Business Unpacked

Banks can do better on rates

In what could be a signal of the new administration’s policy direction to stimulate growth, the Reserve Bank of Malawi (RBM) last week reduced its policy rate by 2.5 percentage points to 22.5 percent.

By reducing the bank rate, government, through RBM, is apparently sending a message that the cost of money or borrowing, by way of interest rates, should be lower.

If lending rates are lower, the private sector will have easier access to credit and expand their production or venture into new businesses altogether, thereby creating new jobs as well as widening tax revenue sources.

Given the fact that RBM had maintained the bank rate—the rate at which commercial banks borrow money from the central bank as lender of last resort—at 25 percent since December 2012 when the central bank raised its benchmark rate from 21 percent, the review offered hope of relief to many customers.

However, as I expected and confided to a colleague soon after RBM announced its decision, the reaction from our banks has been lukewarm, deliberately slow or as they would like to say it, cautionary.

It is worth noting that between December 2012 and the recent reduction, commercial banks have been hiking their base lending rates to as high as 43 percent. They gave various justifications, including “liquidity squeeze” and “a misbehaving” kwacha value against its major trading currencies such as the dollar.

Yet, another fact worth appreciating is that not all commercial banks borrow money from RBM at the prescribed bank rate or indeed the newly introduced Lombard rate—a borrowing window designed by the central bank earlier this year to assist liquidity-stressed banks easily access funds.

Published statistics show that most of our banks borrow money from each other through the “inter-bank” market where the rates are pegged lower than the RBM’s benchmark rate.

From a moral point of view, given these facts, it does not portray honest business practice for all commercial banks to hide behind the policy rate and charge borrowers high interest rates when they are sourcing the funds at a cheaper price through the “inter-bank” market.

What I see is a banking sector not supporting financial intermediation through very high lending rates and meagre rates on deposits. Several consumer rights activists and economic commentators have previously faulted the banking sector for giving customers a raw deal through a wide gap between rates on deposits and lending with, obviously, the scale tilted in favour of base lending rates.

No wonder, the banking industry enjoys a high level of windfall profits for overcharging their loan products besides other services.

At the time of writing this article on Tuesday, nine of the 11 commercial banks were yet to react to RBM’s decision almost a week later. It was only National Bank of Malawi and Malawi Savings Bank that had gpassed on the benefits to customers. I guess the other banks are still working out the digits.

Ironically, if RBM had raised the bank rate by the same 2.5 percentage points, your guess is as good as mine that they could have swiftly adjusted upwards their base lending rates.

Economists say that prices are sticky going downwards; hence, the resistance or delay by some commercial banks to revise downwards their interest rates, especially the base lending rates.

 

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