Wednesday, August 10, 2022

Central bank governor condemns commercial banks charges

Bank of Botswana governor, Linah Mohohlo, openly attacked the commercial banks interest rates spread as “unfair on customers” and urged people to clamour to be treated as prime customers who qualify for discounted rates.

“People should understand that the burden of repayment lies with them. They should demand to be treated as prime customers,” she said.

“Some of the spreads are prohibitively high. We encourage people to negotiate (interest) rates,” she said at the launch of the monetary policy statement on Friday.

The move by the governor comes at a time when there is a fierce debate on the interest spread between the deposit rate and lending rate. The bulk of the people who feel the pinch are on the retail sideÔÇöespecially on the unsecured loans.

The people on the unsecured loans could be charged as much as 28 percentÔÇöthe second highest interest rates after that of furniture shops. This is despite the fact that the default rate in the country is generally low at about five percent given all the banks combined.

Further, her comments come at a time when the general inflationary outlook for the year is unfavourable due to impending fuel and food prices instability owing to different reasons. That has left the monetary policy committee earlier in the week to leave the bank rate unchanged as the inflationary pressures to be faced are not demand driven.

“We continuously engage commercial banks on this item. We believe that the interest rates spread is very, very wide,” deputy governor, Andrew Motsumi, said.

Botswana is one of the very few countries in sub-Sahara AfricaÔÇöincluding those whose currencies are almost non functional, that has the highest interest rates spread. Some of the few countries include AngolaÔÇöan economy that is emerging out of a civil war and, at the same time, largely adopted the United States of America Dollars as the trading currency.

The current inflationary outlook shows that the central bank will not be able to rein it in within its objective of three-to ÔÇô six percent which will hurt the unemployed and the underpaid the most.

“We continuously tell them that they must adjust their lending and borrowing rates and make them narrower,” Motsumi added.

Last year, in his paper entitled “Cost of Botswana Monetary Policy” that circulated within a close net of people, Professor Roman Grynberg charged that the tolls that are employed by Bank of Botswana have enabled commercial banks to profit from unbelievable interest rates while at the same time getting huge returns from Bobcs at no risk.

He said the huge interest rate spread have enabled the banks to ‘ consistently earn higher rate of return on assets than their counterparts in Sub Sahara Africa during 2005/6 period.

“On the basis of the time commercial banking sector in the period under study can be described as super-normal,” he said.

He blamed the central bank’s bank rate, which he said acted as a price setter but the depositors were getting a raw deal on other hand. He pointed out that over the year, the 88-day deposit rate has largely become unattractive because the low interest that it offers compared to the prime rate.
The move, he said, has resulted in low saving culture in the country.

“What is important to note is that the ex post spread i.e. what commercial banks are actually charging customers for advances, minus what they are actually paying depositors is significantly larger than the indicator or ex ante spread,” he said.


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