Bank interest rates hike to strain firms

 Bank interest rates hike to strain firms

 Commercial banks’ move to raise base lending rates in reaction to Reserve Bank of Malawi’s (RBM) policy rate hike will strain businesses and consumers.

Following RBM’s decision to raise the policy rate by 200 basis points to 26 percent, commercial banks have responded by raising the reference rate to 24.9 percent from 23.6 percent

 This means that with the current reference rate, which forms part of interest rates charged by banks on loans, borrowers will now be paying an average of between 33 and 35 percent to service their loans.

This is coming at a time demand for loans has increased, with RBM data indicating that the annual growth of private sector credit has accelerated to 22.6 percent from 19.1 percent in October 2023.

Commercial banks have hiked their lending rate in response to RBM’s policy rate hike

In an interview yesterday, market analyst Cosmas Chigwe observed that for entities and individuals that already servicing loans, this presents a difficult challenge as most repayment projections will not have taken into account high interest rates.

He said: “We are, therefore, likely to see an increase in non-performing loans in the commercial banks.

“If one is borrowing at 35 percent, what kind of business would you have to be doing to achieve a return that covers this plus some retained earnings?”

Chigwe said innovative solutions such as private equity funds should spring up to provide alternatives to debt financing.”

On his part, economist Bond Mtembezeka said with the increase in the reference rate, the cost of borrowing has gone up further and this will put a strain on both businesses and consumers

Speaking separately, Consumers Association of Malawi executive director John Kapito said interest rates rise will shrink trade, with most industries closing down, thereby threatening jobs.

He said: “The prospects for improving people’s lives are completely remote and that stops all productive activities as the cost becomes unprofitable.”

Meanwhile, outstanding loans to the private sector obtained from commercial banks have been on the rise in the half-year period ended June 30, a situation industry players and consumers have linked to the high interest rate environment.

Commercial banks’ published financial results for the half-year period ended June 30 2023 showed that community and individual, manufacturing and agriculture sector loans are claiming the highest outstanding loans to the banking sector.

In addition, wholesale and retail trade, among others, also reported higher outstanding bank loans.

Malawi Confederation of Chambers of Commerce and Industry manufacturing sector chairperson Goodwin Ng’oma is on record as having said that most manufacturers are affected by the foreign exchange scarcity coupled with high interest rates.

In a statement of the First Monetary Policy Committee meeting of 2023, RBM Governor Wilson Banda said the MPC observed that inflationary pressures have intensified

The post  Bank interest rates hike to strain firms first appeared on The Nation Online.

The post  Bank interest rates hike to strain firms appeared first on The Nation Online.

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