Banks should charge interest at CBK rates

The cost of borrowing is critical to economic growth. This is the reason Parliament introduced bank interest rate caps in 2016 to regulate borrowing and spur business. However, the law was repealed last year and gave the banks the latitude to determine the interest rates guided by the Central Bank.

Even so, the principle remains that borrowing interest rates should be justifiable to trigger uptake and increase the cash in circulation. More money in the hands of consumers stimulates consumption of goods and services, sparking production and manufacturing and improving tax revenues.

This week, the Central Bank’s Monetary Policy Committee took the credible step of lowering the interest rate by 25 points from the 8.50 per cent levied in November to 8.25 per cent. Significantly, this followed a reduction last November from 9.00 per cent. Underpinning this is the desire to expand the base of those taking up loans and improve the business environment.

Generally, a situation where bank interest rates are high is detrimental as it locks out potential investors from accessing cash and limits levels to which businesses expand. Financial inclusion is vital in a dynamic economy and that is only tenable where borrowing interests are attractive.

During the regime of the interest cap law, banks were forced to adhere to the regulation unquestioningly. But that era of forced regulation is gone, leaving banks to be guided by the market forces. Which is why the rates by the CBK should be respected because they are borne out of the prevailing realities.

To be sure, the CBK was emphatic that the economy is currently fairly elastic and, therefore, banks can absorb any shocks arising from interest rate reductions. Put differently, banks can still make profits even when the rates are lowered. That high interest rates they used to charge were, essentially, geared towards making abnormal profits in an environment where borrowers and the rest of the population were hurting due to economic shocks.

When citizens find themselves defaulting in repaying loans due to exorbitant interest rates, and when many find their properties and assets being auctioned for failure to service bank advances, then the country is headed in the wrong direction. For this reason, the CBK is making the right decision in reducing interest rates as it insists on expanding productivity to increase revenues.

Banks have an obligation to follow the CBK’s directive and lower interest rates. They have to de-socialise themselves from the past, when they made huge profits through exceedingly high interest rates, which is untenable in a flagging economy.​