Business Reporter
BANKS are charging punitive interest rates on individual borrowers on assumption that they take the loans for consumption when some require funding to support small enterprises, recent research findings noted.
According to the Zimbabwe Economic Policy Analysis and Research Unit economic barometer volume 16, interest rates for individuals are higher than those for corporate borrowers.
However, individuals continue to borrow more than a number of productive sectors of the economy, partly because banks prefer extending credit to individuals, Zeparu said.
It also appears that higher real lending rates for individuals incentivise banks to lend more to individuals, apart from the fact that the clientele is safer because it repays from salaries.
Yet with generally low average employment incomes, many employees engage in small businesses to supplement employment income and may not borrow for consumption.
High real lending rates increase the cost of borrowing, discouraging real investment and consumption, resulting in weak economic growth, which Zimbabwe needs desperately.
“This therefore raises questions on the effectiveness of the tiered interest rate system to support productive borrowing, because it charges high rates on the premise that individuals borrow for consumptive purposes,” Zeparu said in its latest report.
The research unit said the tiered interest rate system would be better if it were not based on the simple distinction between individuals and corporate when pricing loans.
Rather, Zeparu said provision of bank loans should only make distinction between consumptive and productive utilisation of the loans to avoid overpricing of personal loans.
“In that way, individuals who borrow for production would not be penalised by the system. For those individuals who borrow for consumption, a deterrent interest rate level would need to be determined to constrain consumptive borrowing,” Zeparu said.
It is against this background that Reserve Bank governor Dr John Mangudya, in his mid-term monetary policy statement, said he had agreed with banks to cap rates at 18 percent.
Consumptive lending will attract 10-18 percent, housing finance 8-16 percent, borrowers with high risk 12-18 percent, moderate risk 10-12 percent and prime borrowers 6-10 percent. The governor said defaulters would pay interest of 3-8 percent.
Based on its findings Zeparu said commercial real average weighted lending rates for individuals and corporates tightened over the period February 2014 to February 2015.
The bank loans interest rates tightened from 14,64 percent to 15,61 percent for individuals and from 9,85 percent to 11,28 percent for corporate in the period under review.
It is also believed that the tightening of the real lending rates is likely underpinned by the tight liquidity situation, which is compounded by high credit risk, perceived high country risk, declining commodity prices and high import bill, among other factors.
Lending rates form a critical element in the pricing models of products. The higher the real lending rates are, the higher the price of the final products and the less competitive local corporates become in the international markets.