People need to understand the dynamics of bank loans

Editor, The first duty of any deposit-taking institution should be to those who have deposited their money into its safe-keeping. The second is its shareholders, workers, suppliers and other service-providers. Banks are not charities and operate with a view to make a profit. Yes, interest rates in our country — and in Africa in general — are prohibitively high and do not encourage bank-based expenditure, be it for capital investment or for consumption. One’s expected returns would need to be extremely high to justify the exorbitant interest rates offered by our banks. But banks are not the sole culprits. People need to understand the complex factors that determine various rates charged for different borrowers and class of loan. First, an interest rate takes into account different factors: current and projected inflation rates and therefore the net value of the capital and the interest payments over the term of the loan. Second is the creditworthiness of the individual borrower. Third, is the net present value of alternative investments, such as government and other publicly-guaranteed short, medium and long-term paper. In many African countries, many banks find it safer and almost just as profitable to lend their depositors’ money and any other funds they can borrow to the government by purchasing its bonds, rather than risk it with private borrowers without any credit history on which to base their individual interest calculations. Which is why they set very high uniform interest rates for all private borrowers in the hope those who are able to pay them will compensate for expected high losses from a high proportion of non-performing loans to borrowers with little or no credit history. The irony is that such high interest rates are themselves likely to push many loans into sure default. And so the question becomes, what can be done about this situation which discourages or reduces lending to the private sector and households and therefore limits investment, consumption and the maximization of economic growth. I believe we have two possible supply-side approaches that could unblock the situation. The first is encouraging the creation of more - and especially specialist - financial institutions with mandates to lend to specific sectors or activities, for instance mortgage banks, perhaps with tax incentives to encourage them to lend to lower-income borrowers. A second solution might be the development of financial products that can more efficiently and effectively mobilize the savings of households of as many households of modest means as possible with a view to ensuring that the proceeds of such instruments are first and foremost plowed back into investments and expenditure that prioritizes the needs of that class of population, including in housing. What we should avoid, where possible, is government-mandated bank investment or lending decisions, even though I have nothing against industrial policy. Without policies that favour specific strategic economic sectors with a high potential for growth and job creation; neither Japan, nor South Korea, China or the Asian Tigers would have achieved the economic miracles that are there for all of us to see. MweneKalinda Reaction to the article “Kigali City targets 1,000 affordable houses in 2015” (The New Times, January 2).

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People need to understand the dynamics of bank loans