Some commercial banks in Malawi have resorted to borrowing through the collateralised discount window of the Reserve Bank of Malawi (RBM) to address their liquidity challenges after the expiry of the non-collateralised discount window late last year.
Since May 2011, after the RBM devalued the kwacha by 49 percent and subsequently adopted the market-determined exchange rate, some commercial banks faced liquidity shortfalls. This was after paying a lot of kwacha buying dollars from the central bank to help importers pay for arrears.
But the RBM said the banking system has been normalising with most of the banks patching up their liquidity shortfalls; hence, discontinuing the banks to borrow from the lender of last resort without collateral.
But financial market analysts said since then, inter-bank borrowing had been the order of the day, but has proven to be expensive from last week.
“Borrowing within banks in the just ended week remained expensive as compared to borrowing through the central bank,” said a weekly market analysis report from Alliance Capital Limited.
In the week under review, inter-bank activity averaged K2 billion with only 22.5 percent being collaterised at a weighted average rate of 26.19 percent, which is 1.19 percentage points higher than the bank rate at 25 percent, compared to a discount window accommodation of K12.5 billion at a weighted average rate of 25 percent.
According to financial market activity, six commercial banks borrowed from the discount window as compared to four banks that lent out money.
This means banks are preferring borrowing from the central bank.
RBM spokesperson Ralph Tseka had not responded to a questionnaire, but earlier told Business News that the banking system is showing signs of recovery from the liquidity crunch or credit squeeze—a time when cash resources are in short supply and demand is high.
He said the RBM has put measures to ensure that banks correct their balance sheets, and that banks are now operating on a normal window.
Tseka said the RBM has been supportive to all commercial banks and most of them have improved their liquidity levels.
RBM introduced the non-collaterised window borrowing on June 1 2012 at 18.5 percent and later raised it to 23.5 percent, when the bank rate went up to 21 percent, to help stressed banks meet their liquidity challenges to avert a possible bank failure.
But on July 11, RBM Governor Charles Chuka issued a statement indicating that the non-collateralised window can only be justified as a temporary measure and its continuance after end July, if still considered needed, will attract a charge of four percentage points above the borrowing bank’s prime lending rates or base plus four.
Additional charges were imposed when access was prolonged and was considered excessive.
The banks, however, continued borrowing through the non-collateralised discount window, a development that resulted in commercial banks passing on the charges to customers by raising lending rates to above 40 percent.
A financial market analyst yesterday told Business News banks are still struggling with liquidity challenges and have found inter-banking lending to be expensive.
“This only proves that liquidity challenges in the banking system are far from over. The most practical way to gauge if liquidity crisis is over is to find out if banks are honouring the provision of credit to their customers,” said the analyst who did not want to be named, but is privy to the performance of the banks.