Politics and banks interests rates, the saga continues…

After the government, it is now the turn of the Senate to complain about the high interest rates charged by banks  on customers’ loans.

The rationale of the president of the Senate is exactly the same as the one of the prime minister which is : the Central Bank prime rate is as low as 2% p.a , how to explain banks are charging at a average rate above 14 % p.a. ?

Well, once again this argument is flawed as as long as commercial banks won’t be   indebted to the Central Bank, the rate of the latter won’t have any impact on the their own interest rates. And this situation will remain the same as long as the banks assets will be primarly denominated in USD instead of the local currency.

The competition for customers deposits is so fierce in the DRC among the 18 existing banks that sourcing funds is becoming increasingly expensive. Therefore, it is difficult to expect banks to lower their rates when themselves have to face higher interest rate to source the deposits that will fund those loans.

It is funny to see officials claiming lower interest rates on loans while state entities are enjoying interests on term deposits as high as 7% p.a on the dollar!

The officials tend to forget that banks have to factor in risk when pricing an asset. For example multinational companies in the DRC can enjoy rate between 6 and 8% while their staff can have 10 to 12% or even less in some cases…

The customers that are charged the higher interest rates are actually State entities due to a higher risk due to poor management, lack of reliable financials and/or enforcable securities…

Furthermore, the senate and the government both think that decreasing the rates will increase the loans to the economy. Once again, this argument is flawed. Indeed, the assumption is that customers are refusing to borrow because of the high interest rates while, in general, the banks are refusing to lend money to customers due to risk considerations. 

I argue that this debate will become relevant when the Congolese economy will not depend on the USD which makes the country monetary policy impotent...