Reduce interest rates to boost Malawi economy

A London-based financial trainer and investment adviser Paul Richards recently expressed shock over Malawi’s bank lending rates, saying they are prohibitive for individual borrowers and investors. He went on to say that the lending rates in Malawi remain among the highest in the world and that investors cannot afford to borrow at such high rates to expand their businesses.

Richards emphasised that high lending rates are not healthy for a developing economy as they tend to discourage people from borrowing and saving, let alone acquire shares on the stock market. His sentiments are shared by many Malawians who have complained about the high interest rates.

During the investment forum in Lilongwe last Monday, Malawi Confederation of Chamber of Commerce and Industry (MCCCI) chief executive officer Chancellor Kaferapanjira also raised the issue. He told delegates that high cost of financing is still one of the three challenges facing the business community.

Actually, the high cost of borrowing is not only affecting the business community, but all Malawians in general.  For a long time, Malawians have endured high interest rates. Despite the complaints, government through the Reserve Bank of Malawi (RBM) and the commercial banks have not significantly reduced the interest rates to make any borrowing meaningful. Now that outsiders are observing that our interest rates are crazy, our authorities will start doing something about it. Richards observed: “government and commercial banks must seriously consider reducing their lending rates so that investors can make profits and expand their companies.”

While high interest rates are a sign of high inflation, and the Reserve Bank increases bank rate as monetary tool to discourage borrowing. However, the government and commercial banks have been short-changing people because they have kept interest rates high even when the inflation has gone done.

The impression that one gets is that banks and government just want to keep interest rates high for reasons that one cannot understand. And for banks, they are making a “kill” because they pay peanuts on depositors’ investment or savings accounts.

For a country like Malawi which suffers from low production, high interest rates are indeed detrimental to the economy. Ironically, high interest also fuel inflation. We have seen how people who have borrowed money from financial institutions to construct houses are now losing their property because they are not able to service the loans. Small scale industries are the worst hit because they are unable to access loans through commercial banks because many of them do not qualify to access loans in the first place.

Certainly, government must consider reducing interest rates. They have been too high for too long. Reserve Bank should not overuse the interest rate as a means to contain inflation. Inflation naturally goes down when the items are in abundance. It is also common knowledge that when the cost of borrowing is cheap, a lot of people access loans and may use it for consumption. And from the monetary point of view, this increases spending and this fuels inflation. However, this should not be the issue.

Government and commercial banks should reduce interest rates to boost the economy. Let the business community and individuals access loans cheaply for productive purposes.

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