Mogul sees property boom after rate cut

By Taonga Sabola:

One of the country’s property development tycoons has said last week’s policy rate cut by the Monetary Policy Committee (MPC) of the Reserve Bank of Malawi (RBM) will fuel infrastructure development in the country.

MPC last week slashed the policy rate from 16 to 14.5 percent and also directed that base lending rates for all banks be pegged to the Lombard rate, which was reduced to 14.9 percent.

The committee also reduced the Liquidity Reserve Requirement (LRR) from 7.5 percent to five percent, and pledged further reductions for banks supporting development of various sectors of the economy.

Speaking in an interview Sunday, Pacific Group Chairman, Faisal Aboo, said the measures announced by the MPC would likely jump-start infrastructure projects and the economy as a whole.

“The MPC has reduced the bank liquidity and then capped the rates. This, in the long run, will improve the economy. Banks can now lend more with the same deposits due to the decrease in liquidity ratio. On the other hand companies will have a smaller interest bill and this will increase the appetite for affordable lending.

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“Banks do not carry out infrastructure projects; they facilitate finance for companies at a profit. It is the companies that develop the country through trade and infrastructure development. This creates the much-needed jobs.

If the rates are low, more companies invest in infrastructure and machinery,” Aboo said.

He cited the example of his company, which had shelved 13 projects totalling K6 billion due to the high interest rates.

“Today, with the reduction in interest rates, they are now bankable,” he said.

He appealed to RBM discipline microfinance institutions that overcharge on loans, thereby exploiting poor Malawians.

“I have the advantage of sitting on different boards across the sector and heading different NGOs [non-governmental organisations] and we have heard of interest bearing loans of more than five percent per month.

“This is theft and many working class and small scale companies have no option but to accept the loans as a brigade to start up their dreams,” he said.

Aboo further urged Capital Hill to expedite the process of setting up an Islamic Banking platform, which will provide an alternative to conventional banking.

“Worldwide, countries like Malaysia have excelled using the Islamic Banking concept,” he said.

Speaking on Wednesday, Malawi Confederation of Chambers of Commerce and Industry Chief Executive Officer, Chancellor Kaferapanjira, applauded MPC for not only reducing the policy rate from 16 percent to 14.5 percent but also reducing the Lombard rate from 200 basis points to 40 basis points and lowering LRR, in response to developments in the wider economic environment.

Kaferapanjira said, previously, the chamber observed that when the policy rate was at 16 percent and Lombard rate was at two percent, commercial banks were mistakenly but knowingly taking 18 percent as a base before loading any commercial risk premiums to commercial lending rates, even when they were not using borrowed funds from RBM, in which case they would be justified to add the extra two percent.

“This practice inappropriately added an extra two percent to the lending rate. We urge the commercial institutions to desist from this practice, which punishes borrowers without justification. As a matter of course, most commercial banks borrow on the interbank market whose average interest rate is even lower than policy rate.

“We now expect that commercial banks will start from a base of 14.5 percent when calculating their lending rates. The magnitudes of risk premiums added to this base should also go down to respond to significant reductions in LRR, which was another justification by the commercial banks for higher risk premiums,” Kaferapanjira said.

Speaking in November when he launched the Malawi Agricultural and Industrial Investment Corporation, President Peter Mutharika said the government believed in motivating the private sector to drive economic development.

“I want Malawi to have a bigger private sector and a smaller government. What we are doing today is providing a vehicle for expanding and empowering the private sector. This is how we create jobs in a country,” Mutharika said.