Only the banks benefit from high interest rates
Most MSMEs in Malaysia resemble the living dead
Economists have long said that monetary policy is very important in managing the economy. There are three prime tools in monetary policy. One is controlling the size of the nation’s money supply, and another is regulating statutory reserve deposits by banks. However, the most talked about monetary policy tool is controlling interest rates. Monetary policy is supposedly carried out independently of the government by the central bank, Bank Negara Malaysia.
The prime objective of monetary policy is to aid in the expansion or contraction of the economy. If the economy is overheating, BNM through statutory reserve deposits will raise them to make banks more hesitant to lend money out to business and the community, or if the economy is in the doldrums, lower statutory reserve deposits so bank have more freed up money to lend to businesses and the community. Interest rates represent the cost of money. High interest rates make money more expensive to borrow, and low interest rates make money less expensive to borrow. For business, it’s the cost of a resource they need.
However, in Malaysia statutory reserves requirements and interest rates no longer have much bearing upon economic activity, as monetary theory expects. The key to monetary policy is actually the propensity of banks to lend to the public.
Traditionally in Malaysia, banks are tight lenders. Banks usually require fixed deposits, land and buildings as collateral, and/or ASB deposits. These are rare commodities for the bulk of MSMEs. MSMEs have a very limited capacity to provide collateral to banks for loans, so banks are usually very selective on who they lend to.
Therefore, it’s the willingness of banks to lend that has the most bearing on economic activity. This is basically ignored in monetary policy.
In Malaysia (as in most countries), there is a wide margin between the cost of money and the price they lend money out. The current Overnight Bank Rate (OPR) set by BNM is 3.0 percent. This is relatively high, and is making the borrowing of money expensive. In addition, banks source money at rates between 2 and 4.5 percent. Base prime lending rates are between 6.65-7.0 percent. However, not many businesses or people pay those rates. Businesses and individuals are most likely to pay somewhere between 7-16 percent, depending upon the types of loan and risk assessment by banks.
These are massive margins, not forgetting the fees charged. These margins are reflected in the super-profits banks are making. Maybank had a net profit of RM 9.35 billion in 2023, up from RM 7.96 billion in 2022. CIMB made RM 6.98 billion net profit in 2023, up from RM 5.4 billion during the previous year.
This is great for the banks and their shareholders. Most banks in Malaysia are GLCs, primarily owned by other GLCs. For example, Permodalan Nasional Berhad (PNB) owns 44 percent of Maybank, with the EPF owning 12.6 percent, and KWSP owning 4.6 percent. This is a strong link to government.
While banks are making bumper profits many businesses and individuals are struggling with a bank imposed credit squeeze, through their lending selectivity, and the high cost of debt (interest rates). Those MSMEs which can’t borrow due to tight bank restrictions a barely living from hand to mouth. They are the living dead of the economy. These MSMEs can’t grow, can’t exploit new business opportunities, and can barely pay salaries and suppliers, if any provide them with credit.
Most MSMEs in Malaysia resemble the living dead
The key issue in economy health and future growth equity (yes, big corporations can grow) is the propensity of banks to lend. This also means giving SMEs much more competitive interest rates, as a way to promote economic growth within the MSME sector, which represent 96.9 percent of total businesses in Malaysia. MSMEs contribute 39. Percent or RM 613.1 billion to national GDP and employ almost half of the nation’s total workforce.
Given the government has appointed so many representatives to GLC boards, the government has the ability to direct the banks to assist in solving the above problem. This would be much more effective tan developing any new loan assistance scheme where very few MSMEs are eligible to take up.
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There is a trick that many banks all over the world plays. Their guru are of course from the good old US of A. Where else. First they influence the Central Bank or in their case the Fed. to lower intrest rate. So people start taking loans and many people forget credit cards are loans , you stupid boy. So people start to buy buy buy from houses to cars. Of course yhey put up collateral. When enough of the swine have gone into the trap the Central Bank suddenly raise interest rates. Poor guys who thought they were in heaven doing their shopping now can't pay off their loan. Bank sizes their collateral. Let things cool for a while and then lower interest rates again. And here we go again. If banks don't do this scam do you think they can be filthy rich. You expect them to depend only on business loans with so many competing banks. No lah. They create the demand for loans by seducing the useful idiots.