High lending rates threaten Malawi financial system

Current high lending rates are undermining the servicing of loans consequently pausing a risk to the stability of the financial system, the Reserve Bank of Malawi (RBM) has said.

The RBM in its December 2013 Financial Stability Report has said non-performing loans—defaulted or about to be defaulted loans—more than doubled to 13.6 percent in September 2013 from 6.5 percent same period the previous year representing a significant risk to the financial system.

Early January, commercial banks raised their lending rates to over 40 percent compared to 31.4 percent in September 2012 due to factors including RBM’s tight monetary policy and government domestic borrowing.

Experts have so far blamed high treasury bills (T-bills) to heavy domestic borrowing which has resulted in crowding out the private sector.

Due to RBM tight monetary policy the bank rate currently stands at 25 percent while the Lombard rate—a facility that ensures that commercial banks have access to liquidity relief—stands at 27 percent. The bank rate was at 21 percent in September 2012.

Recently, the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) chief executive officer Chancellor Kaferapanjira cautioned that government borrowing from the domestic market is driving interest rates up.

Kaferapanjira warned that the prevailing high interest rates are bound to choke most businesses and consequently stifle private sector investment, thereby constraining economic growth.

However, the Ministry of Finance spokesperson Nations Msowoya said that so far they have agreed with the International Monetary Fund (IMF) to reduce domestic borrowing.

But apart from government’s loose fiscal stance, the RBM fears that the depreciation of the kwacha, high inflation rate and the recent aid freeze pause a credit risk.

“The projected adverse developments in the exchange rate and inflation are likely to cause a reduction in the purchasing power of economic agents, thereby adversely affecting their ability to service loans. This has potential to amplify credit risk and non-performing loans,” reads the report in part.

But regardless of the high lending rates, banking system credit to the private sector increased to K230.2 billion in September 2013 from K209.2 billion same period in the previous year.

However, in the same period, commercial bank lending to individuals continued to slow down, dropping to 14 percent in September 2013 from 20.5 percent in September 2012.

The RBM attributes the prevailing tighter credit conditions to high perception of risk by the lending institutions.