Zimbabwe's new 12% interest rate regime to apply in retrospect

Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya, said the new interest rate regime which capped lending rates at 12 percent will apply in retrospect.

"When you change the interest rate in the system, it means that you are changing interest rates for both the new and the old loans," the central bank chief said after touring a local fruit paste manufacturing plant in Norton last week.

"The bankers have said they are going to comply, before April 1. But we cannot talk about compliance before the compliance date…," he added.

This will certainly be sweet music to the ear for thousands of depositors who are reeling under the country's high interest rates which at some point were as high as 35 percent.

In his 2017 monetary policy statement, the central bank chief directed all banking institutions to set lending interest rates at 12 percent or below, also stating that the institutions were to keep bank charges below three percent.

The directive has attracted arguments from legal experts, who have pointed out that the new regime violates loan contracts entered before Mangudya's directive.

Prior to the announcement, lending interest rates were determined by a framework allowing banks to charge between six and 18 percent, depending on the client's risk profile.

While local banks have said they will comply with the new interest rates regime, they have warned the situation may lead to reduced lending.

Bankers Association of Zimbabwe president Charity Jinya recently told Parliament that financial institutions may be forced to limit loans in order to protect depositors' funds.

"Banks may look at the risk and they may decide — which is also correct - to say the risk is too high. Why put the funds at risk, funds that belong to depositors," she said.

In the policy statement, Mangudya said affordable credit was important to enhance output and productivity for the national economy to flourish.

In the year to December 2016, local banks recorded a startling 42 percent surge in profits from $127,4 million to $181 million driven by lower loan loss provisions.

Interest income continued to be the major income driver constituting 58,4 percent of total income of $1 billion for the year.

After the country's migration to a multi-currency system in 2009, banks charged interest rates as high as 35 percent, excluding default rates of equal or higher thresholds, plunging corporates and individuals into huge debts — as they initially did appreciate real dollar value.