4 January 2013

Zimbabwe: Interest Rates Decline

THE National Social Security Authority and Old Mutual have reduced the cost of money lent to banks from 10 percent to 7 percent, with banks now on-lending that money at a maximum interest rate of 10 percent per annum, banking sources said yesterday.

Before the reduction, banks were on-lending the money at a maximum rate of 15 percent per annum. Many banks obtain significant funds from the two institutions.

The latest reduction comes a few weeks after Finance Minister Tendai Biti said, in his 2013 National Budget last November, he had negotiated with NSSA and Old Mutual to reduce the cost of funds lent to banks so that the financial institutions could also cut their lending rates.

Minister Biti said 40 percent of internally generated money comes from NSSA and Old Mutual and banks could therefore not on-lend at a rate exceeding 10 percent.

"NSSA has reduced the cost of money from 10 percent to 7 percent . . . same as Old Mutual and the banks can on-lend that money at a maximum rate of 10 percent," said a dealer with a local bank.

"This was with effect from January 2, 2013. Before the reduction, banks were on-lending at an average rate of 15 percent."

A number of analysts said while the reduction was commendable, it might not make a meaningful "positive impact", considering the short-term nature of the loans.

"Many companies do not require short-term funding because of their state and while it is positive that these two institutions have reduced the costs of their money, it may not really make an impact due to the short-term nature of the credit," said one analyst.

"Most funding is short-term from 30-90 days and 180 days, in rare cases. But the industry requires long-term funds which are unavailable due to the nature of the deposits.

"As a result, most companies are basically borrowing short-term money to finance long-term projects. Thus, most firms are rolling over their loans with bankers."

But the African Development Bank said in its recent economic review that the reduction "will go a long way in assisting in the reduction of lending rates in the economy".

No official comment could be obtained from Minister Biti, NSSA or Old Mutual yesterday.

Most companies are borrowing at extortionate rates of between 15 and 25 percent, as compared with regional firms, notably SA, where the lending rates are as low as 5 percent.

Most companies have failed to recapitalise since Zimbabwe started using the multi-currency system in February 2009.

This was mainly due to the lack of affordable credit.

The Confederation of Zimbabwe Industries has warned that more companies are likely to collapse this year as the operating environment is expected to remain tough.

Last year saw the number of companies going bust increasing, as the industry continued suffering from numerous ills, including high finance costs.

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