‘Malawi companies face bankruptcy’

The shortage of kwacha commercial banks in Malawi are experiencing may result in massive bankruptcy in the private sector, the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) has cautioned.

MCCCI chief executive officer Chancellor Kaferapanjira said this in an interview on the sidelines of a meeting held to discuss tax measures in the 2012/13 national budget.

“We [private sector players] are feeling the pinch because no company can survive without borrowing. It may lead to genuine bankruptcies in the country,” warned Kaferapanjira.

Cost of devaluation

The warning comes at a time when most banks have hiked their base lending rates to record high, confirming the gravity of the liquidity problems in the banking sector which is blamed on the recent devaluation of the kwacha.

The devaluation had exerted a lot of pressure on local banks which are overwhelmed by the influx and accumulation of foreign cash making them unable to mobilise more kwacha to exchange; hence, the country’s ‘credit crunch’.

The tight market liquidity has seen the Reserve Bank of Malawi (RBM) hiking the bank rate—the rate at which commercial banks borrow from the central bank— which has in turn activated an upward spiral in commercial banks lending rates, among other bank charges.

 “We are also suffering from the current high interest rates which have been caused by some players in the banking sector. At the moment, the inter-bank rate has also been increased and this might cause a recession,” warned Kaferapanjira.

A recession is simply a business cycle contraction or a general slowdown in economic activity mostly characterised by low economic growth rates, fall in investment spending, household income, business profits while bankruptcies and the unemployment rate rise.

Kaferapanjira, however, queried bank supervision by the central bank which he said “might have taken off its eyes on commercial banks.”

‘Liquidity a major concern’

Meanwhile, Capital Alliance Limited, a portfolio and investment management firm, has noted in its latest market review that liquidity still remains a major concern in the market with average discount window accommodation at an average of K20.7 billion (about $82.8 million) per day at rates ranging from 21 to 23.50 percent for the week ending July 27 2012.

Said the firm: “As we enter the month of August, there are fears that the general level of interest rates will increase once again if the Reserve Bank implements the directive for banks to access the uncollateralised window at four percentage points above their published base rates.”

Providing an example, Capital Alliance Limited said if a bank’s base rate is 32 percent, it would access the discount window at 36 percent from RBM.

 “What is to prevent this bank from charging 10 percent above the base rate?” it queried.

RBM introduced a non-collateralised discount window borrowing, currently at 23.5 percent, on June 1 2012, to help commercial banks avert a liquidity squeeze.

RBM said the facility was temporary and it closed last week on July 31.

But RBM Governor Charles Chuka said last month the discount window, if still needed, will be continued but will attract a charge of four percentage points above the borrowing bank’s prime lending rates and that additional charges may be imposed access is considered excessive.

It was not clear as of Friday if the facility is continuing as RBM spokesperson Ralph Tseka could not be reached for his comment.

But he said earlier that as a result lacking enough kwacha currency to lend out to the public, some banks started flocking to RBM for assistance which he said prompted the central bank to introduce a non-collateralised window.

 “The banks were, therefore, squeezed of the kwacha and started to come to us,” said Tseka, adding that RBM is closely monitoring the performance of the banks to ensure that no bank fails in Malawi.