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Makungu attributes low interest rates to lack of business for banks

Makungu attributes low interest rates to lack of business for banks
By Kabanda Chulu
Tuesday September 25, 2007 [04:00]

UNIVERSITY of Zambia head of mass communications department Kenny Makungu has said the reduction in interest rates is not because of an improved economy but lack of business for commercial banks. And Economics Association of Zambia (EAZ) has observed that there was need to break down the invisible cartel that most commercial banks apply when doing business.

During a media workshop for economic and business reporters held last week in Lusaka, Makungu said there was need to expose the anomalies behind the positive macroeconomic indicators because they do not relate to the situation on the ground. He said reduced rate of inflation should result in lower prices and a general improvement in standards of living.

“Almost all the macro economic indicators are showing signs of growth but we are not seeing this on the ground or maybe there is a small group of people who are seeing the benefits of these indicators and there is need to expose this anomaly because it is not tangible,” Makungu said. “If the economy is improving where is the money going to because people in the streets do not have the purchasing power and the reductions in interest rates is not because of an improved economy but lack of business for commercial banks.”

Lately, there is intense competition among banks in the country that has resulted in the banks introducing various promotions in order to attract customers. Several banks have reduced interest rates from over 40 per cent to below 20 per cent and the rate of inflation currently stands at 10.7 per ecnt.

Recently the EAZ stated that there was need to break down the invisible cartel that most commercial banks used to apply in the country. The EAZ has also projected that many commercial banks would continue to feel the pressure due to the government’s reduced participation in treasury bills.

The EAZ also anticipates base rates to come down to as low as 10 per cent by 2008 in order to meet the international trends that is at the same level with the rate of inflation.

The EAZ stated that continued reduction of interest rates, which was spearheaded by Zambia National Commercial Bank (ZNCB), when it reduced rates from 20 per cent to 15 per cent last January, would be a turn around for the country’s economy since funds would be readily available for businesses to borrow.

The EAZ stated that shortage of capital to finance and expand businesses in Zambia had been the major obstacle stifling economic growth.

“The big banks have played the role of influencer in issues of interest rates and they have refused to reduce even when inflation rates went down and also when Felix Mutati was deputy at finance ministry, he used every fora to plead for the reduction of base rates but to no avail,” it stated.

“So one has to believe that there has been an invisible cartel among these banks which ZNCB has literally broken down and it seems this is the only solution that will work since the rest of the banks will follow.”

The EAZ observed that about 75 per cent of all businesses in the country fail to take off because of high capital costs offered by commercial banks.

“There is a lot of viable business plans in the country and almost every sector needs capital injection for expansion but high costs of capital offered by these banks is stifling the intended economic growth and we hope this reduction of base rates will improve things,” it stated. “And owing to these high costs companies literally work for banks to liquidate the high interest loans and given this scenario no economy can grow.”

And according to the medium term expenditure framework (MTEF), the government has indicated intentions of maintaining borrowing from the gross domestic product (GDP) at not more than one per cent in 2007 and 0.5 per cent in 2008 and 2009 respectively.

The government’s participation in the bonds and treasury bills market has reduced since they want to limit borrowing from the GDP and one per cent of GDP would entail the government to only borrow about K500 billion, which a few banks could manage to lend out while others would have no choice but to lend out to the business community.

Labels: BANKING, CARTEL, INFLATION, INTEREST RATES

posted by MrK @ 7:17 PM