The Bank of Botswana has urged commercial banks to peg the deposit interest rates closer to the bank rate in a bid to encourage savings in the country.
The move follows the concerns raised over the country’s interest rates spreadÔÇöthe difference between rates charged on loans and that paid out on deposits ÔÇô that sparked outrage from analysts and consumers alike since last year.
The Director for Banking Supervision, Andrew Motsomi, told Sunday Standard this week that the central bank had indicated to the commercial banks that interest rate payable on 91-day deposit “shall not be more that 400 basis points (four percent) below the prevailing bank rate”.
“The deposit rate anchor was introduced to facilitate effective price bargaining by banks and other clients in order to enhance competitive pricing on either side of the anchor,” he said.
Last year, the central bank’s monetary policy sharply came under criticism for enabling the local commercial banks to rip-off customers through huge lending interest rates while at the same time milking the country of billions of pula through Bobcs.
In his paper, entitled “Cost of Botswana Monetary Policy”, Professor Roman Grynberg, charged that the tolls that are employed by Bank of Botswana in setting the monetary policy have enabled commercial banks to profit from unbelievable interest rates.
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 this 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 the other hand. He pointed out that over the years 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.
Last week, Bank of Botswana said at the unveiling of its 2011 monetary policy statement that it was concerned about the interest rate spread adding that it has continuously raised the issue with the commercial banks at their exclusive meetings.
Motsomi stressed that “Bank of Botswana has been concerned with the magnitude of the commercial banks lending and deposit rates spread for some time now”.
He further added that they expect the commercial banks to follow the bank rate movements to ensure that efforts aimed at encouraging savings are not frustrated.