Feedback on interest rates, insurance
Today, I would like to share some of the feedback I got from readers on two of my recent entries i.e. ‘Why the interest rates ‘madness’?’ and ‘When insurers give a raw deal’.
In the article on interest rates, in a nutshell, I observed that despite reducing their base lending rates from above 40 percent to “as low as” 35 percent in some cases, commercial banks has been creating uncertainty in the market due to their behavior.
This, I said, was the case because commercial banks have since December 2012, the last time the Reserve Bank of Malawi (RBM) raised its bank rate from 21 percent to 25 percent, commercial banks have cited one reason
after another to either raise their lending rates or lower them in rare cases. On the other hand, depositors have continued to get a raw deal as earnings on their deposits has remained way below the inflation rate.
I also indicated that thecentral bank too was playing a key role in the madness that is interest rates. It is like RBMis too obsessed with controlling inflation rate than creating sanity and certainty in the market.
Several readers sent me feedback, but I will share the following entries on ‘Why the interest rates ‘madness’?’
Writing from Lilongwe, one reader from the central bank wrote: “Aubrey, I was wondering why should banks equate their lending rate to the 180 treasury bill (T-bill) rate? This is not their product! Isn’t this tantamount to saying that they will match any income that could be made by investing money borrowed from the banks? After all, this is arbitrage and such opportunities don’t last! The amount of T-bill isn’t unlimited, so as more money go for the T-bill, the interest rate will fall and be in line with the banks’! Banks don’t have to follow the T-bill rate!”
Another reader who identified himself/herself as Sanga wrote: “Aubrey, I would want to agree that the interest rate is very unstable in Malawi. The central bank plays a leading role in determining lending rates through treasury bills. In the name of controlling money supply, the government floats treasury bills on the market at very high rates, thereby pushing the deposit interest rate in banks. In order to break, even banks have no choice but to raise the lending rates.
If banks had huge capital of their own, they would easily
maintain low lending rates as the cost of borrowing from the public [depositors] would be zero. Finally, most financial institutions would rather maintain lower interest rates and a good repayment rate than having high interest rates with poor repayment rate. Good day.—Sanga.”
In the piece about insurance and the raw deal, I faulted the Insurance Association of Malawi for raising short-term insurance premiums to cover losses resulting from fraudulent claims. I said that was not a solution as the insurance industry was like transferring its “inefficiency” or “failure” to track the fraudsters to many innocent insurers.
The other concern I raised was that some insurance companies take long to process claims, thereby inconveniencing claimants.
Reacting to the article ‘When insurers give a raw deal’, one reader said: “Dear Aubrey, Your article regarding insurance companies in today’s The Nation refers. Indeed, there is a problem in the insurance industry regarding handling of claims. But take note that RBM at the moment has no teeth because its mandate is significantly challenged.
“Sanity will only prevail when the matter of Citizen Insurance vs RBM is concluded by the Supreme Court where judgement is taking ages to come out. Until then, insurers and claimants will continue to silently suffer.”
