Reserve Bank cautions bank customers on rates

The Reserve Bank of Malawi (RBM) has cautioned commercial bank customers to look beyond reference rate as the sole contributor of lending rates.

RBM spokesperson Mbane Ngwira, in an interview on Tuesday, argues that several factors are taken into account when constituting base lending rates.

His comments follow Malawi Confederation of Chambers of Commerce and Industry (MCCCI) and Indigenous Businesses Association of Malawi (Ibam) worry over fees charged by commercial banks on bank loans in the name of risk premiums.

MCCCI chief executive officer Chancellor Kaferapanjira on Tuesday said businesses still deem bank loans to be on the higher side.

He said: “Borrowing from banks attracts a number of charges, which push up how much to repay the bank. We are of the view that magnitudes of risk premiums added to the base lending rate be revised as this is what banks use as a justification for higher risk premiums.”

But Ngwira said the base lending rate is just the average cost, which represents interest rate paid on deposits, Lom   bard rate and all kinds of deposits rate.

“What we are saying is that this is not fixed over time. For instance, if one’s risk margin is six percent and 13.5 percent was the reference rate last month and this month the rate is 12 percent, this customer will not pay the same amount as they did last month,” he said. 

Ngwira said the central bank standardised the cost of funds to reduce inefficiencies, but said the interest rate charged on a person varies as some are considered high risk borrowers while others are low risk borrowers.

“Every bank has its own cost of fund which was bringing in efficiencies. We thought of making the rate uniform. What is going to be done going forward is that the portfolio for each customer [risk margins] will be known by all banks and this will be transparent,” he said. 

In May this year, RBM unveiled a new calculation formula for determining reference rate or base lending rate for commercial banks.

With the new structure, the reference rate which is also the base lending rate, moves in line with changes in market rates of the 91-day T-bills rate, interbank rate, the savings rates and the Lombard rate.

Ibam president Mike Mlombwa said in an interview on Tuesday noted that borrowing has been made cheaper, but risk premiums charged on customers remain an issue.

He said: “The step by the central bank to have lending rates softened is appreciated. However, you find that while expectation is that rates would be lower, you would find that after all is done, the charges are still high in the name of risk premiums.”

Bankers Association of Malawi (BAM) chief executive officer Violette Santhe is on record as having said that  each bank has a risk profile of each customer and depending on this rating, they price the risk premiums differently.