By all indications, the government is seriously preparing to make a move to dismantle interest rates caps.
By all indications, the government is seriously preparing to make a move to dismantle interest rates caps.
As we went to press, I gathered that a team of top Treasury officials were holed up in a secret location with a clear mandate to come up with an alternative to the rate-capping regime.
According to my sources, one of the main options on the table is a consumer financial protection law specifically aimed at protecting consumers in the financial sector against exploitation by banks. We also know that the government has committed to the International Monetary Fund (IMF) to modify or repeal the rate-capping law.
The truth of the matter is that the idea of a consumer protection law for the financial sector is not new.
As far back as 2011, the Treasury formulated a comprehensive consumer financial protection bill proposing a financial sector ombudsman and a financial consumer protection agency.
What was drafted was a framework that would have been distinct from the general protection law that was presented to Parliament and passed.
That bill was anchored on three pillars. First, transparency and disclosure. In this regard, the bill proposed disclosure of pricing terms and conditions for all products, including loans.
In other words, it would have forced disclosure an annual percentage rate (APR) for all lending on a prescribed, standardised formula.
Mark you, the current practice does not disclose in a uniform way the effective rate of interest being charged.
This is why banks can still get away with hidden charges that push the effective rate above the legal limit of 14 per cent.
Similarly, disclosures on the rates paid on deposits do not go as far as envisaged in the original proposal for annual percentage yield (APY).
In effect, banks are paying depositors much less than the legal floor of seven per cent. In the absence of a banking ombudsman, there was no regulator to stop banks from re-designating savings accounts into so-called transactional accounts that attract no interest.
The second pillar of the consumer protection bill was fair treatment of consumers.
It would have obliged banks to give consumers fair contracts written in plain language with suitable translations into vernacular and with minimum use of small print.
The bill also proposed to introduce a cooling off period of seven to 14 days, during which period a consumer would be allowed the discretion to cancel signed loan contracts.
The third pillar of the bill was extensive provisions for recourse and redress mechanisms, the most important provision of which was the introduction of a financial sector ombudsman with power to make determinations on consumer complaints, including powers to fine banks for inappropriate behaviour.
What is my point in describing in detail the provisions of a bill that has been gathering dust at some office in the National Treasury offices for more than four years?
First, is to make the point that a consumer protection law is hardly the tool to address the core problem of persistently high interest rate and spreads.
Indeed, consumer protection laws are usually introduced to moderate conduct and behaviour of banks in their relationship with customers.
Thus, when you want to address the problem of persistently high interest rate and spreads, you have to introduce an entirely different set of reforms.
Top of the list of these reforms is recognition that the government’s insatiable appetite for borrowing gifts to banks their largest source of profits.
Thus, as long as interest on government securities, which is the risk free rate, is high- it follows that consumers will be charged high lending rates.
This is why we have always argued in this column that the government must introduce a system of primary dealers that enable it to influence the level and direction of the Treasury Bill rate.
Secondly, you have to address the issue of competition between banks. The reason why the margin above the risk-free rate remains persistently high is there not enough competition between banks. We have too many small banks that are not effectively competing with each other.
Thirdly, a functional interbank market serves to spread liquidity horizontally among banks of the same size and vertically among banks of different sizes.
A well functioning interbank market enables banks to manage their liquidity, allowing them to lower their funding costs. We have a broken interbank market.
Why aren’t we discussing infrastructure sharing? Why are banks not using credit reference bureau good payment history to offer good payers lower rates? Let us address the malady- not systems.
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