells at a premium. That’s the same with dollar lending. Huge demand vs trickles on the supply side,” the executive explained.

This scarcity of US dollars has pushed banks to raise their minimum lending rates, with some now charging as much as  20 percent per annum for USD loans. This is a significant increase from the previous rates of 15 percent, which were already high by regional standards.

Central bank’s tight monetary policy

The RBZ’s tight monetary policy, aimed at curbing inflation and stabilising the currency, has also contributed to the rise in interest rates. A senior banker revealed that the indicative bank rate for USD loans increased to 15 percent in October last year, prompting banks to adjust their lending rates accordingly.

‘The (indicative) bank rate for USDs went up to 15 percent from October last year, so banks hiked their minimum lending rates. We await the Governor’s further direction through the (2024) Monetary Policy Statement in the next two weeks or so.

“However, I don’t expect big changes on this front. I think the tight monetary regime will continue,” the banker said.

Impact on overall economy businesses and consumers

The high interest rates are already having a ripple effect across the economy. Businesses, particularly small and

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medium-sized enterprises (SMEs), are finding it increasingly difficult to access affordable credit, which is essential for expansion and day-to-day operations.

An executive with a listed entity described the current interest rates as “unsustainable”, warning that they could stifle economic growth and lead to further business closures.

Even consumers are feeling the pinch. Clothing retailer Edgars recently notified its customers that the interest rate on their USD accounts would increase from 2.5 percent to 3.5 percent per month, effective from February 3, 2025. The company advised customers to convert to a six-month plan to avoid the hike, highlighting the growing financial strain on households.

The rise in interest rates is not just a banking issue; it has broader implications for Zimbabwe’s economy. High borrowing costs are likely to stifle business growth, as companies will find it harder to invest in new projects, expand operations, or even maintain cash flow.

It might also increase default risk as Nyazema pointed out, few businesses can generate the margins needed to service loans at 20 percent interest, increasing the risk of defaults.

Market analyst Walter Mandeya said higher interest rates leave consumers with less disposable income, further dampening economic activity.

He said as the RBZ prepares to release its next Monetary Policy Statement, stakeholders will be watching closely to see if any relief is in sight.

RBZ governor Dr John Mushayavanhu had not yet responded to questions sent to him by the time of publication.

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