Rising interest rates to fuel defaults

Investment management and advisory firm, Nico Asset Managers says the high costs of borrowing triggered by last week’s upward adjustment of bank rate could fuel defaults among the lending public.

The Reserve Bank of Malawi (RBM) last week raised the rate of interest which a central bank charges on the loans and advances to a commercial bank from 21 percent to 25 percent.

In response, commercial banks have been adjusting their base lending rates from an average of 32 percent to about 36 percent.

Nico Asset Managers said in its November 2012 Monthly Economic Report that rising inflation will continue to exert pressure on interest rates to rise.

The advisory firm says authorities are expected to continue implementing tight monetary policy and that monetary policy is expected to be fairly tight to year end as the government tries to foster price stability and support the Kwacha’s value.

“The high interest rates are likely to result in reduced private sector investment and growth. High borrowing costs may also result in increased risk of defaults of existing liabilities and foreclosure of property pledged as security.

“This may dampen the performance of the property market. Increase in rates on the money market may result in investor shift from stock market to money market as rates become attractive,” says Nico.

The Malawi Confederation of Chambers of Commerce and Industry (MCCCI) last week said the increase in the bank rate will certainly translate into serious challenges in servicing both outstanding loans and overdrafts by the business community.

It, however, observed that the figures given by the Reserve Bank with respect to the amount of borrowing by the private sector, which are pushing inflation and weakening the Kwacha exchange rate, are alarming.

“The Reserve Bank, therefore, had no choice but to bring sanity into the financial system. The increase in interest rates is meant to reduce the amount of borrowing, which may in turn reduce inflationary pressure and pressure on the exchange rate.

“The increase in non-performing loans from 6.8 percent to 7.8 percent is a sign of the difficulties private sector is facing. However, looking beyond the current pain, when these measures work, the results should be good for business.

“If inflation abates, purchasing power will stabilise and consumers will return to the market rather than saving because of future uncertainties,” said MCCCI Chief Executive Officer Chancellor Kaferapanjira.

He said a stable exchange rate is what the business community has been expecting to help them in their planning.

“Consequently not all will be lost through the increase in interest rates. If the stability will be maintained, inflation should definitely trend downwards and the current storms should calm down,” he added.