Rising inflation is having a negative impact on bank lending as it now far exceeding interest rates, Agribank chief executive Sam Malaba has said.
In 2017, the Reserve Bank of Zimbabwe (RBZ) introduced a ceiling of 12 percent per annum on lending rates.
However, Malaba said all thing being equal, banks should be lending above the inflation rate.
“A challenge that we are going to face as a result of what is happening with the domestic inflation.
Our domestic inflation is now in excess of 50 percent, yet our interest rates are pegged at 12 percent and below for the productive sectors, so it means we have negative real interest rates and yet when banks invest in savings bonds earn 7 percent, in Treasury Bills (TBs) 5 percent.
“So you have this mismatch when you have negative real interest rates and yet when we lend we are supposed to lend in terms of positive interest rates. So in an ideal world, we should be lending above the inflation rate, but if we do that everybody would be out of business. But also the bank’s viability is affected by the negative real interest rates and that is a major challenge that the banking sector is facing,” said Malaba.
Zimbabwe’s year on year inflation rate for the month of January 2019 as measured by the all items Consumer Price Index (CPI) stood has risen to 56,90 percent, from 42,09 percent in December 2018, according to latest figures from the Zimbabwe National Statistical Agency.
The central bank has however pledged to implement measures to contain inflation.
“To anchor price stability, the Bank shall aggressively intervene in the market to sterilize liquidity so as to help contain inflationary and exchange rate pressures,” said RBZ governor Dr John Mangudya while announcing the Monetary Policy Statement on Wednesday.
He added:
“And unfortunately, normally when you reduce the interest rates you are trying to reduce the borrowing but the major borrower in this case is Government, that is, the TBs and the overdraft rates. Now Government is insensitive to changes in interest rates and yet private sector borrowing is roughly at 3 percent, which is being crowded out by Government, so it’s unlikely that we will get a serious re-alignment of our interest rates and therefore the sector which will be most affected will be the financial sector in terms of its viability.”
According to global data aggregator TradingEconomics, the interest rate in Zimbabwe averaged 12,19 percent from 2011 until 2018, reaching an all-time high of 16,04 percent in March of 2012 and a record low of 8,86 percent in September of 2017.
The RBZ does not have an official discount rate. The official interest rate is the Weighted Lending Rate.
The Weighted Lending Rate is the sum of minimum nominal lending rates weighted by individual bank’s loan book sizes and published by the central bank.
In 2017, the RBZ’s Monetary Policy introduced a ceiling of 12 percent per annum on lending rates, and prior to that in 2015 the RBZ negotiated with banks to cap interest rates at 18 percent, as part of measures to deal with the prohibitive cost of finance.
Before the 2015 intervention by regulator, local banks were charging interest rates as high as 35 percent per annum, excluding default rates of equal or higher threshold.