Money market and banking analysts have warned that declining lending rates in the country’s financial system, while good for borrowers, could lead to the worsening of the savings culture among Malawians.
Declining policy rate as dictated by the Reserve Bank of Malawi (RBM) have on one hand led to declining interest rates on deposits that depositors earn within a specified period of time and helped consumers save money by reducing interest payments on certain types of financing.
However, some quarters see lower rates as a disincentive to those who save their money within the financial system to earn interest.
Financial analysts comments follow a report released by Nico Asset Managers that also suggests that declining rates may lead to “low propensity to save” as savings rates also decline.
The advice comes at a time when the central bank’s Monetary Policy Committee (MPC) last year slashed twice the policy rate from 16 percent in January to 14.5 percent in March before effecting another 13.5 percent slash in June this year.
Correspondingly, this has led to the softening of reference rates to an average of 12.3 percent as of November 2019, a rate which represents a 40-year record low.
Head of Global Markets at Standard Bank McLewen Sikwese in a written response agreed on the likelihood of having a decline on savings, saying the intention of money savers is to both preserve and increase the purchasing power of their savings.
According to him, any significant decrease in interest rates to levels below inflation result in negative real interest rates which destroys value for savers and make it unattractive for savers to put any resources in financial intermediaries.
However, he emphasised that a well-functioning financial market should be expected to offer alternative avenues of investment for savers.
He believed that the stock exchange and the government corporate securities markets should offer more attractive alternatives to savers such that the overall country savings level is not adversely affected.
He explained: “For the balance to be struck, we need to address the primary motivation of the saver, we need to ensure that the financial market players create an environment where savers are offered saving rates that are able to help them preserve the purchasing power.
“As you are aware financial intermediaries borrow from savers to lend to businesses, individuals and government and can pay savers based on returns from their three customer groups.”
He observed that clients might have noted that government securities of late have been paying negative real return with 91-day Treasury Bill rates as low as 6 percent with inflation hovering around 9 percent on average.
In the fourth monetary policy statement Reserve Bank of Malawi Governor Dalitso Kabambe said: “Private sector credit has remained a strong growth momentum, with the third quarter of 2019 registering a growth rate of 19.2 percent compared to 15.1 percent in the preceding quarter and 9.9 percent in the corresponding quarter of 2018. Recovery in private sector credit follows recent declines in interest rates as well as a generally improved macroeconomic environment”.
Investment portfolio firm, Alliance Capital Limited said though individual savings are not considerable enough for investment, it is important that the economy gets re-organised to shore resources from all avenues to improve the country’s rate of savings at 2.9 percent as of 2017.
Savings in Malawi are influenced by factors like income, liabilities, dependence ratio, location and other demographic factors.
Over the years, despite the financial reforms (like interest rate liberalisation), savings rates have continued to dwindle inconsistently (at five percent of gross domestic product [GDP] in 1990, -3 percent in 1993, 10 percent in 1994, – 4 percent in 1996 and -2 percent of GDP in 1999).
At 2.9 percent, Malawi’s national savings rate is below the recommended average of 12 percent, which negatively affects economic development.