Financial sector profiteers from Reserve Bank of Malawi’s tight monetary policy

The ongoing tight monetary policy stance taken by Malawi’s financial sector regulator, Reserve Bank of Malawi (RBM) is partially contributing to the one-sided profiteering the country is experiencing.

Market analysis firm, Alliance Capital Limited described monetary policy as the strategies employed by the central bank with regard to the amount of money circulating in the economy, and what that money is worth.

This has led to wide mopping up of liquidity from the market leading to ‘scarcity’ of the local currency and higher than usual demand for money by the market including the financial sector.

But instead of balancing market operations, RBM’s policies have aided massive profiteering as the scenario is that players in the financial sector continue to earn more in profits while entrepreneurs and the business community extremely face hurdles to sustain their operations with interest rates ranging between 35% to 45% and risky customers paying back loans at over 50 percent interest rates.

This has led to an interest rate spread of over 30 percent as interest on savings barely moved from an average of 7 percent among Malawi’s commercial banks.

For the first six months of 2013 two major banks that have declared their results show that they have reaped billions of net profits ranging between K3 billion for First Merchant Bank (FMB) and over K6 billion for National Bank of Malawi (NBM).

FMB clearly noticed in its interim financial results saying the monetary policy remained contractionary throughout the period resulting in higher yields being available on all of its domestic monetary assets including low risk instruments and this has led to a marked improvement in the overall net interest margin earned by the
group.

On the other hand, in its outlook for the rest of 2013 NBM said it still expects monetary policy to remain tight but that interest rates will on average be lower in than the closing rates of the first half the reason being that inflation at 27.9% is now on a downward trend after its peaked of 38 percent.

Charles Chuka RBM boss: The central bank cannot dictate

Charles Chuka RBM boss: The central bank cannot dictate

Queried time and again about its regulatory role on checking fair interest rates on consumers RBM governor Charles Chuka’s response has always been that Malawi’s economy was liberalised in the 1990’s therefore the central bank cannot dictate.

But Consumer Association of Malawi (Cama) has counter-argued that the laissez-faire approach by the central bank on interest rates regulation has opened up the public to cartel-like operations where all commercial banks stick to similar base lending and savings rates leaving consumers the burden of generating money while not sharing
proceeds of the profits by the banks.

But in his ‘At the market ‘column last week, Alliance Capital chief executive officer Chris Majavina said while the ultimate objective of monetary policy is to achieve long-term economic growth, central banks may have different stated goals and advised investors should have a basic understanding of monetary policy, as it can have a significant
impact on investment portfolios and net worth.

“Investors can boost their returns by positioning portfolios to benefit from monetary policy changes. Such portfolio positioning depends on the type of investor you are, since risk tolerance and investment horizon are key determinants in deciding on such moves,” Majavina said.

He said aggressive investors with lengthy investment horizons and a high degree of risk tolerance would be well served by a heavy weighting in relatively risky assets such as stocks and real estate and that this weighting should be lowered as policy gets more restrictive.

For conservative investors, Majavina said while such investors cannot afford to be unduly aggressive with their portfolios, they also need to take action to conserve capital and protect gains.

“This is especially true for retirees, for whom investment portfolios are a key source of retirement income. For such investors, recommended strategies are to trim equity exposure as markets march higher, eschew commodities and leveraged investments and lock in higher rates on term deposits if interest rates appear to be trending lower,” he said.

He emphasized that monetary policy changes can have a significant impact on every asset class but by being aware of the nuances of monetary policy, investors can position their portfolios to benefit from policy changes and boost returns.

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