Interests catch Parliament’s eye


Chairperson of Public Accounts Committee, Alekeni Menyani, last week moved a motion in Parliament to make amendments to the Loan Recovery Act and the Reserve Bank of Malawi Act as one way of regulating interest rates and repayment conditions banks offer to borrowers.

In a move meant to bring down interest rates currently hovering above 30 percent, the Monetary Policy Committee of the Reserve Bank of Malawi (RBM) met recently and made a decision to reduce its policy rate by three percentage points to 24 percent from 27 percent on the back of a decline in Malawi’s inflation status.

Commercial banks have followed up RBM decision with cuts in interest rates with most charging base lending rates of above 30 percent.


But while Parliament thinks introducing a policy to cap interest rates would hurt the economy, economic experts feel such a policy would ensure that banks do not make it prohibitive for consumers to access loans from banks and engage in activities to boost the economy.

While faulting banks for pegging interests at a rate which is not affordable to many Malawians, Menyani, however said the economy is not ready to adopt a policy to cap interests.

“If you go to a bank and you obtain a loan, after they charge compound interest, the loan may come to 40 percent. If you look around this country, I don’t think there is a business or Malawian that can go to a bank and obtain a loan and be able to pay back such a loan.


“But instead of capping interests because we realise that it would hurt the economy, what the motion has done is to ask the House for permission to make amendments to the Loan Recovery Act and the Reserve Bank of Malawi Act in the private members motion so that we can afford ordinary Malawians wishing to do business a chance and the House has agreed,” he said.

Kenyan President Uhuru Kenyatta recently made history when he assented to the Banking Amendment Bill 2015 with an intention to regulate interest rates that are applicable to banks’ loans and deposits. The Bill caps interest rates that banks can charge on loans and must pay on deposits.

According to economic experts, ‘Capped Rate’ is defined as an interest rate that is allowed to fluctuate, but which cannot surpass a stated interest cap.

By signing the Bill, it means interest rates in Kenya will drop to a maximum of 14.5 percent given its Central Bank’s rate’s current standing at 10.5 percent.

Executive Director of the Consumers Association of Malawi, John Kapito, said adopting a similar bill in Malawi would offer relief to borrowers who are forced to pay high interest rates on their loans due to lack of competition among the country’s commercial banks.

“If we want to grow our economy, then we need to start capping interest rates,” he said.

According to Kapito, capping interest rates would also act as an incentive to stop government from over borrowing from commercial banks thereby helping to stabilise economic fundamentals.

“Banks are taking advantage of a poor government but if we start capping interest rates that money will be released to the private sector and in the process boosting economic activities,” he said.

But a source from the Reserve Bank of Malawi, who spoke to us on condition of anonymity, said while Malawi’s monetary policy gives an allowance for capping interest rates, such a policy decision would require a lot of analysis and consideration.

The source said economic fundamentals such as inflation, which affect monetary policy, also come into play before a decision to cap interest can be adopted as

“Policies have pros and cons to determine if they are viable. You would need to consider the objective, what it is you want to achieve as a country when capping interests? You have to consider the percentage of non-performing loans, these fundamentals may be different in Kenya where they have decided to cap rates,” the source said.

In an earlier interview, Malawi Confederation of Chambers of Commerce and Industry (MCCCI) Chief executive Officer, Chancellor Kaferapanjira, said for the policy to work in Malawi it would require government to develop suitable mechanisms to ensure its successful implementation.

“Depending on how the law can be framed, capping interest rates may be a good idea for Malawi. Such a law would provide a guide in terms of how the interest rates should be set without necessarily mentioning the maximum limit.

“It is unfortunate that this is happening in Kenya against exactly the same situation we have in Malawi where lending rates are miles away from both inflation rate and policy rate and consequently banks do not seem to oil the economy but constrain its growth through the extortionate and usurious lending rates,” he said.

People have quoted the high interests as among the contributing factors to slow down in private sector growth leading to inability of the economy to create jobs. But while Malawians are churning out interests of over 30 percent on their bank loans, banks in other African countries like Ugandan charge average prime rates for risk free borrowers at 23 percent, Zimbabwe 15 percent (but in US dollars) and Ethiopia 12 percent.

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