Thursday, April 4, 2013

Central Bank prime rate down , pressure on commercial banks from the government up...


Following the 'good' results observed recently in term of inflation, 1.48% p.a at the end of January 2013 according to the Central Bank of Congo (BCC), the BCC has decided to reduce its prime rate by 1% to 3%.

As a Result, the government has requested from the 'independent' BCC to request the commercial banks to reduce the interest rates they charge customers on loans and/or overdraft facilities... Indeed, the government is blaming the commercial banks for charging interest rates that discourage investments and consumption. They do not understand why commercial banks can refinance themselves at the Central Bank @ 3% p.a. and charge customers 15% and plus...

MY ANSWER: banks are essentially lending in USD. Therefore, they do not have recourse to the BCC for refinancing!!! Thus, those rates do not apply to them. The only way this could work would be if commercial banks were indebted to the BCC which is not the case!!!

When commercial banks set their interest rates they take into consideration several other criteria such as the counterpart and country risks, the cost of funding (here in USD), the securities provided...

I argue that it is not the role of the government to dictate the market prices; the competition is more efficient in doing so... As an example the interest rates on a car loan could go up to 36 % p.a. few years ago. Today, banks are ready to charge as little as 10% p.a. for the same loan thanks to the competition...

The government should be focusing on one of its only 'business duty' which is creating a favorable business environment for investors...

2 comments:

Unknown said...

Are all BCC activities in Congolese Francs, or do they also access US$? You are right that they should concentrate on improving the business climate, but eventually this should also tie into collaboration with commercial banks to help them lower their lending rates as well.

Herve Otschudi said...

Dear James, activities are essentially in CDF, however, the Central Bank do intervene on the Forex market on a needed basis.

I agree with with you on the 'collaboration'aspect... For example, a credit bureau at the Central Bank will help reducing the counterpart risks faced by banks. This will lead to a smaller risk premium... But I remain convinced that competition will be key in driving the rates further down.

Thanks for reading the blog and for your comment!

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