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‘Rate spread still wide’

Commentators say interest spread remains wide and in favour of lenders despite narrowing marginally in the past three years.

Seen at 20 percent now, the spread—a difference between the average yield that a financial institution receives from loans (along with other interest-accruing activities) and the average rate it pays on deposits and borrowings —has been dropping from 36 percent in December 2016.

But consumers’ rights body, Consumers Association of Malawi (Cama) and economic think-tank, Economics Association of Malawi (Ecama) feels there is room for further narrowing in the spread.

Currently, savings deposit rate stands at 4.58 percent against a maximum lending rate of 24.68 percent.

In December 2016, the savings deposit rate was recorded at 6.58 percent against a maximum lending rate of 42.88 percent, representing a 44 percent drop in the spread.

Cama Executive Director, John Kapito, however, said the spread remains wide, affecting efforts towards implementing of Reserve Bank of Malawi (RBM)-championed financial inclusion agenda.

He said the situation prohibits most people from saving with commercial banks.

“This is not encouraging for people to save because banks are now using money from the poor to make a lot of money.

“Where in the world do we find such a glaring gap? The poor are given little benefits when they save with the bank, yet when they want to borrow, they pay huge interests,” Kapito said.

While commending the decline in spread in a separate interview, Ecama Executive Director, Malaeka Thula, said more needs to be done.

“Lending rates need to be lowered and savings rates be raised to ensure that both borrowers and those saving are motivated to participate in the market. This can only be possible if the economic performance is favourable and the economy is thriving,” Thula said.

Bankers Association of Malawi President, Kwanele Ngwenya, however, said people should focus on registered progress this far and be optimistic.

“I will not dwell much on the spread because it differs from one institution to the other, depending on what their cost of funds are versus what their lending rate is but I can talk about reduction in interest rates where we are coming from 23 percent some 2 years ago and now 1300 basis below.

“We are not saying that is all we can do but look at the entire operating environment, the issue of high NPL (non-performing loans) ratio which has been reduced at the expense of the shareholders who had to write off a significant amount out of their equity. So while it is high, there are other players that need to be part of the conversation,” Ngwenya said.

RBM spokesperson, Mbane Ngwira, said the central bank expects the trend to continue in the medium term.

“The level of the base rate is the lowest since the 1980s. With the projected medium term inflation rate of 5 percent, we are poised to get the lowest base rate ever.

“Our expectations are that the private sector will be able to borrow and invest in productive projects, create the much needed jobs for the youth and export more. That is the only way we can tackle poverty in this country,” Ngwira said.

The net interest rate spread is a key determinant of a financial institution’s profitability (or lack thereof).

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