Recently the Bank of Botswana (“BOB”) affirmed a position in respect of the basis upon which financial institutions licensed to provide advances, loans and credits can increase cost in terms of a concluded and operative agreement. It is usual for financial institutions to have the right to increase their costs, increasing their interest rates during the subsistence of a loan / facility agreement. However the issue is; on what basis are the financial institutions increasing the interest rate? Is it based on a monetary policy decision or is it based on markets and / or credit disruptions?
The BOB has specifically provided that arrangements and practices where financial institutions increase their costs based on markets and / or credit disruptions are neither fair to customers nor consistent with the BOB’s monetary policy. The BOB requires lenders to carry out a balancing exercise with respect to their profitability objectives and the need for cost effective access to financial services.
Increasing costs in a loan / facility agreement should only be changed in line with the monetary policy decisions. Hence the usual “Increased Costs” clause in a loan / facility agreement should be reviewed carefully in order to ensure that costs are only increased in terms of the adoption, change, amendment, variation, replacement in law and/or in compliance with a directive, announcement, requirement or guidance of the BOB and/or in respect of the Basel III framework as endorsed by the BOB. Therefore increasing costs based on any change in banking practice as generally applied by financial institutions or based on events or circumstances or matters that have or are reasonably likely to have a material adverse effect on the prevailing market conditions in Botswana or the liquidity of the currency is highly questionable.
Lenders are therefore to take note of this otherwise the increase of costs is deemed to be an unfair business practice in accordance with the Consumer Protection Act, 2001 and constitutes an offence.