Despite reduced commercial lending rates, private sector borrowing from the banking system weakened in the fourth quarter of 2017, an indication that interest rates remain a threat to many businesses.
In December last year, the Reserve Bank of Malawi (RBM) reduced the policy rate—the rate at which commercial banks borrow from the central bank as the lender of last resort—to 16 percent, as compared to 24 percent in December 2016.
The falling interest rates—holding other factors constant—were expected to improve credit by the private sector, thereby improving economic activity.
According to RBM 2017 Fourth Quarter Financial and Economic Review, private sector lending dropped by K1.8 billion to K409.8 billion at the end of the fourth quarter of 2017.
The fall in private sector credit was reflected in mortgages, commercial and industrial loans and household loans which decreased by K6.4 billion, K2.8 billion and K2.0 billion to K32.4 billion, K157.9 billion and K125.0 billion, respectively.
Announcing the policy rate reduction in Lilongwe in December, RBM governor Dalitso Kabambe said a large interest rate spread—the gap between the interest rate charged on loans and interest charged on savings—is an indication of inefficiency in commercial banks.
He urged banks to restructure themselves so that they offer loans at low cost without affecting their operating profits.
“High spread entails inefficiency. What this entails for commercial banks is that they need to improve on their cost structures and restructure themselves. Sometimes we need to relook at the bonuses, dividends and salaries,” he said.
The cost of funds, according to Bankers Association of Malawi (BAM) is affected by the cost of deposits, the liquidity reserve and cash in treasury, operating costs and non-performing loans, among others.
In an earlier interview, Small and Medium Enterprises Association of Malawi (Smea) president James Chiutsi said the interest rates are still too high for the small and medium business community.
“The rates are still high, worse enough for starts. We wish they were even lower. It is still tough for the cost of capital to be above 20 percent,” he said.
In terms of economic sectors, the fall in private sector credit highlighted decreases in loans to manufacturing sector (K10.3 billion), financial services sector (K2.8 billion) and wholesale and retail trade sector (K2.5 billion).
In contrast, increases in credit were recorded in agriculture sector (K14.2 billion), electricity, gas, water and energy sector (K2.0 billion), community services sector (K1.4 billion) and restaurants and hotels sector (K1.0 billion).
The above, notwithstanding wholesale and retail trade sector, accounted for the largest proportion of the outstanding loan stock at 26.1 percent.
Agriculture, manufacturing and community services sectors accounted for 25.3 percent, 17.9 percent and 11.1 percent of the total private sector credit, respectively.