Deciphering the Causes of High Interest Rates Spreads in Zimbabwe

Abstract

This study sought to decipher the causes of very high interest rate spreads and also examine the causal effect of very high interest rate spreads on savings mobilisation in Zimbabwe. The random effect estimator was used for statistical inference. Results suggest that interest rate spreads in Zimbabwe are mainly driven by macroeconomic fundamentals. Bank specific factors were found to be weak explanatory variables. Contrary to theory, a positive relationship was established between interest rate spreads and savings. Based on these findings it was suggested that policy makers should address several factors that are affecting the economy. As the economy stabilises interest rates spreads are likely to come down. Furthermore, there is need for policy makers to address the country’s risk profile in order to attract cheap and abundant foreign funds for investments. Due to the country’s perceived high country risk, the cost of borrowing has remained significantly high. On the other hand, the fact that interest rate spreads were found to be positively related to credit risk, there is need for bankers to prudently manage their loan portfolio in order to reduce defaults. This will significantly reduce lending costs, hence interest very high rate spreads can be addressed.