Tax excessive bank profits, reduce interest spread

Our commercial banks at the end of March reported huge profits after tax. Profits between National Bank and Standard Bank hovered around K7billion. Other banks also recorded much higher profits. No bank made a loss. It appears that banks are the most profitable business in a very harsh and tough economic environment. Much of this profit emanates from high interest income. Our banks have annoyingly-katapila like huge spread between lending and savings rates. The Reserve Bank of Malawi (RBM) has failed to coerce banks to reduce the interest spread. A case of free market says RBM. The Bankers Association of Malawi (BAM), typical of any business interest group, has made hysterical arguments that the banking business environment is very tough and risky in Malawi. BAM argues that the Reserve Bank of Malawi, in pursuit of prudential regulations, requires them to deposit a certain amount of money without any interest. Consequently, they feel very justified to pay 2% on savings accounts and charge 18% on loans. BAM demonstrates that they care more about profits of their members and not the cost of finance to the banking public. The liquidity reserve requirement, a proportion of funds that the RBM requires banks to deposit at no interest is meant to ensure that the banking public has its deposits secure in case of a bank failure. Malawi does not have a deposit insurance scheme. If one bank failed today it could be disaster. This is a standard practice anywhere in the world and BAM should not use it as an excuse for usury or overcharging. Worse still, we don’t know how the banks manage their risk or invest.We need an extra tax on these obscene bank profits and encourage a competitive behavior amongst them, level the business playing field. These excuses about risky borrowers yet they bask in billions of profits year in and out is predatory capitalism. Tales of obscene bonuses amongst them are not new.An interest spread of around 15% - 16% on savings and lending rates exploitative. A special tax should be introduced to induce competition and make credit accessible to medium and small businesses. Most of the loans are now given to huge businesses because they can afford it, yet movers of Malawi GDP are the so called risky borrowers . Banking should be an engine for growth. We cannot achieve meaningful growth if small businesses cannot borrow. This is how I see it.Specifically, I suggest a tax be implemented as follows. I only pray that colleagues in tax policy unit can think seriously about it and consider it in the upcoming budget. For me, I believe a tax is progressive and must be seen to address issues of equity and fostering growth on equal terms. While banks, just like any other business do pay corporate taxes, I think they enjoy an undue advantage by overcharging on loans and with RBM powerless to dictate interests, a tax on the interest spread is necessary. Such a tax would generate raise funds that can be allocated to small scale business lenders such as Mardef, SEDOM and institutions like DEMAT or even the fertilizer subsidy. Such institutions have over the years been able to give capital to small vulnerable groups that do not have the collateral required by the dealer banks. Yet small businesses do play a vital role in the fight against poverty. All you need is to visit the mobile markets at different locations in the country such as Kampepuza, Nsundwe, Govala, Mhuju amongst others to appreciate the power of small businesses.If a bank charges 17% on loans and pays 2 % on savings accounts, government can tax part of the difference. Such bank enjoys 15% spread while a saver is disadvantaged by the same margin. Ameneyu si katapila? We need banks and not loan sharks masquerading banks. It simply makes borrowing. It defeats the whole objective of mobilising savings, reduces funds available to small investors .Government would introduce a 3% tax free margin and charge a tax of 12% on excess bank profits, on the after corporate tax profits using this illustration. Tax policy gurus at Treasury might wish to devise such a tax on the basis of the annual average spread of the banking year, April 1, to March 31. In other words, banks that would charge 6% for loans and pay 3% on savings rates would naturally find themselves exempt from paying such a tax. Put it simply, banks that can reduce the spread between lending rates and savings rates will see themselves paying less tax.This is not an attack on the banks but I think it is important that sanity prevails in the financial system to ensure easy access to capital to small and medium businesses. Banks exists to facilitate economic growth, and not derail it, the current situation. It is a fact that banks predominantly lend to big businesses. But we can clearly see that the high levels of GDP growth Malawi has experienced in the recent years has got nothing to do with bank lending. If anything it has been induced by fertiliser subsidy to small-scale poor farmers that are pariah customers to the mainstream banking. In other words, our high GDP growth is due to a category of our society that doesn’t access banking services. And if some do, they are not allowed to borrow because they are deemed risky.So what is this fuss about billions being made by our banks yet their lending is not growth oriented? If I were a government planner, I would be seriously thinking about improving the working capital of public financial intermediaries that lend easily to organized groups of small businesses. OIBM has been trying this concept albeit the interest spread is still high. It does however, give evidence that organized groups of small scale borrowers are not necessary risky. Our banks still play first class capitalism, but I think Capital Hill needs to let the hammer down and take equitable growth seriously. Such tax revenue can be ploughed into Mardef, SEDOM, DEMAT, and others that show willingness to lend to the so called risky group, yet remains the engine for economic growth in this country. In short, establish an after-corporate tax on bank profits. Banks that reduce their lending and savings rates to within 3% to 4% can enjoy an exemption. Those that tend to overcharge and use all sorts of excuses, hallmarks of exploitative businesses must bear the full force of such a tax. You don’t tax the weak but tax the strong to achieve equitable growth. Even if the banks pass on the burden of this tax to its customers, their mindset to lend to the so called “risky group” will not change but in any case it will induce competition amongst themselves. They will reduce the interest spread to minimize the tax burden, a good thing for potential borrowers and encourage more people to save. If this does not work, atleast institutions like Mardef, Sedom, Dematt can have more funds to available to lend to small businesses—if not why not use such a tax to finance fertilizer subsidy? Who wants to see a long queue in the bank of malnourished Malawians and overfed bank executives? After all our growth is smallholder agriculture driven.Feedback: anyasulu@yahoo.com