Ecama tips banks on low interest regimes

Post was last updated: February 28, 2019

By Chimwemwe Mangazi:

The Economics Association of Malawi (Ecama) has said commercial banks should come up with innovative financial products which would attract more customers and ensure their survival in the current low interest rate regime.

Ecama Executive Director, Maleka Thula, has further urged banks to enhance their assessment of creditworthiness of the borrowers to avoid bad loans or defaults.

In January, the Reserve Bank of Malawi (RBM) cut the policy rate by 1.5 percentage points to 14.5 percent, reduced the Lombard rate from 200 basis points to 40 basis points above Policy rate to stand at 14.9 percent, claiming that most risks to inflation that hit the economy in 2018 were dissipating and that the outlook for 2019 was positive.

Following the development, commercial banks reduced lending interest rates which are hovering between 20 and 26 percent.

The banks have argued that despite having the number of people who can access loans increased with the reduced interest rates, the risk on such loans remains high, which poses a threat to their businesses.

Thula said banks should develop products that speak to the current situation, adding that there should be deliberate policy interventions by authorities to support productive sectors such as agriculture and manufacturing.

“For the policy direction taken by the RBM to achieve the intended purpose, there is a need for incentivising productive industries. What is needed in the short run is that banks need to enhance their assessment on credit worthiness of the borrowers to avoid bad loans or defaults. We believe credit reference bureaus are key in allowing banks to easily assess the credit worthiness of borrowers and avoid defaults.

“…But the most important factor that would allow ban k s to come up with more attractive financial products is improvement of the economy. If the economy improves and remains stable, interest rates would automatically go down and borrowers will have more ability to repay their loans due to increased households’ disposable income,” Thula said.

This is coming at a time Parliament is advocating the establishment of interest capping laws in the country.

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