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Low interest rates threaten saving culture

Money market and bank analysts have warned that despite declining lending rates being good for borrowers, they could lead to worsening savings culture.

The comments follow a monthly report by Nico Asset Managers which observes that declining rates may lead to “low propensity to save” as savings rates also decline.

Sikwese: Financial intermediaries
borrow from savers

The caution comes at a time the Reserve Bank of Malawi (RBM) has this year slashed twice the base lending rate or policy rate from 16 percent to 14.5 percent in March before effecting another one percent point cut to 13.5 percent in June this year.

Correspondingly, this has led to the softening of reference rates or commercial bank base lending rates to an average of 12.3 percent as of November 2019, the lowest in 40 years.

Standard Bank plc head of global markets McLewen Sikwese, in a written response, explained that the intention of people who save is to preserve and increase the purchasing power of their savings.

He said any significant decrease in interest rates to levels below inflation, resulting in negative real interest rates, destroys the value of savings and make it unattractive for savers.

He said that a well-functioning financial market should offer alternative avenues for investment for savers.

“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 to help them preserve the purchasing power.

“Financial intermediaries borrow from savers to lend to businesses, individuals and government and can pay savers based on returns from their three customer groups,” said Sikwese.

He said of late, government securities are earning negative real return with 91-day Treasury bill rates at as low as six percent, well below the inflation rate now at 10.4 percent.

In its commentary, investment advisory firm Alliance Capital Limited said though individual savings are not enough for investment, it is important that the economy gets reorganised to shore up 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 such as income, liabilities, dependence ratio, location and demographic.

Over the years, despite the financial reforms such as interest rate liberalisation, savings rates have continued to dwindle at five percent of gross domestic product (GDP)] in 1990, minus three percent in 1993, 10 percent in 1994, minus four percent in 1996 and minus two percent in 1999.

At 2.9 percent, Malawi’s national savings rate is below the recommended average of 12 percent, which negatively affects economic development.

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