The difference between the repo rate, determined by the central bank, and the prime rate at commercial banks forms part of the bank’s working funds to ensure customers have the latest, safest and most reliable systems in place.
This is because banks are service businesses that incur operating expenses, such as employee costs, salaries and training, building or rental costs, communication costs, corporate tax commitments, corporate social responsibility costs and technology development and systems maintenance costs.
FirstRand Namibia
As such, explained FirstRand Namibia’s chief marketing officer Tracy Eagles, saving options at commercial banks are directly linked to the repo rate, whilst bank loans are directly linked to the prime lending rate, which is mostly higher than the repo rate.
The repo rate, the benchmark received from the Bank of Namibia to charge consumers on loans, determines the rate at which commercial banks can borrow from the central bank.
“The cost of protecting customer money is exceptionally high – not just to work against cyber-attacks, but also to comply with financial services regulations and legalities,” explained Eagles in response to queries from
New Era.
She elaborated, as an example, that when a customer earns 5.75% on a savings option, such as the FNB Money Maximiser, a bank loan’s current prime rate of 9.25% is used, in addition to the usury act rate, which may or may not is increased according to the customer’s credit history and ability to pay back the loan over the agreed period it is
granted.
“Profits made by banks are either re-invested into the above categories to continuously improve services and products professionally and easily, or profit is paid out to shareholders, as a return on the investment they made when they put money into the bank company by buying or already holding shares,” said Eagles.
According to Eagles, the biggest difference between taking a loan and saving is that taking a loan is a contract decision, where the customer commits to paying off the loan according to the agreed terms.
“Until it is paid, you are committed legally. This is because the bank is providing you with the cash you don’t have to buy something important you have decided you need. For the benefit of being able to take possession of the reason you want the loan, such as a car or a house, straight away, you commit to paying back the money you lent plus interest, and this interest amount you pay is the money the bank uses to run its business.
“The main amount that you borrowed was paid by the bank on your behalf to the seller of the house or car. Saving is a choice, but a very necessary choice. With savings, you need to make your discipline about saving regularly. There is no law that you have to commit to – only the wish to see your goal be achieved,” Eagles stated.
She continued that banks offer different savings options to suit the different lifestyles and life stages of clients.
At FNB, this ranges from products such as Bank your Change through to fixed deposits and notice accounts as well as Money Maximiser accounts that reward customers dependent on larger balances saved.
Said Eagles: “When you save with a bank your funds are less exposed to volatility and market disruptions because of the reserve bank regulations that require banks to hold certain funds in reserves in case of market crashes”.
Eagles added that the best option for a consumer will always be one that fits their defined objective, ranging from financial stability, the accessibility, term and the associated interest rate needed to achieve the desired goal.
“For instance, if a client has low capital and prefers immediate access with a good interest rate for a short-term period, we have the Savings Pocket account for that which comes freely linked to the client transactional account, additionally if they have larger balances and prefer immediate access with a good interest rate for a short-term period, we have the Money Maximiser for that.
“For medium-term goals, we have products that require a notice to be loaded for funds to be accessible, then lastly for your long-term goals, we have fixed deposits that are designed to have you stay the course to achieve your goal and offer competitive interest rates,” Eagles stated.
As such FNB is currently running a campaign encouraging customers to stick to long-term savings commitments for 12 months, to receive a 10% top-up on their interest from the bank over the 12 months.
Nedbank Namibia
Meanwhile, Nedbank Namibia has reiterated that according to regulations, a lender must make a substantial effort to ensure a loan is a good option, because in some cases it simply isn’t.
According to head of Nedloans Erastus Haihambo, the core focus for the bank is to help customers reach financial security—which is, living comfortably while still paying loan instalments on time.
In fact, Haihambo noted, this carries a double purpose: both to protect banking customers and to ensure the solvency of the credit institution.
“Nedbank Namibia strives to be a responsible lender, providing affordable loans while ensuring that Namibians do not fall into the debt trap unnecessarily. Financial ill-health from acute indebtedness is not only perceived as a financial issue but a public health issue as well. We are committed to operating within the prescribed market conduct regulations, even in the current tough economic environment,” Haihambo stated.
According to Haihambo, customers’ access to financial education coupled with adherence to market conduct principles is key to reducing the high ratio of household debt to disposable income. In this regard he noted that Nedbank is striving to comply with the progressive guidelines of the regulator, having proactively adopted a market conduct-aligned business model.
Haihambo added that when taking out a loan with a variable interest rate, the interest rate may increase, so the increased payments will also make it more difficult to keep up with payments thereby posing a risk that a borrower will not be able to pay back the money borrowed.
“If we take out a loan for something with a set lifespan, like a car, the loan’s term should never be longer than the lifespan of the item.
Nedbank’s goal is to see to it that customers responsibly take Nedloans and avoid over-indebtedness…In this regard, Nedbank has proactively chosen to comply with the regulation prescribed under the Banks Act and has self-regulated its lending policy to protect customers.
Our customers will come to realise that our product offering is one of the best on the market. By ‘over-indebtedness’ we refer to a situation where the customer struggles or fails to keep up with bills and other financial commitments, resulting in missed payments, contrary to the loan agreement,” Haihambo explained.
According to the Financial Stability Report of the Bank of Namibia, at the end of December 2021, the ratio of household debt to disposable income stood at 77.4% compared with 87.7% for the previous reporting year. This 10.3% improvement notwithstanding, the central bank cautioned that the ratio remains unacceptably high.