The Bank of Namibia (BoN) has directed all banking institutions in the country to reduce the interest rate spread on various loan products.
This directive follows a comprehensive review of current and projected domestic, regional and global economic developments by the bank’s Monetary Policy Committee (MPC) at its third bi-monthly meeting of the year on 16 and 17 June.
In a memo dated 1 July, BoN acting governor Leonie Dunn directed all banking institutions to reduce the spread between the prime rate, mortgage rate, any other lending rates and the repo rate by 25 basis points.
“The reduction in the interest rate spread must be implemented 0.125% before 30 September; and 0.125% before 31 December,” says Dunn.
The interest rate spread is the difference between the interest rate charged by banks on loans to private sector customers and the interest rate the banks pay for demand, time or savings deposits.
It represents the bank’s profit margin and is crucial for their profitability.
Windhoek economist Salomo Hei says BoN is within its mandate to direct banks to cut the rate spread.
“Banks need to adjust to be competitive to chase business in the economy.
“It will mean more money in the pockets of consumers and businesses can even employ more people,” he says.
Dunn directs that every banking institution must implement the directive on the date of receipt thereof and provide BoN with written confirmation of implementation.
After the MPC meeting, BoN governor Johannes !Gawaxab said the committee had decided unanimously to keep the repo rate unchanged at 6.75%, a full percentage point decrease compared to a year ago.
“Commercial banks are accordingly expected to maintain their prime lending rates at 10.50% to continue safeguarding the one-to-one link between the Namibia dollar and the South African rand while supporting domestic economic activity,” he said.
The governor said while the MPC had decided to maintain the repo rate at its current level, it has been observed that within the Common Monetary Area (CMA) countries – South Africa, Namibia, Lesotho and Eswatini – the longstanding practice has been that the prime rate does not exceed 3.50 percentage points above the repo rate, only with the exception of Namibia that has maintained margins of 3.75 percentage points.
The CMA governs the monetary policies and currency exchange between these nations.
“In this regard, the MPC is urging the commercial banks to heed the call of the BoN to start aligning their margins above the repo rate to the levels of other CMA countries.
“This move will address this anomaly and in time provide relief to consumers. Given the adjustment that is required on their operating models, the commercial banks will be given a specified time frame to align accordingly,” said !Gawaxab.
– email: matthew@namibian.com.na
