Jo-Maré Duddy
29 June 2009
NEARLY two weeks after the Bank of Namibia's (BoN) last rate cut of 50 basis points, only FNB Namibia and Bank Windhoek have dropped their prime lending rates, although both opted for less relief for home owners.
Bank Windhoek sent out its rate decision on Friday, announcing that its prime lending rate decreased by 50 basis, while its mortgage rate dropped by 25 basis points.
The new rates were effective immediately.
Although FNB Namibia already announced its rate cut on Thursday, the lower rate only kicks in today.
FNB Namibia also dropped its prime lending rate by 50 basis points, but gave no rate breather to its home loan clients.
The adjustments means that both banks now again have the same prime lending rate, namely 11,5 per cent, and the same mortgage rate, currently 12 per cent.
This is unlike rate changes earlier in June, when central bank pressure resulted in the banks offering different rates to please BoN Governor Tom Alweendo, who was getting increasingly impatient with the big gap of 475 basis points between his repo and banks' prime lending rates - called the interest rate spread.
Commercial banks' rates then competed for business with rates ranging from 11,75 per cent to 12,25 per cent.
The rate spread between the BoN and FNB Namibia and Bank Windhoek now stands at 450 basis points.
Nedbank Namibia and Standard Bank Namibia have yet to announce their rate decisions.
The latter surprised the market earlier this month with its swift reaction to the BoN's cut of 50 basis points by dropping both its prime lending and mortgage rates by 100 basis points. Now Standard Bank Namibia apparently has to wait for approval from Standard Bank South Africa to cut its rates.
Every day the commercial banks delay in decreasing their prime lending and mortgage rates by 50 basis points, they boost their total pre-tax profits by roughly N$450 000 at the expense of those borrowing money from them.
Calculated on the total domestic credit of N$33 billion extended by commercial banks in the past fourth quarter and the fact that they haven't followed the BoN's half a percentage point cut, total pre-tax profits of the four banks grew by roughly N$3 billion last week.
This is despite Governor Alweendo motivating his repo cut as being "necessary to stimulate economic activity by slightly boosting disposable income through a reduced interest burden".
Banks buying time lowering their lending rates also came under fire in Parliament recently.
Deputy Finance Minister Tjekero Tweya said the problem arises because the BoN doesn't oblige commercial banks "to do exactly the same and to make it effective the very same day" when it cuts the repo.
He referred to the BoN's previous repo cut on May 22. Two of the commercial banks followed almost immediately, while the other two took their time, Tweya said.
In the meantime, this delay has been identified as an "administrative problem", he said.
"But we are fully aware of it and the BoN is addressing it," Tweya said.
In the past, commercial banks usually announced their rate adjustment one or two days after the BoN. Occasionally they even announced it on the same day, even though the changes didn't become effective immediately.
The Bankers' Association of Namibia (BAN) recently told The Namibian that although the current cycle of interest rate cuts is putting pressure on banks' profits, it in no way threatens the financial stability of the sector.
The BAN hailed Governor Alweendo's interest rate stance, saying "it is critical to have an accommodative monetary policy in economic downswings - such as we have been experiencing since 2008 - and the BoN should be complimented for their monetary policy to date."
The association said it is "unattractive" to borrow from the BoN, since banks have to pay repo plus two per cent to use the central bank's overnight facility.
Commercial banks subsequently borrow "insignificant" amounts from the BoN and prefer to source funds directly from local pension funds and unit trusts. However, as these are still controlled in South Africa, South African reference plus a premium applies when funds are placed in Namibia.
All of this add squeeze to banks' profit margins, the BAN said.
The BAN warned that dropping interest has "significant negative impacts on depositors, many of whom rely on interest income", and said "care should therefore be taken to take their interests into consideration too".
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