My neighbour hates commercial banks. He actually hates them with a passion. He literally calls them thieves. Thieves who can steal from you in broad day light.
About two years ago, my neighbour, trying to boost his business, borrowed money from one of the commercial banks. Based on his analysis, he believed that at an interest rate of around 20 percent he would be able to service the loan. So confidently he put up his house as collateral for the loan.
However, after the May 2012 devaluation and floatation of the kwacha the Reserve Bank of Malawi (RBM) increased the bank rate—the rate at which instruments would be traded and at which liquidity stressed commercial banks would borrow from the central bank.
The argument behind RBM’s raise in the bank rate was to control money supply and consequently rein in inflation which the economy was heading into in the wake of the massive 49 percent devaluation.
But regardless of the raise in the bank rate, inflation shot up. Reading the situation, the central bank again raised the bank rate. But regardless of the second raise, inflation did not recede.
In December 2012, RBM finally raised the bank rate to 25 percent. The central bank has maintained it at 25 percent to date in a bid to wrestle with inflation, a measure that indicates rising costs and corrodes consumer’s purchasing power. In January this year, RBM introduced a Lombard facility at 27 percent for liquidity stressed banks.
After analysing the situation, the number crunchers in our commercial banks took note of the regulatory framework and swooped to make a kill.
Along with rises in the bank rate, the commercial banks increased their lending rates to the shock and surprise of consumers and businesses.
Due to the prevailing high interest rates my neighbour was unable to service his loan as his business collapsed. Consequently, the commercial bank repossessed the house which it has since put up for sale.
After all, who can afford to service a loan at 47 percent that commercial banks are charging as revealed by RBM last week and yet shockingly they are happy to pay five percent for the deposits—a spread of over 40 percent? What irony!
I am aware commercial banks have their arguments. They contend that the economy is currently unpredictable—with high inflation and the kwacha swinging left and right. Some further argue that in Malawi borrowers are so risky that there is need for high interest rates, some sort of an insurance cover for defaulters. And others content doing business in Malawi is so costly.
Arguments taken, but my question has been why do they make the huge profits?
Actually, in 2012 when every sector seemed to be struggling to the point of making losses most commercial banks were smiling ear to ear after making huge profits. If they are fair, were we not to experience the same turbulence and losses that the rest of the economy went through? Or did we not take all take the same painful pill to stabilise the economy?
I think the Consumers Association of Malawi (Cama) boss John Kapito is right when he describes the situation as unfortunate while urging the central bank to put the commercial banks on a short leash.
Apparently, RBM is not ready to take the challenge and rein in the marauding commercial banks.
The central bank argues that the financial system is a free market where consumers and commercial banks must determine prices, interest rates in this case.
We all know the literacy status in Malawi, let alone financial literacy levels. In addition, we all know that with two big banks controlling half the market the financial system is not competitive. So why not apply more controls in the market?
Why can’t the central bank apply reasonable caps on lending rates, especially to micro lenders and on personal loans? After all, Malawi will not be the first in Africa. Why can’t the central bank put a floor on deposits? After all, this will not be a first in Malawi.
There are minimum prices for tobacco. There are recommended pump prices for fuel and we have a minimum wage in the labour market. Why can’t we have the same ceilings and floors on interest rates? A weak financial regulatory framework?
Then I say let’s revisit the framework to ensure banks grow together with businesses and consumers.
—with contribution from business reporter Innocent Helema
