Bank, interest rates spread stir debate

The 10 percentage points gap between commercial bank lending rates and the bank rate has stirred debate with some economists saying the spread is too much and a detriment to the economy while others argue that it is justifiable.

When the Reserve Bank of Malawi (RBM) slashed the bank rate—the rate at which the commercial banks borrow money from the central bank— by four percentage points to 18 percent from 22 percent,  most commercial banks followed suit by cutting lending rates.

However, the banks have put their lending rates at around 27.5 percent while others have put it at 30 percent, a development commentators say creates a wide margin.

In an interview, Chancellor College economics professor Ben Kaluwa said banks can do more than what is currently on paper.

“Malawian banks have comfort zones such as by lending to government which is risk free and returns are high. Similarly, in foreign exchange trading which banks engage in, the profit margins are also high. With this, banks are too comfortable to compete in the core business which is the interest rates business,” he said.

Kaluwa said a research he recently conducted shows that there is no competition in the lending rates which is asymmetric.

But Catholic University head of Economics department Gilbert Kachamba sees the rates as justifiable, sayings banks have to survive and make profits in the end.

“For banks to make revenues to be able to operate effectively and generate enough, this is good, even though the response from some banks came in late,” he said.