Maravi

Chilipamushi accuses banks of running cartel

COMMENT - Neoliberal economic theory fails again. Inflation is in the single digits, but this has not brought down the cost of money, as bank lending rates are still over 20%. This is obviously a major hurdle for SMEs. Also, the mines use over 50% of power produced by ZESCO, and pay fewer tariffs than ordinary people. Again, this smells of corruption. Foreign owned mines are a net drain on the Zambian economy.

Chilipamushi accuses banks of running cartel
By Kabanda Chulu in Kitwe
Tue 27 July 2010, 04:02 CAT

COPPERBELT University senior lecturer Davidson Chilipamushi has accused commercial banks in the country of operating a cartel hence the failure to reduce lending (interest) rates despite the inflation rate declining to 7.8 per cent.

In a free market economy such as Zambia, the rate of inflation should be able to bring down interest rates to a level equivalent to that of the country’s inflation. For instance, the rate of inflation is currently at 7.8 per cent and it is expected that interest rates should also be in the range of eight or 10 per cent.

Despite government’s efforts to bring down the rate of inflation to single digit levels, lending rates are still high, the lowest being about 20 per cent offered by some banks.

Government has reduced its borrowing from commercial banks, therefore the yields on treasury bills and bonds have declined thus offering banks alternative ways to make profits such as lending to the private sector and other entrepreneurs.

“This is very surprising that banks have not reacted in the down turn of inflation rates by reducing lending rates, for instance, the rate of inflation is currently at 7.8 per cent and it is envisaged that interest rates should also be in the range of eight or 10 per cent and banks will still make profit but this is not happening, why?” Chilipamushi asked, in an interview last Friday.

“And this is a hindrance to the development of the economy which needs to be addressed and the competition authority should take a keen interest in this matter because there is an apparent tacit collusion if I may say so because it doesn’t make sense that the rates for all banks are high although some have reduced but still remains high and someone was saying that there are many cars in the street since banks are dishing loans but this growth is not tangible since it is not translating into poverty reduction.”

He said the failure by banks to reduce lending rates was stifling development because investment decisions that had to be made by companies and individuals were delayed.

“It is surprising that this is happening, banks and even micro finance institutions are also charging higher rates despite government making efforts to ensure macroeconomic stability, and players are failing to respond, for instance, government is reducing borrowing from the banking sector therefore yields on bonds and treasury bills also come down in line with the desire not to borrow so much from the banks,” Chilipamushi said.

“This situation compels banks to look for alternatives from which they can make money than the easy way of buying bonds and treasury bills and it appears to me that, the alternative still remains lending to the private sector so there must be a balance between alternative investment sources.”

And Chilipamushi said Zesco Limited should stop looking at increasing electricity tariffs as the major source of its capital investments. Chilipamushi said shareholders of Zesco must recognize that the huge problems facing the company require the entity to be restructured to manageable levels.

“It appears the only source of capital investments as of now is through tariffs they charge to consumers out there but what Zesco needs to do is to look for alternative sources of funding to sustain their activities and that is making it saleable or bankable either through restructuring and bringing their books to date by reducing their debts on the balance sheets then people will have confidence. There are several sources of funding including locally at the stock exchange,” Chilipamushi said.

“What Zambians are looking forward to is to ensure that this Zesco is brought into the market and it has to be listed so that you and me can buy interest in it and I don’t know if that is a hindrance in their (Zesco) quest to move forward but they just have to restructure themselves and ensure that they operate on a commercial basis and get on the market and expand capacity to borrow and meet their expenditure requirements.”

He said Zesco does not operate as a commercial entity since it lacked a strategic plan.

“On paper Zesco had undergone commercialization but I don’t believe Zesco is operating as a commercial entity, firstly it has to be restructured and strategize and unbundling is not an issue and the issue is making Zesco viable as a single entity and in the absence of a proper study being done, it is difficult to recommend unbundling,” said Chilipamushi.

Lusaka Stock Exchange (LuSE) general manager Beatrice Nkanza has used every opportunity requesting struggling government entities such as Zesco, Indeni, Tazama, ZSIC and others, to raise part of their capital investment on the stock markets.

Nkanza has explained that due to the strict process of listing, companies could raise funds through bond issuance and other debentures.

Zesco has applied to the Energy Regulation Board (ERB) requesting for 36 per cent electricity tariff adjustment because it requires more than US $850 million to increase power generation capacity.

Zesco also wants to have in place cost reflective tariffs whereby consumers would pay for the power they use but surprisingly the mines that consume over 50 per cent of Zesco’s power production pay less tariffs compared to domestic consumers.

Labels: BANKING, BEATRICE NKANZA, CARTEL, DAVIDSON CHILIPAMUSHI, LENDING RATES, LUSE, ZESCO

posted by MrK @ 3:58 PM