Average effective interest rates on loans last year ranged from 5.82% to 7.34% per month, while for citizens they ranged from 7.54% to 8.71%, and for the economy from 5.25% to 6.05%, which is the highest level in the last five years according to data from the Central Bank of Montenegro (CBCG).
The new governor, Irena Radović, immediately expressed concern about the rising interest rates upon assuming her position in December, stating that in the coming period, in negotiations with commercial banks, she would ensure that she influences the interest rate policy. Officially, it has not been announced how the CBCG can influence interest rates or responded to questions about what specifically and when the CBCG can do to lower interest rates, as well as how much money banks have earned from loan interest over the past five years.
“When you look at the profits of commercial banks, they have exceeded 130 million EUR over the past 10 months. This indicates that there is sufficient room for a more proactive, agile approach, and of course, cooperation with both sides to provide favorable and better conditions for the functioning of the Montenegrin economy and, of course, for the standard of living of citizens,” said Radović.
The record was in 2014
The average interest rate in 2019 was slightly lower than it is now, and in 2020, during the pandemic, there was a greater decrease to averages from 4.77% to 6.09%. In 2021, there was a slight increase in interest rates, followed by a significant rise since 2022, coinciding with the increase in the reference interest rate and EURIBOR (the cost of money in the European market). The European Central Bank has been increasing the reference interest rate over the past two years to curb inflation. It was announced at the end of last year that this would no longer be done because inflation had stabilized at normal levels and the rise in interest rates had reduced lending, slowing down the European economy.
In the last 15 years, interest rates in Montenegro were highest in 2014, when the total average effective interest rate ranged from 9.02% to 10.77% per month, and for citizens from 11.05% to 12.21%. EURIBOR was around 0.4% at that time.
The Parliament abandoned the adoption of amendments to the Law on Obligations in mid-2014, which former SNP MP Aleksandar Damjanović proposed to limit interest rates. The CBCG stated at the time in an opinion that it recommended that banks do this by the end of September of that year and that it would conduct analyses to determine how interest rates should be limited.
In early 2015, then Prime Minister Milo Đukanović and Finance Minister Radoje Žugić were concerned about interest rates. Then CBCG Governor Milojica Dakić announced that a law on interest rate restrictions was being prepared, the draft of which would be ready by the end of June.
The CBCG Council determined a working version of the Draft Law on Maximum Permissible Interest Rates in July 2015, which it sent to the Government. It was proposed at the time that the highest annual statutory agreed interest rate for banks be the average effective weighted interest rate on newly approved loans over a six-month period, increased by 33%.
However, interest rates soon decreased even without the law. Žugić, as the governor of the CBCG in 2017, said they were abandoning the law because banks had lowered rates themselves.
The question for the new governor is whether the CBCG can propose the same law again and whether interest rates can be limited on that basis.
Deposits at record levels, low savings interest rates
The possibility of state influence on interest rates has been reactivated after last year’s increase. The average interest rate on deposits is 0.3%, as most banks are sufficiently capitalized and do not attract new savings. One exception is the First Bank, which offers interest rates on time deposits of four percent. Total deposits in banks now amount to 5.5 billion EUR, while total approved loans amount to four billion.
Representatives of the banking sector have repeatedly stated that the six-month EURIBOR, the reference interest rate, had a negative value until June 2022, and has since risen to four percent, and that higher interest rates are influenced by Montenegro’s credit rating, obligations, and costs imposed by the CBCG, among other factors.
IMF: Limitation would not yield results
The head of the IMF Mission for Montenegro, Srikant Seshadri, stated at the beginning of last week, at a joint press conference with Prime Minister Milojko Spajić and Governor Radović, that it is possible to resort to interest rate restrictions, but that it would not yield results because banks could charge higher fees, and international experience shows that this is not profitable.
The IMF pointed out that the growing gap between interest rates on loans and deposit rates encourages strong profits in the banking sector.
“High levels of liquidity, high market concentration in the banking sector, limited opportunities for profitable lending, and challenges for local depositors to take advantage of higher yields abroad or their ‘preference for the domestic market’ are likely drivers of low deposit rates. In this regard, developing a retail market for government bonds would help diversify for savers,” the IMF recommended.
The IMF noted that the growing gap between loan and deposit interest rates had driven strong profits in the banking sector.
The CBCG stated at the beginning of last year to Vijesti that commercial banks, according to preliminary data at the end of December 2022, operated with a profit of 85.7 million EUR, which is 34 million more than in 2021 when banks had a profit of 51.7 million.
Mugoša raised the issue of high interest rates before the Committee on Economy
SD MP Boris Mugoša requested a special thematic session of the parliamentary Committee on Economy, Finance, and Budget due to the rise in interest rates.
“The Committee accepted my initiative to hold a hearing soon, at which representatives of the Central Bank, the Banking Association, and others will be invited to discuss various aspects of the functioning of the banking system,” Mugoša told Vijesti.
It was agreed at the committee, he said, that in order to better prepare for the hearing and have a more adequate discussion, the Committee would, in accordance with the Parliament’s Rules of Procedure, request the Central Bank to prepare information for the Committee on various aspects of the banking system’s functioning.
From interest, fees, and commissions, 309.4 million was earned in 2022
At the end of 2022, net interest income at the system level amounted to 170.6 million EUR, showing an increase of 15.3% compared to the previous year, while net income from fees and commissions amounted to 52.3 million EUR, marking an increase of 38.4% over the same period.
“At the end of 2022, total interest income at the system level amounted to 191.5 million EUR, showing an increase of 12.4% compared to the previous year. In total interest income, the largest share comes from interest on loans granted to citizens and privately-owned companies (75%),” according to the CBCG.
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