HARARE: RBZ must require banks to disclose the interest rates that they charge upfront, and to declare to borrowers in writing that they are compliant with any interest rates set by the RBZ.
The Mid-term Monetary Policy Statement (MPS) of July 2015, issued by the Reserve Bank of Zimbabwe (RBZ) brought hope for those economically savvy borrowers, when it ushered limits on interest rates that can be charged by banks on loans advanced.
The MPS however may not have gone far enough to achieve its stated objectives of improving on “. . . non-performing loans (NPLs), limited circulation of liquidity, low consumer and business confidence, and lack of competitiveness besetting both the financial sector and the economy at large . . . ” and growing “ . . . the economy by a minimum of 5 percent per annum”.
The RBZ set limits on interest rates chargeable to bank loans issued to a) the Productive sectors; b) for Housing projects, and c) for Consumptive purposes.
Within the Productive sector category, interest rate limits were set at 6 percent to 10 percent p/a, at 10 percent to 12 percent p/a and at 12 percent to 18 percent, respectively for three sub categories referred to as “Prime Borrowers with Low Credit Risk”, “Borrowers with Moderate Credit Risk” and “Borrowers with High Credit Risk”.
The MPS is not explicit on the credit risk measure or standard engaged in coming up with these Productive sector categories. Interest rate limits for loans issued for housing projects were set at 8 percent to 16 percent p/a, while those for Consumptive purposes were set at 10 percent to 18 percent p/a.
These interest rate limits were agreed upon between the Bankers Association of Zimbabwe and the RBZ — consumers of bank services including borrowers and bank depositors, do not seem to have been consulted on this issue. While the limits are most welcome, the MPS does not set out the rationale or premise for these limits in particular, and not others — leaving that risk of omitting other key considerations necessary in deriving such limits.
To illustrate the potential deficiencies with the current MPS regarding this policy on interest rates, subscribers to pensions and insurance services primarily seeking to establish whether they were entitled correctly from their pension and insurance contracts, have occasionally sought to establish the quantum of interest rates charged on bank loans they took out — this often as an after-thought.
Invariably, these consumers of financial services have visibly been startled and worried, about several issues, not least that the loan amount they took out would not be reducing despite the regular repayments they made, while the interest charges in absolute dollar terms, essentially mop up any regular repayments made.
This has typically made the loan a perpetual obligation to the consumer, putting any collateral offered to the bank at risk.
An assessment of the interest rates charged by banks in question reveals that the interest charges are on a simple interest basis (interest charged does not attract further interest charges); and that interest is charged in absolute dollar terms on a monthly basis, at rates which translate to those charted in the diagram below.
To illustrate the operation of these loans, two representative loans issued by two different banks (Bank A and Bank B), to two borrowers have been used for this discussion — the actual identities have not been used.
The borrower is issued with a loan schedule tracking the principal amount loaned, monthly interest charges in absolute dollar terms, repayments made by the borrower or credits to the account, monthly bank charges in absolute dollar terms, how the credits were applied between principal amount and interest repayments.
From this schedule the average borrower cannot tell the level of interest rate charged, as the interest is charged in absolute dollar terms.
