High interest rates increase credit stress
High interest rates have created stress in the financial system with loan defaults increasing to 15.7 percent and experts have said the situation will not improve regardless of the recent policy changes.
The Reserve Bank of Malawi (RBM) in the June 2014 Financial Stability Report has said that non-performing loans or default loans increased in April 2014 from 15.4 percent in December 2013 due to high interest rates that have been prevailing in the banking system.
Due to tight monetary conditions, commercial banks increased their average base lending rates to 40.19 percent in January 2014 from 37.75 percent in December 2013.
However, the prime lending rates decreased to 38.56 percent and 37.13 percent in February and March 2014 due to what analysts said is falling inflation and liquidity improvement.
Since last month, commercial banks have been reducing their prime rates to about 35 percent in response to monetary policy changes.
But analysts have said regardless of the interest rate cuts, the improvement in the situation will be insignificant.
In July the Monetary Policy Committee (MPC) decreased the policy rate to 22.5 percent from 25 percent while the Lombard rate—the rate at which liquidity stressed commercial banks borrow from the RBM—fell from 27 percent to 24.5 percent.
In reaction to the interest cuts, analysts specifically Small and Medium Enterprises (SMEs) have argued that the rates are still prohibitive in comparison to the profits that they make.
In an interview on Monday Economic Empowerment Action Group (Eeag) president Lewis Chiwalo said the interest rates are still prohibitive regardless of the reduction.
“The improvement in loan defaults is going to be insignificant because borrowers still cannot afford to borrow at such high rates. This will adversely affect economic growth because Malawi has one of the highest interests in the world.
“Although the RBM is implementing a tight monetary policy commercial banks are also responsible for the prevailing high interest rates,” said Chiwalo.
Monetary authorities have been arguing for the high policy rates pointing at the high inflation rates.
The MPC which is chaired by the RBM governor Charles Chuka noted that the pressures on inflation have been receding due to both non-food and food prices but increased the December 2014 projection to 20.5 percent.
Earlier, Chancellor College professor of economics Ben Kaluwa urged the RBM to delink interests from inflation.
But regardless of the high interest rates and worsening non performing loans the private sector continued to increase over the review period with total credit from the banks to the private sector increasing to K264.9 billion compared to K230.2 billion in September 2013.
