High lending rate makes investment stumble

Investment in private and public sectors is now a buzzword everywhere in the world. It helps create employment opportunities, increase productivity of firms and undoubtedly help achieve sustainable economic growth of a country. Every businessman needs capital from incorporation to manufacturing of goods and services. Capital has its cost and the investor has to bear it. The investor while preparing a project profile and feasibility report on a project has to make in-depth analysis about cost of capital, production, marketability and viability of the project.
The main constraint faced by most of investors is arrangement of capital and bearing of its cost. High cost of capital like high borrowing rate of interest has barred many investors from making investment decisions. In developed and developing economies, the investors need to borrow money from banks and financial institutions in addition to their own capital.
The level of interest rates matters for all--an investor, a consumer and a businessman. A rise in interest rates has a negative effect on capital expenditures by businesses. In particular, the market interest rate is considered to be a key building block in the firm's cost of capital, which, combined with the resulting stream of expected cash flows, constitutes the primary determinant of whether and how much to invest.
There is a relationship between interest rate and investment meaning that as interest rate falls, investment rises. And the opposite happens when interest rate rises. Real interest rate helps to determine the trend of investment in an economy. When the interest rates are high, borrowing becomes quite costly for investors. So they make less investment. The high interest rates make it difficult to meet their expenditures because their products become less competitive in both domestic and international markets.
On the other hand, if the interest rate is low, more and more investment takes place in the economy resulting in more production, more employment opportunities and increase in  GDP (Gross domestic Product). Thus the real interest rate through its effect on investment improves growth and future living standards of a nation. According to the survey of the World Bank, GDP growth is higher for those countries which have relatively higher investment.
The economists, analysts and prudent investors always keep their eyes on fiscal and monetary policies of a country and make a thorough analysis of the trend of interest rates before taking any positive decision for short- and long-term investment. Virtually, interest is nothing more than the cost someone pays for the use of someone else's money. Investors in housing and real estate know this scenario quite very well. They have to use a bank's money, through a hypothecation, to purchase a home, a plot for housing and they have to pay the bank for the privileges. Credit card users also know this scenario quite well - they borrow money for the short-term in order to buy something right away. Generally investors never welcome interest rate hike.
Obviously, changes in borrowing rate affect the behaviour of consumers and businesses and the stock market is also hit painfully. The method of valuing stock of a company is to take the sum of all the expected future cash inflows from that company discounted back to the present. To arrive at a stock's price, it takes the sum of the future discounted cash flow and divide it by the number of shares available. This price fluctuates as a result of different expectations that people have about the company at different times. Because of those differences, they are willing to buy or sell shares at different prices. In other ways, increase of debt-service costs affects the profitability and dividend of a company. When investors start getting less Return on Investment (ROI) in stocks, they will look for alternative source of investment where ROI is higher than that of stocks.
In developing countries like Bangladesh where monetary and fiscal policies allow more ROI in investment in government savings instruments meant for financing the public expenditure, investors diligently divert their investments from stocks where ROI is less, uncertain and risk-bearing. A deposit holder of a commercial bank that lends money to businesses and industries for creating employment opportunities and increasing productivity of goods and services for the economy, at present gets interest @ 7.75 per cent per annum (pa). The same deposit holder gets @11.50 pa if he/she invests in government savings instruments. In this scenario, there is less possibility of increase in investment in productive sector, stock and real estate markets. Media reports say that the government has planned to sit with the stakeholders to find out the causes of decline of exports in terms of value and volume.
When the businesses of a country face an unstable situation, production, local and export sales and profitability are drastically affected and the investors have to bear the pains of high interest rates in servicing their debts. In the cyclic order, it affects the whole of the economy and investors and consumers become the worst sufferers. Rising interest rates lead to increased borrowing costs for businesses which reduce profits and slows expansion.
From various analyses of trends in developed economies, interest rates are found to be very low in the developed world; near-zero in nominal terms and negative in real terms. This is part of a deliberate policy by central banks of those countries to discourage savings and encourage borrowings. It has also been seen as a way of boosting the stock market and thus creating a wealth effect for individuals, and boosting confidence of the general investors. Interest rates hike works as trauma, even to the people of developed economies. The mere prospect of raising interest rates has delivered a shock to US markets due to a lack of liquidity - so what can investors expect when the inevitable rate hikes actually take place? When a central bank lowers its interest rates, it is trying to stimulate growth. If money is cheaper to borrow, people will set up businesses and industries and will spend and consume. That is the theory that is being followed by many developed economies during the last decades.
Interest rates around the world, both short-and long-term, are exceptionally low these days. The US government can borrow for ten years at a rate of about 1.9 per cent, and for 30 years at about 2.5 per cent. Rates in other industrial countries are even lower. For example, the yield on ten-year government bonds is now around 0.2 per cent in Germany, 0.3 per cent in Japan, and 1.6 per cent in the United Kingdom. In Switzerland, the ten-year yield is currently slightly negative, meaning that lenders must pay the Swiss government to hold their money! The interest rates paid by businesses and households are relatively higher, primarily because of credit risk, but are still very low on an historical basis. On the contrary, interest rates in government bonds, securities and saving tools of underdeveloped and developing countries are extremely high and the policymakers of these countries sound term as sensible but economists consider it as a stumbling block to investment.
Interest rates on deposit and lending in banks and financial institutions are also very high in underdeveloped and developing economies in comparison to developed economies. This is due to lack of leadership qualities, lack of foresightedness of the fiscal and monetary policymakers, personal gains of the corrupt politicians and black money-holders. The interest rates on deposit and lending by banks and financial institutions need to be revised at a level that helps greatly to stimulate the fragile economies.
By reducing interest rates, the central bank can help spur business spending on capital goods which also helps the economy in the long-term-and can help spur household expenditures on homes or consumer durables like automobiles. Home sales, for example, are generally higher when mortgage rates are 5.0 per cent than when these are 10 per cent. The real estate sector of Bangladesh can be revamped by offering special house loans with low interest and easy terms. Low interest rates improve banks' balance-sheets and capacity to lend and may bring in more economic growth.

The writer is the CFO of a private group of companies.
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