Responsible lending vital for economic stability

01 Oct, 2021 - 00:10 0 Views
Responsible lending vital for economic stability Responsible lending

eBusiness Weekly

Dr Keen Mhlanga

The Reserve Bank of Zimbabwe managed to achieve price and exchange rate stability by discovering a market exchange rate, with a total of US$833 million allocated through the auction system as at 16 February 2021. 

Conjointly, it sustained disinflation from 837,5 percent in July 2020 to 362,5 percent in January 2021, monthly inflation also dropped from a peak of 35,5 percent to below 5 percent in the respective period. 

Amidst semi-annual stability, relevant monitoring and regulative tools should be continually be reviewed to absorb robust Covid-19 pandemic shocks. 

There is need for continuous remodelling of existing financial policies and assessing their alignment with economic growth and stability.

Inflation has a negative significant effect on the demand for credit in the short-run. 

Some credit facility providing financial institutions have suspended lending with some even closing their entire operations and withdrawing their eligibility. 

The primary reason being the rapid rise of the inflation rate experienced in the first half of 2020. 

Amongst other factors it is favourable for the borrower during inflation, it will always be cheaper to pay the agreed amount, which in real terms will be less than the actual borrowed amount, in value. 

Lenders increased their interest rates and avoided long term advances, in order to quickly recover their money and have less exposure to trending risks. 

In dispersion through measures to mitigate an upward swing of prices and exchange rates, responsible lending will play a vital role in promoting economic growth and stability. 

Responsible lending is to act in a customer’s best interests, ensuring affordability, transparency of terms and conditions and supporting a borrower if they experience repayment difficulties. 

The cost of borrowing is relatively high, some banks have not reviewed their lending rates considering that the currency have been stable and the existence of steady sources of income. 

In accordance to the National Development Strategy Phase 1 (NDS1), the first priority which is on national economic policy, mainly devote to maintain economic stability and ensure economic growth.  

The current interest rates in the financial sector are averaging 65 percent per annum, some banks are stretching up to 120 percent per annum and microfinance institutions charging an average of 40 percent per month including processing fees. 

The financial policy in Zimbabwe is based on the principle of macroeconomic stability to create the basis for economic growth in the country. 

Economic stability is an important criterion for the economy but high interest rates may harness the national growth rate potential. 

High lending rates affect borrowers’ businesses negatively in the sense that they will not be able to make enough profits to grow their businesses which is the primary reason why they opted for the loan facility. 

Lending rates impact on the operations of businesses whether high or low. 

All active financial institutions that have the capacity to advance money should adopt Interest Rate Reduction Refinancing Loan (IRRRL) into their business operation so that borrowers can invest to yield enough profit to service their loans and also make some profit for growth.

Quality lending should also allow a due diligence approach to assess the feasibility of the loan proposal, main use applied for and actual use during the advancement course and repayment. 

Lenders put more weight on the ability to pay back, yet ignoring if the applied use of the advance is adhered to by the borrower. 

Business proposals are used for loan approval by businesses, after acquiring the loan they may use it for other purposes, which might end up fuelling the parallel market and catalysing inflation and exchange rate instability. 

It is the duty of lenders under responsible lending to analyse and rectify red flags within the loan period, quick loan repayment should also be justified by business ethical parameters. 

If the interest rate is high it will force business to increase their prices in order to pay back the loan and also make profit to survive and remain competent. 

Many households and businesses are heavily indebted and large segments of the community and the nation are highly susceptible to future harm.

Interest rate channel in South Africa, a percentage restriction in monetary policy increases lending rate by 0,29 percent; a percentage increase in the lending rate reduces investment by 0,063 percent; and a percentage fall in investment reduces inflation by 0,074 percent. 

For the lending channel, a percentage restriction of monetary policy reduces banking sector credit by 0,22 percent; a percentage fall in private sector credit reduces investment by 0,20 percent; and a percentage decline in investment reduces inflation by 0,086 percent. 

We need more investments and at the same time there is need to maintain low levels of inflation and the balance of the two is on the interest rate. 

Interest rates reflect the purchasing power value and the rate of time preference of the borrower and lender, it has a significant impact on the demand for credit both in the short-run and long-run.  

The interest rate and exchange rate have a negative and significant impact on Return on Equity. 

Bank size and interest rates have a negative complementary with gearing in predicting profitability. 

Interest rates are also negatively related to the cash flow rights and positively related to the control rights granted to creditors. 

Therefore, there is need for policymakers, regulators, and bank management to identify all drivers of profitability so they can maximise on those which encourage economic growth and stability. 

The design of financial contracts in practice should reflect a multi-dimensional trade-off among contract features that aligns incentives and apportions risk among the contracting parties in a state-contingent manner.

A refurbished national responsible lending regime is of imperative in reinforcing the essential objectives to promote prudent lending, curtail undesirable market practices, and impose heavy penalties for irresponsible lending and leasing. 

Moving forward, more systematic supervision of responsible lending risks, practices and exposures should be practised and proposals for modest reforms that require lenders to better inform and engage with consumers about the risks of elevated levels of debt, should be given first priority. 

If we have a non-responsible financial system, it may be attributable to the extreme minimum capital requirement and the emerging consolidation of commercial banks through government takeovers as well as the various credit rationing practices by banks aimed at reducing the risk of adverse selection and insolvency.

Lenders put more weight on the ability to pay back, yet ignoring if the applied use of the advance is adhered to by the borrower. 

Keen Mhlanga, Founder and Chairman of FinKing Financial Advisory

Share This:

Sponsored Links