Commercial banks’ mandatory deposits at the Reserve Bank of Malawi (RBM) are likely to be revised downwards to unleash the scarce kwacha currency into the financial market and avert the current poor liquidity position by local banks.
Alliance Capital Limited, a portfolio and investment management firm, made the observation in its latest weekly market review ending July 13 2012.
Every commercial bank is obligated to hold minimum reserves of its customer deposits, normally in form of cash which is physically stored at the central bank and is called the Liquidity Reserve Requirements (LRR).
LRR is most often used as a monetary policy tool for influencing the country’s borrowing and interest rates by changing the amount of funds available for banks to lend out.
The higher the reserve requirement is set, the less funds banks will have to loan out, leading to low money creation or circulation in the economy.
Malawi’s LRR has been static for a year at 15.5 percent, but according to Capital Alliance Limited, the rate is the highest in the Sadc Region which has an average LRR of 10 percent.
“We might see the RBM lowering this in line with the region as one way of mitigating the bank’s liquidity positions,” says Capital Alliance.
Following the substantial 49 percent devaluation of the kwacha in May, most commercial banks were caught unawares with the subsequent inflow of foreign currency which virtually wipe out kwacha balances that had been accumulated during the three-year forex drought.
As a consequence, a liquidity crunch of Malawi version was created which prompted most banks to unilaterally hike their lending rates following RBM’s highly punitive uncollateralised rates.
“Liquidity in the market, in our opinion, has reached a crisis proportion. Discount window accommodation for the week ending July 13 2012 was at an average of K26.33 billion [about $105m at current exchange rate] per day, down from K33.65 billion [about $134m] per day as at end of the other week.
“Despite the improvement, the unprecedented figures underscore the gravity of the liquidity problem.”
The portfolio and investment management firm believes that lowering LRR will likely see commercial banks responding by reducing their rates, thereby narrowing interest rate spreads, the difference between lending and deposit rates.
RBM last week hiked its bank rate-the rate at which banks borrow at the central bank-to 21 percent from 16 percent in view of rising inflation rates.
Commenting on the prevailing high interest rates, Alliance Capital says high interest rates will make borrowing prohibitive, thereby affecting the survival of some businesses.
“This could lead to closures and attendant unemployment and ultimately slow-down in economic activity. This is clearly not in line with the recently passed recovery budget which aims at resuscitating the economy through private sector initiatives,” it says.
It also argues that the prevailing problems in the financial market have serious implications on the new government and its agenda.
RBM spokesperson Ralph Tseka on Monday said he was in Abuja, Nigeria; hence, could not immediately comment on the bank’s position on Alliance Capital Limited.
But RBM Governor Charles Chuka said when he announced the bank rate hike that monetary authorities hope that the measure will help stabilise the economy, restore balance in the money market and improve foreign exchange situation.
