Concern over high interest rates [1]
Thursday, July 1, 1999 - 12:00. Updated on Thursday, January 7, 2016 - 19:09.
From Matangi Tonga Magazine Vol. 14, no. 3, July 1999.
High interest rates on loans from banks, particularly from the Tonga Development Bank, have caused concern among business people who say that it further restrains economic development due to a lack of capital funds.
The Tonga Development Bank, which lends to a wide range of sectors including women groups, growers, fishermen and private business, has increased its interest rate on loans to as high as 16.5 per cent on personal loans, although house loans remain at 11 to 12 per cent. The increase is applied only to new loans, while old loans may be repaid at the old interest rate.
The rise is due to a number of reasons, according to Afu‘alo Matoto, TDB General Manager. These include the loss of funding sources, which used to offer capital through soft loans to the bank. Afu said that even big financial institutions such as the Asian Development Bank were no longer offering soft loans to the TDB.
Looking for an alternative source of funds, Afu said that it might be possible for the TDB to borrow from the newly established government Retirement Fund. “I think that fund will accumulate really fast and within a short time they will be looking for an investment opportunity.”
Afu hoped that by the end of the year interest would drop to .5 per cent or 1 per cent below the rate offered by commercial banks.
He said it was inevitable that they had to start operating like a commercial bank to keep their customers and to become competitive in the money market.
Afu did not think that the Reserve Bank would like to set interest rates, “I think they have accepted the de-regulation theory, thereby allowing the market force to set the rate. A high loan interest rate normally means a high deposit rate, which would be supported by the Reserve Bank because it will encourage people to deposit their money here instead of transferring it overseas.
“But if interest rate on deposits becomes too high and attracts a big flow of overseas currencies, it could be risky if these overseas depositors suddenly withdraw their deposits.”
Afu said that in real terms he did not think that commercial banks would like an increase in deposits because they already had more capital than they could lend and they may be unable to repay the interest on deposits.
Afu said that the other way to get out of this tight situation was for government to allocate a certain amount of money to be lent out to a specific sector, “say agriculture, fisheries or manufacturing.”