RBZ to enforce in duplum rule

The Reserve Bank of Zimbabwe has moved to boost public confidence in the local banking sector by among other things, compelling banks to adhere to the in duplum rule in respect of interest rates.

The in duplum rule protects debtors from exploitation by ensuring that their creditors cannot allow interest to accumulate indefinitely.

This initiative - among several others - are contained in the central bank's draft 'Consumer Protection Prudential Standards' released today.

"Regulated entities should charge interest rates to borrowers computed on reducing balance basis, based on the outstanding loan balance. Regulated entities should ensure that they comply with in-duplum rule.

"The rule provides that the total amount of unpaid interest on a loan or credit transaction may accrue only to an amount equal to the outstanding capital sum, and that all arrear interest ceases to run when that interest has reached the outstanding capital amount.

"Thus where sums are claimed for moneys loaned and advanced, the capital component and the interest component should be clearly distinguished, so that the rule can be properly applied," reads the draft Consumer Protection Prudential Standards.

"Regulated entities should therefore note that despite any provision of the common law or a credit agreement to the contrary, the amounts contemplated under the in duplum rule that accrue during the time that a consumer is in default under the credit agreement may not, in aggregate, exceed the unpaid balance of the principal debt under that credit agreement as at the time that the default occurs."

The specific amounts the RBZ is referring to include initiation fees, service fees, interest, the cost of any credit insurance, default administration charges and collection costs (charges). Also in respect of interest rates, fees and charges, the RBZ wants local financial institutions to fully and easily disclose their interest rates, fees and charges.

"Banking institutions should disclose interest rates, fees and charges to their customers as follows: Upon opening a new account for a person, a banking institution will be required to provide the person in writing with a written statement of: all its charges for maintaining the account and allowing the person access to the funds in the account; the interest it will pay on the funds in the account, and the interest the person will have to pay on any overdraft; and such other particulars as may be prescribed by the Registrar.

"Where a banking institution extends credit to a borrower, it shall disclose to the borrower in writing: the interest charged and the manner in which it is to be calculated; any applicable fee or other charge and the manner in which it was calculated; every term or condition applicable to the credit, clearly identifying the obligations of the borrower; and such other conditions as may be prescribed or as the Registrar may specify," said the Central Bank.

Abuse of depositors' funds, bank closures and a generally poor sense of customer approach has eroded trust and confidence in the local financial system. But the Central has in recent times moved to restore that confidence by pushing for broader financial inclusion and reducing banking transaction charges.

And the formulation of the Consumer Protection Prudential Standards should address numerous issues that bank customers have long complained about.