In the multi-layered world of banking and investing, where limited transparency is commonplace, few are aware that a significant number of banks and brokers are choosing to retain the benefits of the recent global central bank rate hikes, rather than passing them on to their clients.
This practice, while not immediately visible, has significant implications for all people, and it’s time we shed some light on the subject. Yes, the financial industry must make money – but the balance needs to be right; we need to nurture win-win relationships with our clients.
As we navigate the complex terrain of personal finance, the interest rates offered by banks may seem distant from everyday concerns. However, what often goes unnoticed is that not all banks treat these rates in the same way.
Rate hikes boost bank profits
While a few embrace a customer-first approach, swiftly sharing the benefits of interest rate hikes with those who entrust their funds with them, most industry players are following a different path.
It appears that the playbook of banking after years of low interest rates is to reap the benefits of rate hikes for themselves, often at the expense of their clients. This is evident in global banks’ quarterly results and has been a major driver for increased profits of MENA banks. In some jurisdictions, such as the UK, this has also brought the UK financial regulator to call on financial institutions to improve the deposit rates offered to consumers.
The playbook appears to be the same across the Eurozone, where the average bank interest rate on instant-access deposit accounts for households is only 0.23 percent on an annualised basis. This is at a time when the European Central Bank’s (ECB) official deposit rate is at 3.75 percent!
Closer to home in the UAE, whilst some banks are offering enhanced rates on Fixed deposits and savings accounts, there are few, if any, that are close to the 5.15 percent overnight reference rate from the Central Bank of the UAE. The same is true across the MENA region.
Central banks have raised rates frequently over the past year to curb inflation. While the intent behind such a move is to lower inflation and aggregate demand (by making saving money and “cutting back on spending” more attractive), the reality can be quite different for those who fall victim to what appears to be the new norm.
This brings us to the heart of the matter. Addressing this issue requires a shift in the practices of an industry in which clients’ interests are not being fully served. When a Central Bank increases its reference rate, it could be prudent to immediately pass on the increase to the clients.
Additionally, for players who operate on a daily interest accrual model, and do not have any penalty or lock-in periods on deposits – the clients could be allowed to use their deposits as their circumstances require.
Now, the regulators could play a more proactive role in protecting consumers by ensuring fair business practices. We recognise that the financial choices our clients make are not simply numbers on a spreadsheet – they represent dreams, aspirations, and the pursuit of a better future. We all have a responsibility to ensure that these aspirations are met with timely and transparent actions, rather than a queue of delayed benefits.
By passing on the benefit of rate hikes to the customers we commit to redefining the bank-customer relationship. Higher interest rates may benefit our business, but they should also benefit our clients in a timely manner. Financial institutions must actively pursue a win-win relationship with their clients.
An industry-wide change is required to show the determination to place clients – and their success – at the forefront of our operations. The industry must reflect on its priorities and embrace a philosophy with the values of trust, transparency, and client-centricity at its core.
Consider this more than an op-ed – it’s a call to action for an industry-wide change to benefit the investors and savers without them having to demand more.
Embracing change means having greater collaboration and discussion among us, the stakeholders in the MENA region. The entire financial ecosystem must work together to help reshape the norms of saving and investing – because every client deserves to enjoy the benefits they’ve earned, and every institutional ecosystem should aspire to put customers’ interests first.
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