Last week the High Court quashed Section 32 of the Banking Amendment Act which provides for the four percent interest cap on bank lending.
The popular reaction was that this ruling will just give banks free licence to make even bigger profits. Indeed consumer rights organisation Cofek has now rushed to appeal (P15).
Let's avoid a kneejerk response to the court ruling. It is true that for the last year the CBK, the banks and the Treasury have wanted to get rid of the interest rate cap because it is starving the private sector of funding. The drop in lending since 2016, when the cap was introduced, has slowed down economic growth.
Rather than lending to the private sector at 12 percent, the banks prefer to safely receive 10 percent on Treasury bills without the administrative hassle of seeking securities and collecting late payments.
Citizens are also worse off. They now resort to mobile borrowing which is much more expensive than bank borrowing.
We are all better off if the banks can lend at rates that take account of risk. Cofek should drop this misguided case.
Quote of the day: "It is unfortunate, considering that enthusiasm moves the world, that so few enthusiasts can be trusted to speak the truth."
Arthur Balfour British Prime Minister died on 19 March, 1830.
