A regulatory directive to reduce lending rates does not fall well on the ears of commercial bank managers because they feel morally obliged to impress the shareholders with attractive bottom lines at the end of the financial year. A reduction in lending rates is an implication of a (short-run) reduction in interest income, ceteris paribus, thereby eroding the profitability of banks.
However, what many advocates of higher lending rates have failed to pay consideration to is the fact that the banking industry does not operate in isolation from the economy as a whole. A reduction in lending rates stimulates private sector investment which results in economic prosperity. This may not be in the immediate short run, but as more investors get access to investible funds, the resulting effect is economic growth from which commercial banks are sure to benefit for a longer time.
The Covid-19 “pandemic” has taken the global economy through a very rough ride and The Gambia is not an exception to the economic shocks. The paralysis of the tourism industry, first from the downing of Thomas Cook and then by the Covid-19 travel restrictions, placed Gambia’s economy under a “knife-edge”. International financial aid, grants or loans, or whatever they call them, only proved to be food for just the “lions”, thus having a very negligible effect on economic stabilization or recovery.
Apart from maintaining a lower policy rate, I think it was very prudent for the Central Bank of The Gambia to “instruct” commercial banks to reduce their lending rates in a bid to encourage private sector investment. One would argue that the “imposition” of a lending rate cap of 15% is anti-competition and represents an autocratic regulatory regime, but in a system where regulatory capacity and compliance schemes are yet to prove sufficient, the attainment of the monetary policy goal(s) will be far-reaching without such an emphatic position taken by the regulator body.
For a fact, a decline in lending rates is not “totally” bad for commercial banks if they enhance credit scrutiny, improve credit quality and institute restrictive covenants to mitigate moral hazards. Selective lending strategies will also minimize the chance of credit loss. Banks can further consider feasible cost reduction approaches such as winding down interest expense and operational cost and explore other sources of income such as fee incomes on contingent liabilities and foreign exchange trading. That way, the decline in lending rates will have very a negligible effect on their overall performance.
Conclusion
In conclusion, I wish to say that I support the reduced lending rate and I will welcome a further reasonable reduction, taking into consideration the greater economic benefits of increased private sector investments.
By Saihou Jeng
Economist
February 2021
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