Bankers Association of Malawi (BAM) says the liquidity squeeze some commercial banks are facing should not be a concern as it has not reached unmanageable levels.
BAM president MacFussy Kawawa said this in an interview in reaction to the current situation in which some banks’ depositors are demanding larger withdrawals than normal.
The situation has forced commercial banks to borrow from the central bank through Lombard Facility— a discount window borrowing largely meant for commercial banks that are stressed and have not enough liquidity or cash to meet their obligations.
For example, in the week ended November 26, commercial banks borrowed over K106 billion from the central bank’s loan facility.
The Reserve Bank of Malawi (RBM) Financial Market Development Report shows that daily average commercial banks’ excess reserves before borrowing from the central bank stood at -K99.5 billion from –K94.5 billion observed in the week ended November 19.
The report shows the tightening of liquidity condition in the week reduced loanable funds in the interbank market to K14.8 billion per day from K22.7 billion per day in the previous week.
But Kawawa said the liquidity squeeze is a temporary issue, observing that the banks have not reached a perennial kind of tight liquidity situation.
He said: “What we read in this situation is that this is just the period with some tightness in liquidity, but going forward we expect more liquidity given that banks are not lending as much in view of the subdued economic activity.”
Kawawa said given that foreign exchange is in short supply, it means there are deposits chasing foreign exchange and there is a bit of cash lying around waiting for foreign exchange as such banks are not in a dire situation.
For the last three months, commercial banks have been experiencing tight liquidity condition, which has led to a significant decline of funds available for commercial banks to meet liabilities.
In an interview, Financial Market Dealers Association of Malawi president Mclewen Sikwese said what is key is the approach to be adopted by monetary authorities in managing the tightening liquidity conditions.
“Considering that we have a substantial amount of reverse repos that is anchoring the market, RBM’s short to medium-term plan in managing these exposures will define the future state of the market liquidity,” he said.
RBM Governor Wilson Banda said in the last Monetary Policy Committee Statement that the central bank will continue taking measures that will ensure recovery from the Covid-19 pandemic.
RBM has maintained the policy rate at 12 percent to make borrowing cheaper and the Lombard Rate at 20 basis points above the Policy Rate to reduce the cost of funds for commercial banks.