Despite commercial banks’ downward adjustment of base lending rates, private sector borrowing from the banking system has continued to decrease, an indication that interest rates remain a threat to many businesses.
In November last year, the Reserve Bank of Malawi (RBM) slashed the policy rate by three percentage points to 24 percent from 27 percent to reduce the cost of borrowing.
But figures released by the central bank this month show that private sector lending dropped by K1.5 billion to K408.3 billion in December 2016 compared to K1.9 billion in November 2016.
According to RBM Monthly Economic Review there were also notable decreases in credit balances in community, social and personal services at K4.7 billion, real estate at K2.5 billion, restaurant and hotels at K633.6 million and other sectors at K13.1 billion.
In an interview, Indigenous Business Association of Malawi (Ibam) president Mike Mlombwa said the level of interest rates in the country is a huge burden and risk for business people especially small-scale businesses.
He said: “Although the central bank reduced the policy rate which ultimately resulted in interest rates cut, lending rates are still way too high for businesses. Other than that commercial banks have not been willing to lend small businesses
He added that business people have become skeptical to borrow from banks looking at the past experiences from borrowing from banks.
He said: “I know of a business person who has recently lost close to K600 million worth of property which accumulated from a K40 million loan he took from one of the commercial banks in town. With such news flooding the market, SME’s and businesses are scared to get credit from commercial banks.”
University of Malawi (Unima) Chancellor College economics professor Ben Kaluwa said it is not surprising that the private sector is shunning credit citing that Malawi’s interest rates are prohibitive.
“With rates hovering at around 35 percent or there about, it is almost impossible for businesses to borrow to finance their business endeavours. What kind of business can anybody go into to borrow and return with an interest of over 30 percent? Sadly this does not affect the businesses, but the whole economy in general because it is borrowing [for production] that grows the economy,” he said.
The RBM report further shows that in terms loan categories, retail loans and mortgages also declined by K18.5 billion and K3.4 billion to K123.5 billion and K46.8 billion, respectively.
But on the contrary, commercial banks extended K17.2 billion increases in the stock positions of these categories to K163.4 billion and K95.7 billion, respectively.
For sectoral distribution of the outstanding stock of private sector credit, wholesale and retail sector dominated the sector at 25 percent, followed by the agriculture sector at 21.1 percent, manufacturing sector at 19.4 percent and community services sector at 14.3 percent. n