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BANKS must stop charging interest on loans once the interest payable equals the amount borrowed while interest charges should be on reducing balance basis, the Reserve Bank of Zimbabwe said in a framework for protecting rights and interests of consumers.

The reducing interest rate method means that as a payment is made on the principal amount of a loan, the interest payable by the borrower reduces in the process.

Not all local banks were lending on the basis of this method of interest calculation. This contrasts from the flat interest rate method where the amount of interest paid on a loan remains fixed and does not reduce as time moves on.  In other words, the amount of interest payable on a loan does not decrease as the loan gets paid off each month.

“Regulated entities should charge interest rates computed on reducing balance basis. Regulated entities should (also) ensure that they comply with the in-duplum rule,” RBZ said.

On the other hand, the in-duplum rule requires that interest on a loan stops to run once the amount accumulating equals the amount of capital initially borrowed or outstanding.

According to the provisions on interest rates and charges, the central bank said where a regulated entity extends credit, it shall disclose to the borrower in writing the interest charged and the manner in which it is to be calculated, applicable fee or other charge and the manner in which it was calculated and every                                                                                                       term or condition applicable to the credit,     clearly identifying the obligations of the borrower.

“During the tenure of a loan contract, the regulated entity should send or make available to the borrower and the guarantor (if applicable), a statement of account in written or electronic form, at agreed intervals showing, the capital, interest amount, payments received as capital and interest and the annual rate of interest,” RBZ said.

At least every six months, the RBZ said, banks should cause to be published, in a newspaper circulating in each area in which the institution carries on banking business, a notice setting out the interest rates offered by the institution on deposits and loans, and the terms and conditions under which it accepts deposits and makes loans.

“A regulated entity should not prey upon the vulnerabilities inherent in segments of customers and should ensure that its targeted marketing is not aimed at putting anyone in an unsustainable position of debt or loss,” part of protection framework reads.

While some borrowers would struggle to pay their US dollar denominated loans after dollarisation in 2009, due to difficult economic conditions, some banks seized the opportunity presented by information asymmetry to fleece unsuspecting or desperate borrowers.

The RBZ said that the ever-increasing complexity and diversity of the range of products and services offered by financial institutions through traditional and electronic channels, and the increasing transfer of opportunities, pricing and transactional risks to consumers call for enhanced protection of consumers of financial services. — BH24