The Reserve Bank of Malawi (RBM) on Friday published the Fair Treatment of Financial Consumers Directive 2024 which puts a limit on the magnitude of interest that can be charged on non-performing loans.
The directive comes at a time lawmakers have been pushing for the enactment of a law that limits the amount of penalties or charges that can be levied on a bad debt.
The directive issued by Registrar of Financial Institutions Wilson Banda has the objective of promoting consumer trust and confidence in financial institutions and financial products and services in addition to enhancing discipline and accountability in the financial sector by ensuring fair, transparent and objective pricing of financial products and services
The directive sets a limit on interest on nonperforming credit facility.
Reads Section 21 of the directive: “The total amount of interest, service fee, and penalty charge administration fee, and credit insurance cost that accrue from the date of expiry or termination of a credit contract shall not exceed the outstanding account balance on the date of the expiry or termination of the credit contract”.
Commenting on directive, Scotland-based economist Velli Nyirongo Sunday said the Fair Treatment of Financial Consumers Directive 2024, with its cap on interest for non-performing credit facility loans, marks a significant step towards safeguarding borrowers from excessive debt burdens.
According to Nyirongo, by restricting the total amount of interest, fees, and charges that can accumulate on a loan, the directive seeks to prevent debt spirals and encourages lenders to prioritise sustainable repayment solutions.
He observed that this focus on transparency and responsible lending practices stands to benefit both borrowers and lenders alike.
“However, the directive’s potential impact will hinge on effective implementation and enforcement. To build on this progress, establishing a financial ombudsman to arbitrate disputes between financial institutions and customers could provide an accessible and cost-effective solution for borrowers in case of disagreements on the same.
“Furthermore, measures such as strengthening consumer protection agencies, offering debt counselling services, and promoting financial literacy programmes would offer additional support to borrowers navigating financial challenges. The bank should have a moral responsibility to provide such services to the deserved borrowers,” Nyirongo said.
Another economist Marvin Banda described the directive as a step in the right direction for both lenders and borrowers.
“The whole point of this pseudo-cap is to protect banks from having a debt portfolio of unrealistic loans that oppress borrowers through unrealistically exorbitant charges and interest.
“It encourages banks to do due diligence on the potential contract holder before and during the contract period to ensure that the capacity required remains intact,” Banda said.
Banda was, however, quick to note that this will have an impact on the dynamics of their respective debt portfolios because the quickest to become delinquent are households and consumers who rely on inflexible income to honour their obligations.
“The borrowers are protected from this pseudo-cap by being given prior knowledge that charges and interest are not going to shoot beyond the capacity of the principal owed.
“In an environment where interest rates are already high and have the potential to increase, this means that anyone borrowing money needs to make supernormal profits to be able to service the loan and even be tax compliant.
“It protects borrowers from being exploited out of their property and even holding unrealistic debts that the banks know that the holders cannot repay. Therefore, it encourages most of the borrowers who are not profiteers to enter into debt obligations that are psychologically bearable and can be serviced,” Banda said.
Over the years, the country’s lenders have come under fire for squeezing life out of borrowers through unrealistic penalties in the event of a default.
