Interest capping: Is it the solution?


By Alick Ponje 

Parliament on Thursday agreed to table a private-member Bill that would focus on regulating interest rates on loans obtained from commercial banks.

The motion was introduced by Dowa West legislator Abel Kayembe who is expected to bring on the floor the amended Financial Services Act.


Like several other Malawians, Kayembe said the rationale for interest capping is that lending institutions in the country charge exorbitant interest rates on principal loans which they give.

Kayembe argued the exorbitant loans lead to some citizens losing their assets and being declared bankrupt after failing to service the loans within the agreed period.

“The banks in Malawi are killing a lot of people through exorbitant interest rates. People can’t afford to have some disposable income for medical health or send children to school.


“This is simply because of these exorbitant and irritating rates. So I am very convinced that this motion may pass and go into a bill stage,” the lawmaker said.

Owen Chomanika of Chikwawa North wants his fellow lawmakers to be careful with the proposal, arguing there are countries that introduced interest capping only to reverse the decision after a few years.

An interest rate cap refers to a particular ceiling set on interest rate charged on loans or paid for deposits. The interest rate moves freely until it reaches the ceiling beyond which it cannot go.

Some economists argue that though it may be punitive to financial institutions, interest rate capping has a positive impact on businesses and the economy.

They argue it offers protection to borrowers against repayments going over a certain level when interest rates possibly rise and makes budgeting easier because one knows the maximum to be repaid.

Still, there are those who posit that this is just a populist political policy with no clear evidence of its advantages.

In 2018, an opposition Member of Parliament Alexander Kusamba Dzonzi attempted to introduce the Bill but it was shot down by the government side and got referred to relevant committees for further scrutiny.

In 2016, K e n y a established an interest rate cap on loans at four percentage points above the base rate published by its central bank.

It turned out the supposedly good intentions actually hurt l ow- i n c o m e p o p u l a t i o n s by limiting their access to finance and reducing price transparency.

That would become the case in Malawi if the Bill to cap interest rates finally gets approved by Parliament.

Financial institutions, according to researchers, find it difficult to recover costs and often reduce service delivery in rural areas and other more costly markets.

Without capping the interest rates, banks have little worry giving out their money as they rely on the pool of many customers and interest profit to counter non-performing loans.

MAY BECOME EXCLUDED—People in remote

Ugandan economist Doreen Mugisha argues interest capping is, most of the times, a bad idea.

Mugisha says countries that want to go for that policy actually need long-term solutions to address the money supply side constraints as well as deal with the issue of government borrowing and the high cost of doing business.

“The objective of an interest cap is to protect borrowers from excessive credit interest rates, to make loans more affordable and to improve access to credit.

“Despite these good i n t e n t i o n s , interest rate caps can actually hurt l ow- income populations by limiting their access to finance. If the interest rate cap is set too low, banks will find it difficult to recover costs and will most likely reduce service delivery in rural areas and other more costly markets,” she says.

The economist further points out that in some countries interest capping laws have resulted in slowdowns in credit growth as banks tightened their credit parameters.

“This resulted in the high-risk borrowers being excluded from the formal financial system. Introduction of an interest cap in a fully liberalised capital market results in capital flight.

“A very good example is what happened in Kenya. Shares of the largest Kenyan Banks listed on the Nairobi Exchange plummeted by 10 percent in response to the news of the introduction of the interest rate cap. This was mainly due to loss of investor confidence and capital flight,” Mugisha says.

So, it appears capping interest rates may actually hurt the poor most. It happened in some West African countries where, when an interest cap was introduced, microfinance institutions withdrew from poor and more remote areas.

In South Africa, lending institutions introduced many extra fees and commissions in response to interest-rate caps and loans reportedly became more expensive overall.

Economists further warn that a cap on interests will also discourage supply of funds to the financial system, thus encouraging informal loan shacks.

A law may be politically popular but end up hurting the very people it sought to protect.

However, if lawmakers are convinced an interest capping legislation is in the best interest of Malawians, then that would be the only thing to do.


Show More

Related Articles

Back to top button

Adblock Detected

Please consider supporting us by disabling your ad blocker