At a time consumers are feeling the pinch of high lending rates from banks, Finca, one of Malawiâ€™s microfinance institutions, has reduced interest rates for its village banking and business loans products.
This should be good news particularly to small-scale business operators because they will now be in a position to expand their businesses at much more affordable cost at a time the economic climate is harsh for businesses.
The Reserve Bank of Malawi (RBM) in July raised the bank rateâ€”the rate at which commercial banks borrow from the central bankâ€”to 21 percent from 16 percent.
The move widened the interest rate spreadâ€”the difference between the bank rate and lending rateâ€”now by about 11 percentage points, a situation analysts argue could increase the number of defaulters and foreclosures, a situation in which a bank, a mortgage company seeks to take an ownerâ€™s property to satisfy a debt.
But Finca chief executive officer Ponsiano Ndyabahika told journalists on Friday that since their organisation is socially driven, they are not looking for profit but to provide opportunity to improve the living standards of people.
â€œWe understand that these are challenging times for Malawians. Finca believes that by reducing interest rates, clients will be better able to survive the current economic hardships facing businesses,â€ he said.
The microfinance institution has also introduced the reduced balance method of calculating interest, a shift from the flat rate which means that their clients will pay interest on their outstanding loan amount as compared to the full loan amount done before to be in line with modern and ethical principles of lending.
For example, if a client borrowed K300 000, using the old flat rate, the clientâ€™s total interest repayment will be K63 000 plus a processing fee of K7 500 which means the total loan repayment will be K370 500.
But using the new reduced balance method, the client will have to pay a total interest of K56 898 plus a processing fee of K6 000, bringing the total loan repayment to K362 898, which means the client is now saving K7 602.
The institution provides three categories of loans, individual, small groups and village banking and their recovery rate is at 98 percent.
Fincaâ€™s chief operations officer Olaf Becker noted that the reduction in interest rate has taken into account the effects of 49 percent devaluation of the kwacha and its subsequent floatation which has made money to be worthless.