BANKS with high cost structures will likely experience challenges in complying with the Reserve Bank of Zimbabwe’s requirements to charge interest rates of 12,5 percent over and above the cost of funds.
In its monthly economic review African Development Bank (AfDB) said some banks had complied with the directive to reduce interest rates which became effective in February this year, but hinted that financial institutions with high cost structures were likely to experience challenges in complying with the requirement.
“Some banks have already complied; others were already compliant before this measure was taken, while some others are yet to comply. However, banks with high cost structures are likely to experience challenges in complying with this requirement,” said AfDB.
Most banks that release financial results at the just-ended reporting season said they planned to review their cost structures which were eating into their profits.
Some economists say bank charges are high simply because costs are high.
Banks have been accused of paying paltry interest on savings whilst levying exorbitant account maintenance fees, actions that are seen as working against the need to grow national savings which is critical to maintaining liquidity in the economy.
The reluctance by banks to pay real returns on savings, coupled with high administrative charges that eat into the savings, have been singled out as the two major drivers of depositors away from the formal banking sector, a situation that has prompted authorities to set fixed legislated interest rates and bank charges.
Lending rates are expected to decline, following the signing of the memorandum of understanding (MoU) between the Reserve Bank of Zimbabwe (RBZ) and banks in January this year.
According to the memorandum only a 12,5 percent interest margin is allowed over and above the cost of funds.
In January this year, commercial bank weighted average lending rates for individuals and corporate entities firmed to 15,58 and 10,81 percent, from 15,08 and 10,40 percent in December last year respectively.
Merchant bank weighted average lending rates for individuals firmed from 17,93 percent in December last year to 17,96 percent in January. However, over the same period, merchant bank weighted average lending rates for corporates softened marginally, from 14,43 percent to 14,42 percent.Advertisement
At the same time, the range of commercial bank three-month and savings deposit rates remained at the November 2012 levels of 4 to 20 percent and 0,15 to 8 percent respectively.
According to the 2013 National Budget Statement, deposits with a minimum of 30 days are to be paid an interest of at least 4 percent per annum.
“Deposit rates are expected to firm following the signing of the MoU. However, banks with high cost structures may not be able to increase deposit rates significantly,” said AfDB.
A survey showed that most bank’s lending rates were between 12,5 percent and 15 percent.
The disparity between lending and deposit rates in Zimbabwe had been widening, dampening the already weak savings culture in the country and its economic recovery.
Interest rates are misaligned from the regional interest rates levels, reflecting the liquidity crunch and risk element in the market. The difference between lending and deposit rates is extremely high as compared to regional standards.
The spread between lending and deposit rates for Namibia, Botswana and South Africa is said to be around 5 percent, compared to 20 percent for Zimbabwe before the signing of the MoU.
The Zimbabwean banking system is characterised by liquidity challenges, which has made the cost of money expensive.