Malawi’s slight interest rates drop draws varied reactions

African Alliance Securities has noted that Malawi’s money market and commercial bank interest rates continues have slightly dropped which they said is a good economic sign that consumers will access credit on cheaper terms.

The money market yield rates have gone down to 30% from around 43% and several commercial banks have reduced their lending rates to between 35% to 38% from 40%, which is still being rated as ultra high by the civil society.

Some of the banks that have reduced their International Commercial Bank Standard Bank, First Merchant Bank and National Bank.

However, the Consumer Association of Malawi(Cama) still argues that the interest rate spread is still unrealistically wide.

Kapito: Vety unfair
Kapito: Vety unfair

The interest rate spread is the difference between savings rate and base lending rate and Malawi commercial banks average savings interest is at around 7 percent while the base lending rate is at 44 percent.

Cama executive director John Kapito said banks must not be cruel in their quest to make money but apply business ethics and exercise fairness to consumers.

“Seriously speaking this is very unfair because when you and me save our money with them they give a meagre interest of 7 percent but when we borrow the same the rate jumps exorbitantly by over 100 percent to 45 percent and as Malawians we all look at this and do nothing about it?,” queried Kapito

Alliance Capital said interest rates play an important role in not only in the national economy, but personal finances as well.

They said Reserve Bank of Malawi monitors economic conditions and has the ability to raise or lower key interest rates that trickle down and affect everything right down to one’s savings account.

The company said among other factors, Treasury Bill rates determine the rate setting process by commercial banks, and usually there is a direct relationship between treasury bills and base lending (or deposits) rates.

“For over two months now, Treasury bills have been exhibiting a downward trend in their yield across all tenors. Commercial bank rates however were a bit stubborn to follow the trend, basically due to some liquidity strains that were characterized by the financial market for long. Lately, we have noticed that there has been a significant drop in interest rates; Standard Bank and National Bank have since revised their base lending rates. We expect other banks to follow suit. As rates begin to fall, what does this mean for you, and how can you plan for lower rates,” Alliance Capital said.

The company said Malawi being agricultural based economy, issues of changes in interest rates and inflation and thus monetary policy changes are very sensitive because an expansionary monetary policy by the RBM increases the supply of money available in the economy which drives down interest rates.

“Lower interest rates reduce a farmer’s cost of borrowing money for short-term operating expenses (e.g., fertilizer, seed, livestock expenses) and long-term capital investments (e.g., machinery, land). Lower interest rates also benefit agribusinesses. They result in lower credit costs to customers due to lower operating costs of capital and higher demand for goods and services. Changing interest rates also influence the price of farmland and agricultural wealth,” said Alliance Capital.

It notes that macroeconomic policy changes have affected the Malawi agricultural economy greatly in recent years through their impacts on interest rates and inflation since changing interest rates influence variable production costs, long-term capital investments, cash flow, land values, and exchange rates, while inflation affects input prices, commodity prices, real interest rates and land prices.

“Given the growing integration of the world economy, future domestic and foreign policy changes may play an even greater role in determining the financial performance of the agricultural industry. Therefore, it is becoming increasingly important that farmers and agribusinesses understand the linkages between the macro economy and agriculture in making sound business decisions,” the company said.

For investors, Alliance Capital said lower interest rates are a mixed blessing because as a consumer, one would love to see lower interest rates when borrowing money. Whether it is the rate on your mortgage, or any other type of loan, consumers generally enjoy these lower rates. While lower rates can certainly be a blessing to one’s debt, money market investors start to mourn but as long as the rates hover above 20% per annum, this is still attractive.

They said a trend of decreasing rates is good news for the stock market. In as long as money market rates are as attractive, stocks depress since rational investors seek to maximise their return. With the current fall in interest rates most stocks are slowly moving, so investors ought not to worry after all. There is always an alternative!

Alliance Capital concluded that all in all interest rates influence the economy. Interest rates increase in an effort to make borrowing money less-attractive and slow a rapidly growing economy. This is done because excessive growth and business expansion can lead to increased inflation.

“On the other hand, when the economy weakens, its only imperative to lower interest rates. Lowering the rate will make money flow more freely and hopefully stimulate economic growth. Being an agricultural economy, where most small holder farmers rely on borrowing for farm inputs, we need to maintain our interest rates to minimum levels so as to make borrowing more viable thus stimulating economic growth”.

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