Cost of borrowing rises as banks hike reference rate

Businesses and consumers already struggling with high interest rates will face continued pressure as commercial banks have raised the reference rate to 23.4 percent this month, thereby increasing the cost of borrowing.

Published statements show that banks have revised the reference rate, an interest rate benchmark used to set other interest rates from 22.7 percent to 23.4 percent, a move financial market analysts and consumers say is a direct response to the recent policy rate adjustment.

Effectively, borrowers will now be paying a minimum of 30 percent and a maximum of about 34 percent on loans accessed from banks.

To the business community and households, the raise in interest rates will exert more pressure on them as higher interest rates will mean more financing charges for both existing and future credit lines.

Speaking in an interview on Monday, Consumers Association of Malawi executive director John Kapito said high interest rates will continue to hit hard consumers who are currently struggling to service loans and even borrow more to expand their businesses.

He said: “This is worsening the high cost of living. Our fear is that businesses will have no choice but increase prices of goods and make them unaffordable.

“Should this continue, our concern is also that some industries will end up closing as demand for their products and services diminishes and many people will be affected by redundancies as market activities slow.”

Applecore Grain and Milling Limited managing director Frederick Chngayaya said the private sector has been strained  due to high interest rates.

He said: “In an economy such as Malawi, the tight monetary policy hardly achieves the objective of containing inflation, but instead hurts the productive sector.

“Already, people are failing to honour their obligation due to the high interest rates. Most businesses have now halted expansionary plans and prioritised containing pressure of doing business which is a cost to the economy.”

Financial services strategist Misheck Esau in an earlier interview said the rising lending rates will continue to distress businesses, especially those that already borrowed. 

During the third Monetary Policy Committee meeting in July, the Reserve Bank of Malawi adjusted upwards the policy rate by two percentage points to 24 percent, further exerting pressure on borrowers. n