What’s in the new interest rates regime

Now that almost all commercial banks have revised their interest rates in reaction to recent monetary policy measures by the Reserve Bank of Malawi (RBM) I feel it is time to reflect on what it all means to you and me.

In one way or the other, the interest rates affect us. If businesses borrow from the commercial banks, they will naturally pass on the cost to consumers of their goods and services.

While reducing the policy rate—the rate at which commercial banks borrow from the Central Bank as lender of last resort—from 16 percent to 14.5 percent and the Lombard rate from 200 basis points to 40 basis points above the policy rate to 14.9 percent, RBM Governor Dalitso Kabambe instructed the commercial banks to be using the Lombard rate as the base lending rate.

Thus, the banks have realigned their base lending rates to a minimum of 14.5 percent and a maximum of 26 percent. This means that depending on the risk profile of the customer, the price of borrowing money will hover between 14.9 and 26 percent.

In a country where the cost of borrowing could hit as high as 35 percent, this should be welcome relief. But then, who will benefit and what are the implications?

To the banks, their profitability will likely be reduced as the Lombard rate will barely cover their operational costs and inflation. To remain profitable ventures, banks will need to be more creative and review their transactional fees.

Banks will need to adjust their plans to achieve budgeted performance targets in the new environment where interest income from lending and other investments will now require larger asset portfolios to achieve budgeted performance. Increased lending to clients is one of the options to earn more interest income. To achieve that, banks will need to be more flexible in their terms and conditions.

In reality, to businesses and individuals the gains translate to a mere “two percent” reduction in the cost of borrowing. Ironically, the new arrangement or interest rates regime appears to favour loan defaulters while punishing the honest borrowers. What I mean is that with the maximum rate pegged at 25.9 percent, loan defaulters will be gaining up to five percent at the minimum.

Given that the base lending rate is the best price a bank can offer to least risky customers, it will be important for borrowers to look out for margins above base lending rates to determine the actual lending rates applicable. Do not get carried away and simply sign for the loans, take time to read the small prints.

To the depositor, however, the interest rates are not attractive to saving money in banks. This is the time to find alternative sources of investing money such as treasury bills, unit trusts and others.

But when all is said and done, there will be some relief to borrowers. It is also worth commending the Reserve Bank for demonstrating the much needed leadership that will bring sanity on the market. Now, the ball remains in RBM’s court to manage money supply to ensure that the reduced rates leave a lasting impact on the economy, especially in as far as stimulating consumption and investment is concerned.

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