Introduction
The Central Bank of Lesotho is charged with maintaining the stabilisation of prices. Interest charged on the principal loan amount arguably constitutes the primary source of income for financial service providers. Accordingly, interest is a tool utilised by a commercial bank to generate income. A bank levies its lending rate of interest on a due principal loan amount over a period during which the loan remains unpaid in full. It subsequently becomes clear where the bank derives its lending rate. Also, when a court grants an order in relation to a claim sounding in money, any such unpaid judgment debt attracts interest under common law. Notably, in Lesotho, banks levy various types of interest, but the focus in this research is on the prime lending rate, bank lending rate, repurchase agreement (repo) rate, and the common law mora interest developed through case law. The prime lending rate and the repurchase agreement rate (repo rate) are crucial for understanding how financial service providers compute the other two types of interest.
Types of Interest
Rule 139(4) of Legal Notice 65 of 2024 provides that interest regarding a liquidated claim accrues either from “the date of the issue of the originating application or from when the respondent was in mora to the date of payment”. Accordingly, it is submitted that when the drafter of an originating application relies on the latest balance on the debtor’s loan account as a liquidated claim, the interest runs from the issuance of the originating application so long as it is issued before the next demand is made to the debtor. Otherwise, when the claim is based on the balance that obtained when the Respondent fell in arrears (mora), the interest runs from the date the debtor defaulted on payment. The following discussion outlines the types of interest claimable by creditors (financial service providers).
Prime Lending Rate
The prime lending rate is set by the Central Bank and can change monthly. It may stay the same throughout the year or fluctuate. For instance, in May 2020 the prime lending rate was 8.56% while in May 2023 it had escalated to 11.25%. This rate impacts the bank lending rate of interest. When the prime lending rate decreases, so does the bank lending rate, and the opposite is true when it increases. Consequently, the bank lending rate directly influences the instalment amount a debtor must pay to service (pay instalments on time consistently) a loan. The prime lending rate directly affects the bank lending rate.
Bank Lending Rate
The bank lending rate is a sum of the prime lending rate and a margin set by the bank at its discretion within limits set by the Central Bank. When the prime lending rate increases, so does the bank lending rate, affecting the debtor’s instalment payments. For instance, in May 2019, the prime lending rate was 11.44% per annum, but in May 2021, it decreased to 8.19% (CBL Statistics). That is, if a bank added a 10% margin to the prime rate, a debtor would pay 21.44% in May 2019 and 18.19% in May 2021, resulting in lower instalments in 2021.
Repo Rate
The repurchase agreement rate (repo rate) also referred to as the Central Bank policy rate, is the interest rate at which the Central Bank lends money to commercial banks (Xing Long Enterprise v Zhong Sing 2016 LSCA 16 para 11). A lower repo rate makes it cheaper for banks to borrow money, leading to lower interest rates for loans to businesses and consumers, which encourages spending and investment. Conversely, a higher repo rate makes borrowing more expensive, which can slow down spending and help control inflation. As discussed subsequently the repo rate has a direct bearing on the mora interest granted by the Courts.
Mora Interest
There is no statutory mora interest rate set in Lesotho (Xing Long para 10). Under common law, mora interest is a form of damages claimed on overdue debts (M and C Construction International v Lesotho Housing and Land Corporation 2016 LSCA 4 paras 34 and 36). Previously, it was common in Lesotho to claim mora interest at the rate of 18.5% per annum without any legal justification. However, in the case of Xing Long, the Court intervened because the plaintiff’s counsel failed to justify this rate. The Court then set mora interest to equal the repo rate, and therefore, it fluctuates with the Central Bank’s repo rate (para 11). The repo rate was at the time, March 2016, set at 7% (para 11). Thus, as the repo rate changes, so does the mora interest that can be claimed. For instance, in February 2024 in an unreported unopposed case, the Court declined to grant 18.5% mora interest, but instead, inquired what the repo rate was. After ascertaining the rate, the Court proceeded to grant mora interest based on the repo rate.
Bank Lending Rate or Mora Interest?
It is not difficult to conclude that more often it is in the best interests of the creditor to claim the bank lending rate than mora interest. When there is no contract specifying the interest rate, the law allows the creditor to claim mora interest instead of the bank lending rate. However when there is a contract that specifies the bank lending rate, the Courts uphold such rate instead of mora interest. The reason is that the bank lending rate will have a legal basis: the contract. In the case of M and C Construction International v Lesotho Housing and Land Corporation, the Court held that a party wishing to recover an interest rate higher than the legal mora interest must establish justification by evidence as to the current rates. Therefore, there must be a legal basis for charging and claiming the bank lending rate of interest especially if it is higher than mora interest, or else, the Court will grant mora interest at the repo rate set by the Central Bank.
Conclusion
The Central Bank’s mandate is to achieve price stability. Thus, Interest is a tool used by the Central Bank to control money supply and inflation. Its fluctuating nature impacts how debts are repaid over time or after default. By adjusting interest rates, the Central Bank can influence the primary income that money lenders (creditors) earn from the interest levied on the principal loan amount and judgement debt.
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