The cost of borrowing in Malawi

To carry out any development one needs money. Fortunately, there are organisations that will always have money to lend and they do so as a business, so that for any tambala they lend they expect a definite return. They always charge interest on their money. This makes sense, however, the amount of money these organisations charge, affects the decision as to whether one borrows or not and that in return will affect the pace of development. So, interest rates will eventually affect developments such as construction. The current situation is that, it does not make financial sense to go into construction of any kind when interest rates are extremely high.

I am a specialised economist, a land economist and a housing expert, so my main interest is land development and housing. My observation is that since independence, fifty years ago, this country has never experienced return on property that has been adequate enough to cover the cost of borrowing and maintenance on an investment in property. When we went into multiparty, we were forced to devalue our currency and a runaway inflation ensued and interest rates reached as high as 50 percent similar to the current rates. At the moment it is pretty difficult to do any kind of development and almost impossible to build anything even a house. A simple illustration may be necessary. Say you want to build a simple three bedroom house 100 sq metres and with a brick wall fence and also a basic gate house in Chitawira, Blantyre. This may cost you K15 000 ( K15 million ). To get the required finance the bank will be able to lend you at base plus say 5 and the base lending rate is 35 percent. This means effectively borrowing at 40 percent interest.

One therefore, has to be able to afford to at least pay back the cost of the money K 15 000 000 at 40 percent over say a period of 10 years means one has to pay K175 000 000 every month. This kind of house though can only rent out at K60 000 000. If you put in students at say K15 000 for a shared room, the maximum you can get is K90 000, but if you also use the lounge as a bedroom then you can get a maximum of K 120 000. You still cannot meet the banks instalment as you will be K55 000 in the red. That of course assumes that the bank gives you all required amount, which is very rare, otherwise you may be required to contribute up to 20 percent which in this case would be a cool K3 000 000 which may be out of reach of most Malawians. Even the houses being built by the Malawi Housing Corporation could have been cheaper if the seed capital was cheaper.

I was listening very attentively when the President was speaking about the proposed Village Transformation Trust and that it would have a housing element for our low income civil servants and I could not help wondering as to where the finance would be sourced from and at what cost. May be the time has now come where we need as a country a specialised institution which will provide cheaper money for house construction. Sadly Malawi is one of the few countries in Africa where such an Institution does not exist as the only building society was privatised and became a commercial bank and functions of a building society are not performed any longer.

The loss of the New Building Society, which is now NBS Bank, has left a big hole that needs to be filled very urgently. Under the Building Society Government was able to give a 20percent guarantee on each mortgage and the Building Society was exempted from corporate tax and enjoyed a facility where the society was not subject to the liquidity reserve ratio. Under it the civil servants had a housing scheme even though this had many challenges in terms of management. Even though there were many complaints as regards the management of mortgages, it was available to Government and through it the housing financing mechanisms could be influenced. The disappearance of the only building society meant that all the benefits which were there disappeared.

In other countries housing finance is regarded as very special and a special housing fund has been set up so that government provide the much needed finance. The Trust would then source cheaper sources of finance and on lend to building societies or indeed banks to on lend cheaply to individuals.Perhaps we could give this system some thought.