UTM takes stand on interest rate capping

UTM Party has joined the interest rate capping debate, urging Parliament not to pass the proposed Financial Services (Amendment) Bill of 2018.

Instead, the UTM Party, in a statement signed by its president Saulos Chilima, who is also  the country’s Vice-President, is proposing that the Registrar of Financial Institutions should ensure accountability for the persistent challenges relating to the cost of capital in the country.

Tabled by Dowa North West legislator Alexander Kusamba Dzonzi (Malawi Congress Party -MCP) in the previous meeting, interest rate capping—a regulatory measure that prevents banks and financial institutions from charging more than a certain level of interest—has faced mixed reactions from various stakeholders.

In its statement on Tuesday, UTM Party said the enormity of the powers of the registrar should be understood from the perspective that the Reserve Bank of Malawi (RBM) which he heads, sets references for the structure of market interest rates in the country.

Reads the statement in part: “A proactive, pro-growth and forward-looking Registrar is, therefore, fully equipped to address the challenges at hand on a continuous basis as part of his key economic management responsibilities, without being unduly reactive to mounting pressure.”

Chilima said the UTM Party views that the proposed legislation as extreme and unwarranted; hence, should not be passed by Parliament.

“Evidence from other countries suggests that this could have negative unintended consequences such as a reduction in lending to private sector and particularly the numerous medium and small enterprises in Malawi.

“The primary basis for this view is that the existing legislation is adequate and should be constantly invoked to address the aforesaid challenges without recourse to the rigidity that the proposed amendment would induce,” he said.

Meanwhile, Bankers Association of Malawi (BAM) warned of far-reaching consequences to the economy once interest rates are capped through the Financial Services (Amendment) Bill.

BAM president Paul Guta, who recently appeared before a joint parliamentary committee comprising Public Accounts Committee, Government Assurance and Women Caucus, said the country will face  economic shocks when interest rates are capped.

“Banks will not cope as it will be expensive to take deposits and issue out loans that will be cheap. For every economy to survive, it relies on the strong and resilient banking sector.

“The tenets of the Bill make its execution very difficult should it pass in its current form into law,” he said.

Earlier, Malawi Confederation of Chambers of Commerce and Industry (MCCCI)  chief executive officer Chancellor Kaferapanjira said if passed into law, interest rate capping will not support small businesses because they exhibit slightly higher risks.

In a bold move some market analysts applauded and said was expected, RBM in January this year slashed the policy rate—a key driver of interest rates on loans—to 14.5 percent from 16 percent.

Further, the central bank having noted that previous policy rate adjustments were not fully transmitted to the rest of the economy, instructed banks to use the Lombard rate at 14.9 percent as the base lending rate. n

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