Interest Rate and Investment in Malawi The Reserve Bank of Malawi (RBM) benchmark interest rate (the RBM benchmark interest rate is usually the overnight rate at which the RBM make loans to the commercial banks) is at 25%. The interest rate averaged 26.11% from 2001 until 2014, reaching an all time high of 75.53% in February of 2001 and a record low of 13% in August of 2010. Beginning January 2014, commercial banks raised their interest rate to 40%. The rate was reduced to a minimum of 36% later in February 2014 starting with National Bank of Malawi. And there lies the problem. While the RBM rate is 25% the commercial bank base lending rate is about 36%, a spread of 11%. The interest rate spread (interest rate charged by banks on loans to private sector customers minus the interest rate paid by commercial or similar banks for demand, time, or savings deposits) is way too high in Malawi which means investors are being overcharged. How is the economy going to stimulate investment, job creation and economic growth when interest rate are this high and commercial banks are allowed to set the base lending rate will nilly? Think of this: all reserve banks (central banks) around the world have cut their bank rates to stimulate growth especially after the 2008 economic crisis while the RBM is busy increasing the interest rate. Not only that, banks are setting their own base lending rate so high that the interest spread is way too big and no one seems to care. Compare the interest rate spread of Malawi and other countries such as Mozambique and you will appreciate what we are talking about. follow this link data.worldbank.org/indi... Given that Malawi has the highest lending rate amongst its neighboring countries and African counties in general, one would also expect it to have the highest deposit interest rate. But NO it has the worst! This link will take you to the data data.worldbank.org/indi... No wonder all foreign investors are rushing to Mozambique to invest and deposit their money. Dont take our word for it check the FDI pattern here data.worldbank.org/indi... What is going on in Malawi? There are very few businesses that would make profit of over40% in Malawi. What this means is that no one is borrowing money from the bank for investment. Malawi cannot develop with this situation. No, no one is saying that financial reform by itself will fix the whole economy because that requires an integrated development strategy but it is one piece of the puzzle in the right direction.
Posted on: Fri, 14 Mar 2014 06:04:08 +0000
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