20 February 2013

Zimbabwe: Lending, Deposit Rates Gap Widening - AFDB

THE disparity between lending and deposit rates in Zimbabwe is widening, dampening the already weak savings culture in the country and its economic recovery, according to the African Development Bank (AfDB).

In its January economic review, AfDB said on average, lending rates were higher for individuals than for corporates, with commercial banks charging an average of 14,63 percent for individuals and 11,52 percent for corporates. Merchant banks were charging an average of 17,77 percent for individuals and 14,26 percent for corporates.

AfDB said in a bid to reduce average lending rates, government was negotiating with banks to reduce their bank lending rates to levels below 10 percent per annum to enable banks to lend to their clients at 10 percent or less.

"While this is commendable, the challenge is that only a small amount (40 percent) of funds are mobilised internally, which means the overall impact on lending rates may be small. Thus, more measures are still required to address the funding and interest rate challenges facing the economy," said AfDB.

Local financial institutions have maintained that the high interest rates are a result of the level of risk associated with offshore borrowing which has been expensive.

The difference between lending and deposit rates is extremely high compared to regional levels. The spread between lending and deposit rates for Namibia, Botswana and South Africa is said to be around five percent compared to 15 percent in Zimbabwe.

AfDB said the minimum three-month deposit rate (excluding rates on dormant or inactive accounts) for November 2012 declined to four percent, from the five percent per annum rate that prevailed since March last year.

"The range for commercial banks' three-month deposit rates is wide across banks, suggesting the banks' different capacities to reward depositors. Strong and weak banks have varying capacities to reward depositors and savers," said AfDB.

AfBD said banks' reputation and goodwill in the market varies, as do their willingness and capacity to attract new and quality customers.

The bank said the maximum saving deposit rate declined to eight percent per annum in November 2012, down from the 12 percent per annum that prevailed since March 2012.

"The decline is unfavorable in an environment where there is need to mobilise more savings. Saving rates vary widely across banks, suggesting the different banks' differing abilities to reward savers. Given the need to boost funding for productive sectors, banks should still be encouraged to increase deposit and savings rates," said AfBD.

The Zimbabwean banking system is characterised by liquidity challenges, which has made the cost of money expensive.

Given the nature of the bank deposits, which are currently short-term, bank deposits are skewed and the bulk of the corporates now place their funds on fixed term deposits.

Fixed deposits now attract high rates similar to those on the interbank market since there is no lender of last resort.

This scenario renders the bulk of bank deposits to be relatively high since they are fixed compared to savings deposit rates.

Banks still maintain high lending rates because the bulk of their deposits require a high rate on these fixed deposits.

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