Bank loans get more expensive

Twice within the year, the Reserve Bank of Malawi has adjusted upwards its policy rate— the rate at which commercial banks borrow from the central bank as lender of last resort— to 24 percent. In a statement after its recent Monetary Policy Committee meeting, RBM said the adjustments were in an attempt to contain price pressures which have intensified.

Consumers accessing loans from financial service institutions will continue to dig deeper into their pockets to service their loans as commercial banks continue to adjust upwards their reference rate—a benchmark for other rates including interest rate.

According to communication from the banks published in the local press, starting from yesterday, the rate has moved up to 23.4 percent from 22.7 percent in the preceding month.

For a good part of the year, commercial banks have been raising their reference rate on a monthly basis, signalling an increase in the expense of servicing.

Twice within the year, the Reserve Bank of Malawi (RBM) has adjusted upwards its policy rate—the rate at which commercial banks borrow from the central bank as lender of last resort—to 24 percent.

In a statement after its recent Monetary Policy Committee meeting, RBM said the adjustments were in an attempt to contain price pressures which have intensified.

In an interview Tuesday, Financial Market Dealers Association President Leslie Fatch said the underlying rates that contribute 99.8 percent to the reference rate have gone up in reaction to the upward adjustment of the policy rate.

Fatch said the Lombard rate —the interest rate commercial banks pay to the central bank after borrowing from it— which contributes 64.8 percent to the calculations of reference rate has gone up.

“Subsequently, we have seen the all type T-Bill rate, which contributes 10 percent to reference rate calculations, moving up after the policy rate adjustment and overnight interbank rate, which contributes 25 percent to reference rate calculations, has also moved upwards,” Fatch said.

Fatch added that, with the adjustments, the commercial banks are only aligning to the adjustment of the policy rate by the central bank.

This means that rates that are benchmarked by the reference rate, such as interest rate, will go up, making the cost of servicing a loan expensive.

“What this means is that the benchmark for pricing loans in the country is now aligning to the tight monetary policy stance taken by RBM as evidenced in the increases in the policy rate,” Fatch added.

Market analyst Bond Mtembezeka said the rise in reference rate means consumers will pay more for loans than they would have paid in the past months.

Mtembedzeka said the reference rate may continue rising as it responds to the tight monetary policy stance which RBM may continue implementing in a bid to arrest rocketing inflation.

“The policy rate rises to arrest inflation rate. From the look of things now, we are far from arresting inflation which means the policy rate may continue rising and reference rate will be following suit,” Mtembezeka said.

Consumers Association of Malawi (Cama) Executive Director John Kapito believes the option will exert more pressure on commodity prices.

Kapito said most of the goods and services on the market are supplied by businesses that borrow money from banks and any increase on the charges has a negative impact on consumers.

“This increase plus many others before will affect the cost of living, where prices will be adjusted and, unfortunately, the incomes of individuals continue decreasing and causing higher inflation on the market,” Kapito said.

In its July Market Intelligence report, the Reserve Bank of Malawi said while advanced economies may start relaxing monetary stances, on the local front, these benefits could be eroded by the lingering effects of adverse climatic shocks which are manifesting through rising food prices in developing economies, on account of food insecurity.

“This, therefore, implies that the era of tight monetary policy stance will be longer in developing than advanced economies,” the central bank said.

Captains of industry and small-scale business operators have cited lack of access to finance as a key hindrance to the growth of industries in Malawi.