Policy rate hike to knock down SMEs
Small and medium enterprises (SMEs) already struggling to get back on their feet after being knocked by various shocks have been pushed to the corner following the Reserve Bank of Malawi’s (RBM) decision to raise the policy rate.
In a statement of the Second Monetary Policy Committee (MPC) of 2023 on Thursday, RBM Governor Wilson Banda announced that the committee raised the benchmark policy rate by 400 basis points to 22 percent.
SMEs have been struggling to cope with the devastating impact of the Covid-19 pandemic, persistent power outages and Cyclone Freddy, which not only cost jobs, but also disrupted their business operations.
Speaking in an interview on Friday, Chamber for Small and Medium Enterprises executive secretary James Chiutsi observed that with all the challenges being faced by small businesses, raising the cost of borrowing will only dampen their growth prospects.
He said: “It [the policy rate rise] is retrogressive to SMEs growth. Given the negative business environment that the SMEs have faced over the years, it is surprising how the central bank thinks the sector will grow.
“Access to finance will be limited, over and above the high cost of borrowing, which will hinder business operations. SMEs will be forced to raise prices of their products, leading to slower business growth.”
In Malawi, the majority of SMEs are still failing to access finance despite the sector being a significant source of employment, providing jobs to 1.6 million people and contributing over 40 percent to the gross domestic product.
According to the World Bank data, about 10 percent of medium enterprises, five percent of small enterprises and three percent of micro enterprises access credit from commercial banks despite the economy having 1.1 million businesses classified as SMEs.
The hike in the policy rate, which is the key driver of interest rates on loans, will in turn compel commercial banks to raise their interest rates from the prevailing 17.3 percent, raising the price of loans even further.
Economist Edward Chilima said in an interview that while the economic position taken by RBM was inevitable given the condition of the economy, it signifies tougher times ahead.
He said: “This is a difficult time for those in borrowing. This will signal economic slowdown as credit levels will slow down due to high cost of borrowing.
“We are likely to see high bank loan defaults for those that are already committed in debt and reduced creation of new loans by banks.”
Already, the depressed economic environment characterised by high inflation and interest rates has affected borrowers who are struggling to service their loans, according to a statement from commercial banks.
