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I read with interest James Mphande’s article on how much profits banks in Malawi are making, which appeared in the Daily Times of 5 April 2010. I concur with Mr. Mphande and seek to extend the discussion to disclosure of bank charges.

How much money are you losing to bank fees each year? Odds are you don’t know, and despite being required to do so by law, many banks fail to disclose their fee structures and charges to customers. Some have the information on their websites but I do not expect a tobacco farmer from T.A. Simlemba to have access to the internet. It is disturbing that many consumers are not provided with account terms and information about fees before opening an account. You don’t have to buy a car before you find out how much fuel it consumes, and you don’t have to move into a house before you find out what your monthly rent will be. In the same way, consumers should not be forced to walk blindly into the terms and conditions of a bank account.

What are the major types of charges that banks impose on your money? First there is the monthly account management

RBM Headquarters in Lilongwe

charge – a fixed service fee for the provision of the account. This is levied on all current accounts, and a few banks impose this fee on savings accounts too (as I write, I have one such savings account with a local bank which is now in the negative due inactivity– I will let them decide what to do with it). Have you ever wondered why customers have to pay for online account management? And then there is the double-charge for ATM withdrawals on ‘foreign’ or ‘out-of-network’ machines (other banks’ ATMs) – your bank charges you and the owners of the other ATM charge you too.

Banks in Malawi, it seems, are very dependent on fees to meet profit goals. In defense, the banks argue that Malawians are actually paying for state-of-the-art ATM and computer technology, invested into a market with relatively few consumers and that it is unfair to compare bank charges in Malawi with those of developed countries. Granted, it is risky to extend credit in Malawi because the country lacks the mechanisms for protecting lenders (and our judicial system is always crowded with cases) but there is no justification for selling cash withdrawal slips when deposit slips are free in the first place. And does anyone know why nobody asks any questions when you try to deposit huge sums of money into your personal account but you get frustrated with questions when you attempt to withdrawal the same amount? If Malawian banks were indeed not making so much money, why is there more interest from international banks in the Malawian market? Why have we seen the birth of new local banks and an influx of international banks into the industry over the past five years?

Last year, I had a colleague send me money from the US by telegraphic transfer which I was to use to pay for some services he had used during his visit here. I had looked up the exchange rate from the schedule my bank publishes in one of the dailies and it said K140. I did my conversions and told my friend the US$ equivalent, plus a tiny contingency in case my calculations were off. After waiting in line for almost an hour (only two teller counters were open out of 5, and I have grown to accept that as the norm), the teller asked me to step aside while I wait for confirmation that the account was mine (which took a good 15 minutes – the owner of the account probably was not picking up the bank’s calls). My friend had told me that he paid all the necessary wire transfer fee at his bank in the US but when the money reached my account here, I discovered it was 5% less than what I had expected. I tried for several days to get an explanation from my bank for the difference but was never successful. Without an explanation, I could not ask my colleague to send me extra money – I had to meet the shortfall from my own pocket. It comes as no surprise to me that most Malawians in diaspora would rather risk carrying all their foreign currency savings in their pockets (and those of their kids and spouses, if any) when returning home than to safely deposit it into their local accounts before departure. This customer service (or lack thereof) is a prime example of how our banks operate. In Malawi, the customer is no longer the king. We all are at the mercy of our banks that you sometimes wonder if saving your money in a hole underneath your bed is a better option.

A strange lack of serious research into the issue of bank charges baffles me. As far as could be established, none of our public universities has ever properly researched the issue. This is an indictment against tax-subsidised research institutions, and suggests that Malawian consumers are not getting their money’s worth from their universities.

I suggest that the Reserve Bank of Malawi include assessments of the need for disclosure in their regular oversight of banks and lenders, and that consumers regularly receive fee and penalty disclosures prior to opening an account. By the way, do we still have the Competition and Fair Trading Commission? Consistent conspiracy theories have it that the banks have for years colluded over pricing. Nearly all of my friends seem to know someone who knew someone who once worked at one of the banks and regularly attended meetings between officials from different banks where price levels were agreed. As Mr. Mphande pointed out in the prelude to this article, there is no competition in the banking industry in Malawi. You can almost just pick a bank by looking at which of them has your favourite colour and logo, they are all the same.

Earlier this year, parliament passed the Credit Reference Bureau (CRB) bill whose objective, according to Finance Minister Ken Kandodo, is to ensure that individuals and companies in the country have easy access to loans. The CRB will also allow lenders to check defaulters through the sharing of a borrowers’ credit behavior. The Reserve Bank of Malawi has been mandated with the oversight of the CRB. During debate on the bill, opposition politicians worried if the CRB will not be used to victimize people, especially those deemed to be critical of the powers that be. In some countries that have an operational credit bureau industry, one of the problems is that CRBs are not required to give any consideration to the circumstances around a defaulting lender. A responsible person who loses his job unexpectedly, for instance, is treated no differently from a fraudster. Indeed, one of the biggest problems faced by entrepreneurs is access to credit, and a system of blacklisting without sufficient regulation and transparency can severely undermine national economic objectives in the promotion of entrepreneurship and the development of the small business sector. I sure hope the CRB is going to have a human face. Government needs to look at all these issues, and to develop a clear policy on how it is going to police the credit bureau industry. More generally, it also needs to decide how it will regulate the collection and distribution of consumers’ personal information.

The Malawi Kwacha

The Malawi Kwacha

The Malawi Kwacha has for the past three years been trading at K140 to the United States Dollar. In the wake of the recent global economic crisis that has seen the devaluation of some of the world’s major currencies – key among them being the United States Dollar and the British Pound Sterling, there have been calls from some sections of the Malawian society and the international donor community for the government to devalue our local currency, the Kwacha. The Bretton Woods Institutions (the World Bank and the IMF) too have been calling on the government to lessen its grip on the exchange rate. The president has however stood his ground (just as he did when he first introduced the fertilizer subsidy program) and has so far resisted all calls to devalue the Kwacha. What, though, is devaluation and what are the likely consequences of such a move? In this article I attempt to explain this and more.

The Malawi Government maintains a managed float exchange rate system, which is a hybrid of a fixed exchange rate system and a flexible exchange rate system. Unlike in a fixed rate regime, the Reserve Bank does not have an explicit set value for the currency; and unlike in a flexible exchange rate regime, it doesn’t allow the market to freely determine the value of the currency either. Instead, the Reserve Bank has either an implicit target value or an explicit range of target values for the currency, determined by pegging the Kwacha against a trade-weighted basket of currencies of the country’s major trading partners. The Bank intervenes in the foreign exchange market by buying and selling domestic and foreign currency to keep the exchange rate close to this desired implicit value or within the desired target values.

Only a decision by the government through the Reserve Bank of Malawi can thus alter the official value of the currency. The government could, if it wished, take such a measure, often in response to unusual market pressures. Devaluation, the deliberate downward adjustment in the official exchange rate, would reduce the Kwacha’s value. To illustrate, the present exchange rate is K140 to one dollar. To devalue, government, through the Reserve Bank might announce that from now on K280 will be equal to one dollar. This would make the Kwacha half as expensive to Americans or anyone intending to buy it, and the U.S. dollar twice as expensive to Malawians.

Under what circumstances might a government devalue its currency? It is often because the interaction of market forces and policy decisions has made the currency’s fixed exchange rate untenable. In order to sustain a fixed exchange rate, a country must have sufficient foreign exchange reserves, often dollars, and be willing to spend them, to purchase all offers of its currency at the established exchange rate. When a country is unable or unwilling to do so, then it must devalue its currency to a level that it is able and willing to support with its foreign exchange reserves. Going back home, there have been numerous cries about the shortage of foreign currency in the country, which climaxed with the arrests of several people suspected of externalizing forex and the closure of all unlicensed forex bureaus which were thought to be hoarding forex. This is one of the reasons why the aforementioned stakeholders have been calling for the devaluation of the Kwacha.

A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There are two implications of a devaluation. First, devaluation makes the country’s exports relatively less expensive for foreigners. This would seem to be consistent with the president’s vision of turning Malawi into a net exporter as it would drive up exports. Second, the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country’s exports and decrease imports, and may therefore help to reduce the current account deficit.

However, the president’s argument has been that devaluing the currency will make things more expensive for the average Malawian. “Devaluation of the kwacha would only benefit a few people, and most of them are not even Malawians,” the president is quoted as saying. “On the other hand, devaluation would impact badly on poor people as it would increase prices of commodities… the cost of raw materials and equipment importation for companies.” This is a highly valid argument as a significant risk is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this happens, the government may have to raise interest rates to control inflation, eventually slowing down economic growth.

One other risk of devaluation is psychological. Often times devaluation is seen as a sign of economic weakness. This would place the creditworthiness of the nation at risk. As a result, devaluation may lower investor confidence in the country’s economy and may reduce the country’s ability to secure foreign investment.

The government is thus faced with a tough choice here. In the end, it all depends on who has the most votes as the issue of devaluing the Kwacha becomes more of a political decision than an economic one. The business community, who the president argued he is trying to protect too, wants assurance that there will be enough foreign currency reserves in the country. I would not be surprised if I found the Kwacha still trading at K140 to the US$ come the World Cup in 2010!

This article was also published in Malawi’s Daily Times newspaper and the online Nyasa Times (http://www.nyasatimes.com/columns/of-devaluing-the-malawi-kwacha.html)

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