Interest Capping Bill tabled

Lyness Nkungula

The Financial Services Amendment Bill of 2021, popularly known as the interest capping bill, was tabled by Dowa West Constituency lawmaker Abel Kayembe in Parliament Thursday.
According to Kayembe, the bill is designed to iron out challenges being faced by Malawians as they are required to pay exorbitant interest rates whenever they access a loan from banks and other financial institutions.
“Having observed the exorbitant interest rates on loans obtained from banks and other lending institutions have resulted in failure by most citizens of the Republic of Malawi to service the loans and in some cases forfeiture of property, this House resolves that a Private Member’s Bill that prohibits all commercial banks and all finance lending institutions from recovering more than 100 percent of the principal loaned amount, be drafted and introduced in the House for consideration,” reads part of the bill.
Among others, the bill seeks to amend the Financial Services Act, Cap 44:05 of the Laws of Malawi, to regulate interest rates on loans obtained by banks and other financial lending institutions after it was observed that some borrowers had lost property after failing to honour loans.
Among other things, the bill proposes a fine of K500 million to banks that recover interest of more than the principal from borrowers.
The bill seeks to amend the Financial Services Act by inserting, in Part VII, a new section 34A, which will provide for the regulation of interest rates; setting policy rate; setting the maximum recovery from any loaned amount and shrinking the ever-widening spread between lending and deposit rate.
“A bank or financial institution shall not (i) recover interest on a loan from a borrower of more than the principle sum and (ii) charge other fees which shall in any way affect the borrower’s principal lump sum obtained from a bank or financial institution,” subsection 4 of the new section reads.
Subsection 5 of the section says that a bank or financial institution shall not allow a person to enter into any agreement or arrangement to borrow or lend directly or indirectly at an interest rate more than that prescribed by the law.
“A person who contravenes the provision of the subsections (4) and (5) commits an offence and shall on conviction be liable to a fine of K500,000,000 and imprisonment for 10 years and if the person committing the offence is not a natural person, then the provisions of section 112 shall apply,” subsection 6 of the bill reads.
However, the Bankers Association of Malawi (Bam) Thursday warned that, by reducing the lending rate to levels below adequate risk pricing, banks will stop lending to individuals and small and medium-scale enterprises (SMEs).
Bam Chief Executive Officer Lyness Nkungula Thursday warned that, given the short-term nature of lending books in Malawi, with high reliance on overdrafts, the decision by banks to limit their lending appetite will have an almost immediate impact on the economy.
“The private sector would stop having access to credit and excessive funds would be allocated to government-driven projects, leading to higher losses in parastatal entities and [to those that] pursue non-viable activities,” Nkungula said.
The Malawi University of Business and Applied Studies economist Betchani Tchereni said the bill had positive and negative sides.
Among the positives, Tchereni said banks and other financial institutions may not charge exorbitantly and make supernormal profits.
He said the consumer may find it cheaper to access loans.
On the negative side, Tchereni said the bill may discourage other financial investors from investing in the country.
On his part, Centre for Research and Consultancy Director Milward Tobias said there was a need to study countries that have introduced interest capping and analyse results registered so far.
“While I so much want to see low-interest rates and reduced interest rate spread, I am not too sure on whether using the legal tool to solve an economic problem is the best decision,” Tobias said.
Parliament is expected to debate the bill and, where necessary, pass it.

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