Borrowers dance, but banks cringe

The interest rate cap bill set to come on the House floor today could—if enacted—gift borrowers billions in direct cash backs, but the proposed legislation could also bring losses to banks that a banking sector player warns few can survive.

The private members’bill—officially known as Financial Services (Amendment)—seeks, among otherprovisions, to put limits on how much interest rates banks, microfinanceinstitutions, Saccos and other lenders can put on loans.

In that context, the Bill—sponsored by member of Parliament (MP) for Dowa West Alexander Kusamba Dzonzi (Malawi Congress Party)—could sharply cut interest rates that currently stand as high as 32 percent.

The suggested law could also dramatically narrow the spread between deposit and lending rates as well as hedge the borrower against inflation, which erodes the value of deposits when it rises.

But with interest income accounting for around 70 percent of banking sector earnings—according to the Reserve Bank of Malawi (RBM)—the Bill could cut deep into the sector’s return on equity and return on assets.

Last year alone, the sector raked in K199 billion in interest earnings although the share of non-interest income has been growing as well over the years as banks cash in on fees more.

The sector’s profitability levels could also take a crippling hit, threatening the K1.5 trillion industry, of which K1 trillion are depositor’s funds, and the economy as a whole as it is tethered to the financial system.

But the Bill’s sponsor, Dzonzi, is adamant, saying the proposed legislation will create a win-win situation between money owners and lenders.

“Banks should not steal from Malawians. They pay themselves [millions in salaries] when the owners of the funds are languishing,” he said.

Dzonzi claimed that out of the K1 trillion of the loanable amount in commercial banks, only K30 billion goes to small and medium enterprises while half of the lendable amount goes to government—a crowding effect that has cordoned off private sector borrowers, bloated Malawi’s domestic debt and bestowed a gloomy fiscal outlook on the country.

He urged both government and opposition MPs to support the Bill.

Dzonzi has the backing of the Consumers Association of Malawi (Cama) as well as audit and corporate governance expert Anthony Mukumbwa.

Cama executive director John Kapito said if the Bill was passed, people will borrow much easily and banks will still be making money on the volumes instead of merely feeding off the few individuals and companies on the loan books.

“The banks have been taking advantage of the poor people. There was a lot of greed,” he said.

Kapito observed that Malawian banks are not creative and innovative, largely surviving on benefits on the prohibitive interest rates.

On his part, Mkumbwa said any MP who cares about the people he or she represents should fully support the Bill.

“At the moment, banks are squeezing the growth of industries because of exorbitant interest rates charged, forcing companies not to borrow, which squeezes growth. Note also that high interest rates have resulted in high commodity prices because vendors borrow money for trading and this impacts on levels of inflation too,” he said.

Mukumbwa further said once companies default due to high costs of borrowing—which normally overtakes company profitability—firms scaledown operations and eventually close, resulting in untold suffering of employees and their families.

On the argument that banks might close down, Mukumbwa said “let the strong and ethical banks survive”.

But a senior banking sector player—who spoke on condition of anonymity, citing the matter’s sensitivity—said if the Bill is passed and implemented, “most of the banks will fail.”

He said capping of interest rates would also render the country’s monetary policy ineffective because interest rates will have been fixed by Parliament, depriving the Reserve Bank of Malawi (RBM) of a key leveraging tool for controlling money and providing direction to the economy.

The move, according to the analyst, could also kick out many who need to borrow out of the market as banks try to cut down risks that take up a few percentage points of the overall interest rate charged.

“In simple terms, banks use interest rates to select among customers. If you restrict, that means all risky customers will not get any loans. The microfinance institutions that serve the poor will close, it may not be profitable for them to operate. This will favour the big companies and traders whose risk is relatively low,” he explained.

The analyst said some countries in Africa such as Kenya and Zambia tried to cap the interest rates, but they reversed the decisions.

Banks, through BankersAssociation of Malawi and RBM have launched a furious lobbying drive, largelytargeting parliamentarians—especially the Budget and Finance Committee ofParliament—a move Parliament spokesperson Leonard Mengezi said it was normal forinstitutions to lobby relevant committees of Parliament on issues of interestand pay for the meeting.