CALLS for measures to compel banks to reduce interest rates currently around 40 percent are misplaced because these are determined by market forces, says Bankers Association of Zambia (BAZ) chief executive officer Leonard Mwanza.
Mr Mwanza said those calling for drastic reduction should remember that banks also borrow money (from deposits) at a very high premium of about 35 percent.
He explained that high interest rates were a reflection of tight liquidity on the market where banks were compelled to borrow from deposits at a high premium of about 35 percent to be able to lend it out to customers.
Reacting to remarks by the Zambia Federation of Employers (ZFE) which recently called on the Government to come up with effective measures which will compel commercial banks to reduce interest rates, Mr Mwanza said interest rates were determined by the market forces.
“We are coming from a market where liquidity was tight and low; new depositing saving costs are quite on the high side, near 34 to 35 percent, so if your deposits are costing that much one wouldn’t expect interest rates to be below 40 percent.
“The call for regulation is misplaced and this is a free market and interest rates basically react to the market situations and the market has been tight on liquidity and banks are contracting new deposits at extremely high costs,” he said.
He explained that commercial banks were protecting their depositors’ funds and avoiding running on a subsidised loan book by lending the money at that lending rate.
“If I am going to contract a deposit at 35 per cent surely at what rate should I lend it? Banks are also getting these monies from others who have it and they are paying a very high premium. The last thing you want to see is a subsidised loan book; banks do not operate on subsidies,” he said.
Mr Mwanza said the current interest rates were normal as they placed themselves where they were supposed to be in reaction to what was happening in the market.
He also said banks understood the pain customers were going through but there was nothing they could do as it was a reaction of market forces.
He however said the rates would drop once there was a decline in liquidity, adding that then there would be no justification for high interest rates.