Bill to amend Financial Services Act to regulate interest rates on loans gazetted in Parliament

A private member bill by MP for Dowa West Constituency, Ephraim Abel Kayembe

* The objective of the Bill is to iron out challenges Malawians currently face of paying exorbitant interest rates on loans

* Interest rates on bank loans and other lending financial institutions have resulted in people’s failure to service their loans

* And in some cases leading to seizure of borrowers’ properties they used as collateral on loans obtained

By Duncan Mlanjira

The Bill that seeks to amend the Financial Services Act, Cap 44:05 of the Laws of Malawi in order to regulate the interest rates on loans obtained from banks and other lending financial institutions, was gazetted in Parliament on November 12, 2021.

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The private member’s Bill by MP for Dowa West Constituency, Ephraim Abel Kayembe was circulated by Clerk of Parliament Fiona Kalemba for public scrutiny as it is set to be debated on by the legislators.

The objective of the Bill to amend the Financial Services Act is “in order to iron out challenges currently being faced by Malawians as they are required to pay exorbitant interest rates whenever they access a loan from the banks and the financial institutions”.

It takes cognizance that “interest rates on loans obtained from banks and other lending financial institutions have resulted in failure by most citizens of the Republic of Malawi to service the loans and in some cases leading to seizure of the property”.

“The Bill recognizes that the problems on the ground requires a collective responsibility in order to mitigate the situation that Malawians are facing with the high interest rates on loans.

The Reserve Bank of Malawi as Registrar 

“The Bill will, therefore, not only focus on the banks and other institutions but also on the Reserve Bank of Malawi (RBM) and the Treasury,” says the notice.

The Bill will seek to amend the Act by inserting in Part VII, a new section 34A which will make provision for:

(i) regulating interest;

(ii) setting the maximum recovery from any loaned amount;

(iii) setting policy rate;

(vi) improvement of non-performing loans and mopping-up excess liquidity into investable funds for small to medium enterprise;

(v) reduction of domestic public debt service costs by ensuring that the interest costs do not exceed the principal amount borrowed; and

(vi) shrinking of the ever widening spread between the lending and the deposit rate.

Malawi Parliament

“By addressing these issues, the financial institutions will be more inclined to fully exploit inflation declines for the benefit of Malawians,” says the notice.

The new section 34A says the Registrar, RBM shall set the maximum chargeable policy rate at 3% above inflation rate, if the inflation rate is below 10%.

The Registrar shall also set the maximum chargeable policy rate at 10% of the interest rate if the inflation rate is above 10%.

The Registrar shall also set the interest rate charged by banks in Malawi on principal loans obtained from financial institution not beyond 50% of the base lending policy rate, provided the policy rate is not more than 10%; otherwise a 5% above policy rate shall apply.

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Registrar shall also set the total interest payable on principal of the loans secured shall not under any circumstances go beyond 100% of the principal amount and that the minimum interest rate granted by banks on a deposit held in an interest earning account in Malawi at 2% above the ruling inflation rate or 5% below the lending rate whichever is greater.

The maximum chargeable lending interest rate for microfinance institutions operating within the rural areas shall be at 20% per annum above the policy rate set and published by RBM.

For Savings and Credit Cooperative (SACCOs), the maximum chargeable interest rate will be at 5% per annum above the policy rate set and published by RBM — provided that the deposit interest rate chargeable by SACCOs on their members shall not be less than 8%.

There shall be no interest rate charges set by the Registrar or any other person on the loans or advances to banks by Government, other than the policy rate and Treasury Bills rate set and published by RBM.

The Bill further says where the Registrar is convinced that the policy rate has to be increased above 10%, RBM shall allow the increase in consultation with the Minister of Finance; Secretary to the Treasury; Secretary responsible for Industry and Trade; Director General of the National Planning Commission; the National Assembly and the Judiciary — provided that such policy rate shall remain below 15%.

A bank or a financial institution shall not recover interest on a loan, from a borrower, of any more than the principal sum and shall not charge any other fees which shall in any way affect borrower’s principal lump sum obtained from a bank or a financial institution.

A bank or a financial institution shall not allow a person to enter into any agreement or arrangement to borrow or lend directly or indirectly at an interest rate in excess of that prescribed by law.

The Bill further says a person who contravenes the provisions of subsection (4) and (5) commits an offence and shall, on conviction, be liable to a fine of K500 million and to imprisoment for 10 years, and if the person committing the offence is not a natural person, then provision of section 112 shall apply.

The Interest Rate Capping Bill courted controversy when it was first moved by the then opposition Malawi Congress Party (MCP) legislator for Dowa West, Alexander Kusamba Dzonzi in 2018.

It resurfaced in Parliament as a private member bill by MP for Mangochi South West, Shadric Namalomba, of the Democratic Progressive Party (DPP).

Shadric Namalomba

When the Bill was initially tabled by Kusamba Dzonzi in 2018, it was riddled with controversy within the august House that eventually saw MCP and People’s Party (PP) boycotting its session in protest over suspected tactics by the then ruling DPP, accused of trying to derail it.

Bankers Association of Malawi (BAM) also tried to play a part in tactics to derail the tabling of the Bill with report awash on social media BAM invited some MPs to a business breakfast meeting in Salima where they were allegedly enticed with over K800,000 each as fuel re-imbursement in a bid that the MPs should shoot down discussion of the Bill.

Just recently, BAM was involved in another controversy over the amended 16.5% value added tax (VAT), which came into effect on November 1 when the association announced that “all fees and charges will be subject to a 16.5% VAT as per VAT (amendment) Act 2021”.

Finance Minister Felix Mlusu

But Finance Minister Felix Mlusu and Malawi Revenue Authority (MRA) quickly explained to the public that it is only non-banking services in the country that attract VAT as according to the amended law and described BAM’s statement as misleading and misinformation.

Mlusu advised the public to report to RBM if they discover that their banks are charging them VAT, saying banks are not supposed to pass on the VAT to customers.

He had explained that VAT applies on non-banking services that banks charge for their services on transactions customers make, which is an earning on the part of the financial service providers — thus they need to pay VAT for — and not the customer.

He advised customers to continue doing their businesses with banks because the fees the banks earn are those that attract VAT which the banks were not paying paying before.

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He assured the public that their money shall be refunded if they shall be charged VAT while asking the banks to stop issuing the SMSs informing customers of their intention to be charging VAT, also saying this was misinformation.

The confusion that arose created a furore, with Consumer Association of Malawi (CAMA) joining the outcry by appealing to consumers to immediately consider withdrawing their money from the banks and keep it safe in their homes.

In a statement issued, CAMA executive director John Kapito said with the current situation, it is dangerous for anybody to assume that there will be safety of their money at the Bank, saying “consumers will only wake up one day and only to find that their money in the bank has been wiped-out”.

CAMA Executive Director, John Kapito

And acting on behalf of “financially vulnerable members” of the Malawi public, Human Rights Defenders Coalition (HRDC) also engaged legal firm, Kawelo Lawyers to demand the Attorney General to suspend enforcement of the VAT by banks.

In a legal notice, Kawelo Lawyers had warned that if the demands are not met and the law comes into force, the clients’ instructions are to proceed with Constitutional review of the “impudged amendments”.

Kawelo Lawyers explained HRDC was approached by the financially vulnerable members, who include women doing small businesses; the elderly who receive remittances from their children and grand children working outside of the country.

It also includes people living with disabilities, peasant farmers and other members of the community ejusdem generis.