Bank Lending Conditions

[bm21]

Bank lending rates are out to be a function of returns from alternative investments. For Commercial Banks, alternative investment is the investment in government securities such as Treasury Bills and Treasury Bonds. Treasury Bonds and Bills Auction Summary held on Feb 10, 2010 which is a typical prevailing performance of government securities is as follows:

2-yr Treasury Bond
Weighted Average Yield to Maturity (WAY) = 9.46%
Weighted Average Coupon Yield (WCY) = 8.05%

5-yr Treasury Bond
Weighted Average Yield to Maturity (WAY) = 9.52%
Weighted Average Coupon Yield (WCY) = 9.30%

7-yr Treasury Bond
Weighted Average Yield to Maturity (WAY) = 10.38%
Weighted Average Coupon Yield (WCY) = 10.23%

10-yr Treasury Bond
Weighted Average Yield to Maturity (WAY) = 11.79%
Weighted Average Coupon Yield (WCY) = 11.67%

Weighted Average Yield to Maturity (WAY) % per Annum for Treasury Bills is such that 0.64%, 3.35%, 3.92% and 6.36% for 35 days, 91 days, 182 days and 364 days Treasury Bills.

I understand banks have to add a certain margin over and above the prevailing coupon rate say +1.5% - +3% to get the lending rates for other private firms and individuals. Having said that, the question comes that:
1. Why do Bank lending rates uniform irrespective of loan tenure particularly for loan duration over and above 2 years?
2. Why do Bank prevailing lending rates ranges between 17 - 20%? If they you add a risk margin say of 5% for a 5 -yr Treasury Bond WAY you get 14.46%, this means a Bank loan to be repaid within 5-yrs was ought to be charged interest rate of not more than 15%, so why do rates still 18%?
3. Cost of funds to Banks such as NMB, AZANIA Bank, CRDB, BARCLAYS, STANBIC Bank and TIB are substantially low due to huge deposits they have, why do these Banks also restrict loan tenure to 5 years charged at more or less same interest rates as other junior Banks with limited deposits of 17 - 20%?

 

[Anfaal]

BM21, its not true that the lending rates are uniform irrespective of the maturity of the loan in response to yr question. From yr example above, none of the interest rates have been the same throughout the period. Equally when it comes to lending private institutions and individuals, interest rates are varied. However, the decision of the rate to particular client/customer does not only depend on maturity of the loan, there are other factors that lead to creditworthness of the clients attributed in security, relationship with the bank (the ability to negoatiate loan with the bank) etc.
We have the problems on the rates especially in our economy however the part of it is the result of poor economy policy by the government. For instance, three years ago, the government was offering more than 10% to its lenders. Remember the government is regarded as risky free lenders. With that respect, banks are more interested to lend the riskless borrowers ultimately at higher interest rates for private sectors. Secondly, is the inflation which was at the tune of 10%. In this case if your given a loan than in the end may be affected with inflation which inflict the value of money, lenders have to find the way to compensate that through higher interest rates. Thirdly, among the investors in our local banks are foreign investors with their investments in foreign currencies who in the end will have their investment translated to their local currency. In the environment where the our currency is depreciated with such pace, higher interest rates are taken as means to compensate for the loss of depreciation. Other factors inadequate supervision reflected with the so called "free market", higher risks for lending the locals due to difficulties of monitoring creditwortheness of customers, etc.