‘Non-performing loans put banks under pressure’
The Economics Association of Malawi (Ecama) and economic analysts have warned that unless measures are put in place to address shocks being experienced in the economy, the future of banking sector will be under threat largely due to the increase in non-performing loans (NPLs).
The warning follows a Bank Lending Survey (BLS) conducted by the Reserve Bank of Malawi (RBM)covering the period April 2015 to March 2016 done in 10 commercial banks, which showed worsening levels of NPLs.
Ecama executive director Edward Chilima and Chancellor College economics professor Ben Kaluwa told Business Review that the increase in NPLs will negatively affect the banks’ profitability and ability to give loans.
On his part, Chilima said high interest and inflation rates, coupled with the poor performance of businesses due to the ailing economy have contributed to high NPLs.
He said: “People or businesses that have borrowed are failing to sustain their businesses to repay the loans. But now, the banks will have to provide for the loans, which will hinder their profitability and also capital base and they will be weakened as time goes.
“This will also result in the banks becoming more careful in loan provision, a situation which will worsen the economic situation as businesses will not access finance for business expansion.”
Chilima said there is need to address the issue of high interest rate and structural challenges facing the economy.
On his part, Kaluwa said commercial banks have now become risk averse, making it difficult for businesses to borrow from banks.
“Commercial banks are already risk averse and this will prompt them to become increasingly risk averse. This is why you will find banks demanding more in collateral apart from life insurance,” he said.
In an e-mailed response, Bankers Association of Malawi (BAM) executive director Lyness Nkungula said while the economic situation has prompted high default rates, some people and businesses are finding themselves in such a situation because of financial mismanagement.
Commercial banks too are struggling to stay afloat.
A recent string of published financial reports from banks show that the majority have either posted reduced profits or made outright losses.
For example, listed FMB’s profit dipped to around K2.48 billion in the year ended June 30 2016 from K3.6 billion the same period last year.
FDH Bank had the worse half year, with just K116.9 million profit-after-tax from K2.13 billion the year before.
CDH Investment Bank (CDHIB) profit before tax dropped to K192 million from K493 million the year before.
Opportunity Bank Malawi (OBM), which is undergoing rationalisation, made an after -income tax loss of K1.1 billion compared to K1.9 billion over a similar period last year.
The biggest contributor to NON PERFORMING LOANS is the high rate of interest Banks charge to borrowers. Unless you have a Katapila business can anyone repay interest rates of 42%. I think Banks should offer an amnesty for borrowers to repay the Capital that was borrowed, we can then discuss the interest issues, apo ayi sitibweza chilichonse to the bankers loss.
I completely agree with you. When is this country going to wake up to the fact that we are killing our own economic growth and wealth creation initiatives with these high lending rates? Malawi is a graveyard of entrepreneurial investment where success rate is very low. The reason high rates kill businesses is simple they cannot breakeven in their early formative years when sales revenue is just picking up.
Unfortunately, we are neck deep into this cycle that the only option to break this cycle of high rates is to make an executive decision to cut interest rates either by politicians or the RBM MPC like the rest of the world. Otherwise forget sunrise in Malawi. It will be forever sunset and Good night!