Maravi

Banks and interest rates

Banks and interest rates
By Editor
Wed 27 Jan. 2010, 04:00 CAT

IT is undeniable that a reliable and innovative banking sector is the lifeblood of any economy. And if finance is the lifeblood of our economy, the figuring out of new ways to pump blood through the economy should foster investment, entrepreneurialism, and progress.

The debate about high interest rates in the country and the failure by local commercial banks to foster investment, entrepreneurialism, and progress has been with us for a long time. It has been a thorn in the flesh of most entrepreneurs.

While this trend has been going on, we have seen commercial banks become inefficient and lazy, preferring to deal with mostly, the almost risk-free government securities – only succeeding in adequately crowding out our fragile but crucial private sector. This has also led to stagnation in financial inclusions and development of new products and services to deepen the growth and role of the financial sector in the development of our economy.

Not even the previous approach by the Bank of Zambia (BoZ) of applying moral persuasion in pleading with commercial banks to reduce lending rates has helped to improve the cost and accessibility of working capital for most local entrepreneurs and domestic investors.

Against that background, there is need to pay serious attention to the new development being touted for the financial sector this year by BoZ.

We have recently seen a positive shift in a number of policies in respect to financial markets.

Firstly, the government intends to change its monetary policy from monitoring the inflation rates to start using the interest rates.

In countries where inflation is used as a monetary policy tool, we see that when annual inflation rates move, similar movement occurs in interest rates.

Ironically in our case, this tool was not effective. We are not aloof to what happened last year when inflation rates moved from over 14 per cent at the beginning of the year to close the year at 9.9 per cent. Notwithstanding this development, most commercial banks remained obstinate and refused to move their lending rates in tandem with the movements in inflationary dynamics.

We also saw that even the few banks that responded to the improvement in the inflation rate, there is a huge discrepancy between what the inflation rate is and their base rates.

In the current scenario, inflation stands at 9.9 per cent yet the lowest base rate we know of stands at 19 per cent. This is a very huge discrepancy, which is totally unacceptable.

Therefore, the move by BoZ to now use interest rates as a monetary policy tool is very welcome. Banks base rates will now be relative to the BoZ rate. The Central Bank needs and deserves support on this matter.

Government has also decided to close most of its accounts with commercial banks and come up with one single Treasury account at BoZ. This is a good thing to a large extent. We have seen commercial banks getting government money, invest in government securities and make profit on the same government money! So basically the government gives money to a bank and goes back to borrow the same money through government bonds and Treasury Bills. Therefore, the idea to consolidate these accounts is good. This will help government to have a holistic view of its cash-flows.

However, the fact that the Treasury account will be at Central Bank poses a challenge. We say so because we fully understand that this new development will mean that BoZ will now begin offering commercial banking services to the government ministries and other spending agencies.

This may be in conflict with their primary role of being the regulator. And in case of a dispute between the BoZ and the payee, who arbitrates?

Further, by these funds being held at BoZ, it means that a certain amount of liquidity is removed from commercial banks and this will affect the lending.
There is certainly need for the Central Bank to clearly state how it is going to manage any cases of liquidity stress on some banks as a result of the mopping of the government money because we know that public funds form a substantial amount of liquidity in the local banking sector.

But the good side to this is that commercial banks in the country will be forced to put attractive conditions to compete for clients as their funds will be dependent on deposits unlike the current situation where banks could possibly run without individual customers because they get huge deposits from the government.

All in all, the move to close most of the government accounts among other monetary polices being peddled by the government through the Central Bank is positive and needs to be supported.

Labels: BANKING, INTEREST RATES, LENDING RATES, NEOLIBERALISM

posted by MrK @ 8:43 PM