L ack of liquidity or cash is the fastest path to failure for a commercial bank and market analysts say local financial institutions are facing what seems like a near crisis.
Commercial banks have been caught up in a situation where depositors are demanding larger withdrawals than normal, forcing them (banks) to borrow from Reserve Bank of Malawi (RBM) at 29 percent through what is called Lombard facility or discount window borrowing.
Lombard facility is largely used in a situation where commercial banks are stressed for cash to meet their obligations and is charged at two percentage points above the policy rate at 27 percent.
Business News calculations based on figures from RBM show that in the first half (January to June) this year, commercial banks borrowed over K200 billion from the central bank.
In the first week of August alone, commercial bank’s borrowing increased to an average of K14.33 billion per day from K11.88 billion the week before, according to a weekly market update from Nico Asset Managers, a local investment management firm.
At the same time, average interbank borrowing rate—the rate commercial banks charge each other—increased to around 28 percent, RBM reports show, a clear indication that some banks are squeezed.
A Blantyre-based market analyst said yesterday the liquidity squeeze in the commercial banks does not necessarily mean that they are short of money or broke, which could compel them to put withdrawal limit.
“The poor economic growth has had an impact on the financial sector which resulted in shrinking liquidity levels,” he said.
But the analyst said commercial banks, as part of the financial sector and being drivers of the economy, the liquidity squeeze is not a healthy sign.
The economy registered a real gross domestic product (GDP) growth of three percent in 2015 and indications are that this year, growth could even dip further despite government projecting a 5.1 percent growth rate.
Alliance Capital Limited analysis indicates that high inflation rate, currently at 22.6 percent as of June 2016, kwacha depreciation, poor tobacco performance and a drop in commercial bank funds have played a big part in the currently prevailing liquidity crisis.
First, they argue that high inflation, occasioned by rising food inflation because of shortage of maize, has caused most people to hold on to their money to support their consumption than making deposits.
“Economic agents are holding more cash than making deposits,” they argue.
Second, the depreciation of the kwacha has increased production cost for most of business, particularly those that import raw materials for their production purposes.
This means that most businesses are struggling to make profits and save disposable income.
Third, the poor performance of the tobacco market, whose proceeds have dropped by about 30 percent to $186 million (about K135 billion) from last year’s $271 million (K197 billion) during the same period, has aggravated liquidity problems. As a result of this, most of the tobacco growers have no money to spend.
A drop in commercial banks money has also been cited as one of the reasons for liquidity challenges, largely due to depletion of private sector deposits explained by withdrawals from foreign currency denominated accounts (FCDAs) or term deposits—sum of money placed in a bank account to gain interest.
“FCDAs have dropped on import payments especially maize importation while low demand for savings deposits has been caused by investors’ preference for short-term instruments such as Treasury bills [T-bills],” explained the analysis.
As a result of tightening liquidity, private sector credit from commercial banks has continued to decline, according to RBM, attributing this to prevailing high interest rates and continued tightening of credit standards. n