The central bank argues that freeing up the prime lending rates will “facilitate market competition and fair pricing of credit and other lending products,” although the BoB will monitor implementation and “enforce good business conduct”.
Before a wave of reforms in the country’s interest regime dating back to last April, the prime lending rate, defined as the lending interest rate banks give their best customers, was pegged at one and a half percentage points above the bank rate.
Although the BoB moved to use the more efficient Monetary Policy Rate (MoPR) rather than the bank rate last April, commercial banks’ prime rates continued to be linked to the old bank rate, with the traditional one-and-a-half percentage point gap, while moving higher in line with the three rates increases effected by the central bank last year.
At the time, the BoB ordered banks to maintain their prime lending rate to ensure “an orderly and smooth transition” particularly in the pricing of existing financial contracts and other products linked to the industry's prime lending rate.
The bank rate last April was 3.75 percent, while the prime rate for banks was at 5.75 percent. The MoPR was introduced at 1.14 percent and was increased by 151 basis points during the year to 2.65 percent. The prime rate, over the same period, moved from 5.25 percent to the current 6.76 percent, reflecting the increases in rates effected by the central bank.
On Wednesday, BoB governor, Moses Pelaelo, announced that commercial banks would be given the freedom to set their own prime lending rates.
“With effect from April 1, 2023, individual banks will be allowed to independently determine their own prime lending rate,” he said. “Preparatory consultations with banks were undertaken during 2022 and the expectation is that banks are ready to implement this.”
This week, Pelaelo said the spread between the 6.76 percent prime rate level at the moment and the 2.65 percent anchored by the MoPR, was sufficiently broad for banks to price both their deposits and loans.
“The differential between the current prime rate for all banks of 6.76 percent and the policy rate at 2.65 percent is sufficiently broad, providing commercial banks significant flexibility in pricing decisions, for both deposits and credit to their customers,” he said. “Given that Botswana banks are safe, sound, and prudently managed, the bank is confident that commercial banks will continue to be disciplined and rational in determining the prime lending rate for high-quality credits or prime borrowers.”
The latest developments come as the country’s smaller banks have made marginal market gains in recent years against the Big Five, which comprise First National Bank Botswana, Absa Botswana, Standard Chartered Bank Botswana, Stanbic Bank Botswana, and Access Bank.
Analysts expect that the liberalisation of prime lending rates will lead to increased competition amongst banks for lending opportunities and products, with part of the success dependent on the depth of a bank’s balance sheet.
Industry insiders told BusinessWeek that by liberalising the prime rate, Botswana was joining South Africa, where competition and innovation has grown through similar measures.
“Every bank will set its own prime rate, based on how it views the market but they cannot collude,” the insiders said. “It is not expected that the prime rates will significantly differ that much.”
The insiders also disclosed that the BoB had issued guidelines ahead of April 1, under which banks could not change the interest rates charged on existing facilities and could only apply their new, independent prime rates on new loans and products.
