The savings, loan debacle
The year 2017 is perhaps the only year in living memory in which the Reserve Bank of Malawi (RBM) cut the policy rate three times within a few months.
But, although on banks have been following up the monetary policy stance taken by RBM with reductions in their base lending rates, economic commentators continue to mourn the spread that still exists between deposit and lending rates.
The experts are arguing that banks need to do much more to reduce the spread to ensure that policy interventions taken by the central bank also benefit consumers.
Earlier in March, RBM announced a policy rate cut from 24 to 22 percent. In reaction, most banks reduced their lending rates to between 30 and 31 percent.
Barely three months later, RBM announced another reduction in the bank rate to 18 percent from 22 percent.
This decision saw interest rates going down to between 27 and 28 percent.
And, just last week, RBM further trimmed the policy rate by 200 basis points to 16 percent. So far, National Bank of Malawi is the only bank that has followed up on the decision, with a cut in its lending rate to 23 percent.
But the trends have attracted criticism from economic commentators, who says RBM, as a regulator of the financial services sector, needs to intervene to narrow the spread between interest banks place on deposits against the interest on loans.
Further, calls emerged requesting authorities to investigate the banking sector over the possibility that the banks are colluding when setting interest rates.
The accusations followed near uniform rates that players in the financial sector were charging borrowers as interest on loans.
Collusion is a non-competitive agreement between rivals that attempts to disrupt the market’s equilibrium.
Results of a study done by Professor of Economic, Ben Kalua and Gowokani Chirwa suggests that commercial banks are following price leadership collusion when setting interest rates where one firm serves as an industry leader and sets prices, while other firms raise and lower their prices to match.
The study analysed the conduct and performance of six licensed banks over a period of nine years from January 2005 to March 2014 and was commissioned by the Competition and Fair Trading Commission (CFTC).
Commenting, Kalua said the banking sector is still not competitive, requiring intervention from authorities to protect consumers.
However, the Bankers Association of Malawi (Bam) dismissed the findings of the study, insisting that there is no collusion between banks in setting interest rates.
Earlier, Bam President, Paul Guta, said banks are not just waiting for policy direction from RBM to make a move on their base lending rates but also making their own individual assessments to pass on the benefits to consumers.
Going forward, Guta said the financial services sector will continue to scan the environment to either reduce or increase their rates to match movements in the economy.
But experts feel a solution should be found to narrow the spread and others suggested that Malawi needs to introduce a policy to cap interest rates.
Placing a cap on interests means rates are allowed to fluctuate, but cannot surpass a stated interest cap.
On the continent, Kenyan president, Uhuru Kenyatta, made history when he assented to the Banking Amendment Bill 2015, putting a cap on interest rates that banks can charge on loans and pay on deposits.
RBM was, however, skeptical that such a policy should be introduced in Malawi at this point, arguing that many fundamentals must be right before a decision can be made to adopt such a monetary stance.
CFTC has since said it will continue to monitor the banking industry to establish if there is evidence of collusion.
CFTC Executive Director, Wezi Malonda, said if the commission establishes that collusion exists in the determination of interest rates by commercial banks, it would constitute a violation of the Competition and Fair Trading Act, for which the Commission would take stern action.
People have quoted the high interests as among the contributing factors to a slow down in private sector growth, leading to inability of the economy to create jobs.
Elsewhere on the continent, countries like Uganda charge average prime rates for risk free borrowers at 23 percent, Zimbabwe 15 percent (but in US dollars) and Ethiopia 12 percent.