Deposit interest rates have started to rise but still below inflation, leading to a negative real return, a situation which may not attract more savings, more deposits and create more investment funds.
The deposit rate increase, according to a Blantyre-based investment advisory firm, Nico Asset Managers, has however, been subdued by high market liquidity levels and low Treasury Bills (T-Bills) rates.
A local investment analyst in an interview on Monday welcomed the development but was quick to point out that the commercial lending rate should also fall to benefit businesses.
“The increase in the lending rate may be temporary and will be meaningless if the lending rate does not fall because investors will still borrow at prohibitive rates. We hope that the lending rates will drop along with the falling inflation and low T-Bills rates,” said the analyst.
Inflation has been falling since March, receding to 22.6 percent in May from 23.9 percent the previous month, according to the National Statistical Office (NSO).
Nico Asset Managers, in the May 2014 economic report, has however said that commercial bank lending rates remained high and prohibitive.
According to the Reserve Bank of Malawi, the base lending rates for commercial banks averaged 36.52 percent in May.
However, the report notes that high lending rates will increase the cost of borrowing, create less demand which will in turn reduce inflation rates through a fall in prices.
On the other hand, the report adds, high borrowing costs may also result in higher risk of defaults of existing liabilities while lower deposit rates will result in lower investment returns.
Malawi, according to Chancellor College professor of economics Ben Kaluwa, has one of the highest interest rate spreads in the world and experts have cautioned that this has huge negative effects to both savings and borrowing.
While money market experts have pointed out that Malawian borrowers are seen to be risky because they cannot easily be traced due to factors, including lack of national identification system, other analysts have pointed out that it is difficult to mobilise savings at such low deposit rates.
The analysts have also decried the high lending rates pointing out it is difficult to borrow and exploit business opportunities with locally available financial resources.
In April, the RBM maintained the policy rate at 25 percent—a rate often blamed for the high lending rates—while both the average base lending rate and savings rate for commercial banks remained unchanged at their March 2014 rates of 37.13 percent and 9.63 percent, respectively.