Times Of Swaziland: INTEREST RATE HIKE: TALK TO YOUR BANK - ECONOMIST

INTEREST RATE HIKE: TALK TO YOUR BANK - ECONOMIST
================================================================================
Nonduduzo Kunene on 31/01/2023 08:36:00


MBABANE – If new instalments on your bank loan are increased due to the
recently announced prime rate hike, you can negotiate with your bank for new
repayment terms.
This was advice shared by Economist Thembinkosi Dube. Last Friday, the Central
Bank of Eswatini (CBE) announced a 25 basis points increase to the discount
rate, which translated to a 0.25 per cent increase in the interest rate. This
increased the interest rate from 6.5 per cent to 6.75 per cent. The newly-
announced interest rate affected the prime lending rate charged on bank loans in
the country, from 10 per cent to 10.25 per cent.
CBE Governor Phil Mnisi made the announcement a day after the South African
Reserve Bank (SARB) had announced the same increase, which escalated the
interest rate from seven per cent to 7.25 per cent. This meant everyone who had
a bank loan linked to the prime rate would be affected by the new interest rate.
In simpler terms, if one had obtained a E100 000 personal loan in the previous
10 per cent prime rate, they would have paid E110 000 over a year. However,
following the recent increase in the interest rate, the total repayment would
now be E110 250. “The difference may not be much significant to small loans,
but those who are paying huge monthly instalments will be affected because the
difference will be noticeable,” said the expert.
Loans
Dube stated that defaulting on bank loans was not necessary, more especially if 
clients felt that the new imposed interest rate was either steep on them or was
eating in the 33 per cent income threshold that financial services should be
cognisant of. Financial institutions are bound by the Employment Act to ensure
that whenever they issue a loan, they can only take a maximum of 33 per cent of
the income.  The economist said depending on the size of the loan and the change
it encompassed in your monthly instalments, clients could go and negotiate new
instalments with the financial institutions. “You can go to the bank and
negotiate new instalments if they are too steep for you, or exceed the threshold
of 33 per cent, but that depends on the client’s payment history,” he said.
He explained, however, that negotiating the instalment did not imply that the
new rates would not apply. Dube said people should understand that if they
renegotiated the payments, it would only prolong the payment period.
He said the same principle would apply to home loans. He highlighted that home
loans were a bit tricky because they were supposed to be paid up before
retirement age. However, through negotiations and the change that the new rates
might bring, nothing was impossible. Further, Dube said it was important for
consumers to note that the changes in the interest rate also affected financial
institutions. He noted that the change in the interest rate might increase the
number of defaulters. Secondly, the interest rate discourage people from
obtaining bank loans yet they were a major income pool for the financial
institutions.
Due to the stated reasons, Dube said banks were open to negotiate with their
clients. He highlighted that, before, banks were quick on repossessing
properties that were obtained through their loans, but over the years, they
changed due to the depreciating value of money, among other things. “Interest
rates negatively affect banks because they are faced with the risk of people
defaulting on loans. In turn, this has a negative effect on the banks because
they survive on loans. That is why banks are kind to people with loans than
before,” he said.
Spending
Dube mentioned that the thinking behind the recently announced interest rate was
to discourage people from too much spending and obtaining bank loans.
“Basically, the understanding is that it will discourage people from taking
loans in a way that there should not be much money in their hands, in order to
control the inflation rate. This is because bank loans are perceived to give
people more disposable cash, which might influence the demand and supply
rate,” he explained. He, however, mentioned that in as much as there was a
thinking that an increase in the interest rate would prevent too much spending,
this was not the case in the Eswatini economy.
The interest rate increase  was announced while parents were in and out of
financial institutions, seeking back-to-school loans, among other basic needs.
In Eswatini, the cost of living has been skyrocketing for the past 13 months,
which reduced disposable income. Some workers have turned to bank loans for
survival. The economist noted that looking at the salaries and high cost of
living, the theory applied to determine the interest rates was not practical in
the Eswatini context and economy, since people borrowed loans for basic needs
and not for luxury. “The interest rates will leave many people worse off,”
he said.