Businesses speak on policy cut

Local businesses say while the decision by the Reserve Bank of Malawi (RBM) to cut the policy rate has rejuvenated hopes for a reduced cost of doing business, there is need for banks to relax borrowing regulations if all sectors of the economy are to benefit.

In an interview with Business News on Saturday, Chamber of Small and Medium Enterprises (SMEs) executive secretary James Chiutsi said while access to finance is a good strategy, issues of collateral among SMEs  and capacity building are critical.

“We believe reduced rates will trickle down to SMEs and so reducing cost of doing business and further making interest rates competitive. But, our SMEs require long periods of incubation to ensure they reach required production capacities. We need development banks that do not eye prompt returns on their investments.

“We need all government institutions that support business growth like Malawi Investment and Trade Centre [Mitc], Small and Medium Enterprise Development Institute [Smedi] as well as Ministry of Industry, Trade and Tourism to operate at the same wavelength; reducing interest rates, without capacitating SMEs on financial management for instance, will still lead to slow rate of growth, likewise if Mitc can’t help identify export markets,” he said.

On his part, National Working Group on Trade and Policy chairperson Frederick Changaya said while it is imperative that the cost of finance decelerates for the economy to register meaningful economic growth, particularly in productive sectors, the problem is that banks are a fertile ground for domestic borrowing by government.

“Banks have to innovate. For example, they can partner some SMEs and grow them into big players. The problem in Malawi is that many banks scramble for the same over-banked firms and discard many SMEs and start-ups. Yet some of the start-ups or SMEs have better future potential than the big companies.

“The structure of the economy also plays a big part. If you see now private sector credit is dominated by wholesale and retail borrowing. Therefore, the higher the cost of finance with the above structure in private sector credit leads to negative terms of trade that fuel currency depreciation which in turn elevates inflation that will keep interest rates higher. It becomes a self feeding vicious circle,” he said.

Changaya observed that Malawi’s economy requires development financing to re-industrialise the economy as this will allow local firms to capacitate themselves at a relatively lower cost than would be the case at commercial rates of borrowing, hence the need to nurture Malawi Agricultural and Industrial Corporation (Maiic).

For the second time in five months, RBM on Friday slashed the policy rate—a key driver of interest rates on loans—by 100 basis point from 14.5 percent to 13.5 percent on account of improved macroeconomic environment which is projected to remain firm during the year, with inflation projected on a downward trend

RBM, however, maintained the lombard rate at 0.4 percentage points above the policy rate, the liquidity reserve requirement (LRR)- a fraction of bank deposits that commercial banks are required to keep at the central bank-local deposits at five percent and the LRR on foreign currency deposits at 3.75 percent.

Kabambe said the policy cut is a relief to the private sector whose credit has been registering growth with the proportion on bad loans going down, a proxy indication that there is now increased economic activities; hence the need to sustain the macro-economic stability.