Reserve Bank of Malawiâ€™s (RBM) recently implemented â€˜base rate plus four percentage pointsâ€™ policy has come under heavy criticism from money market analysts who have described it as self-defeating and detrimental to the current economic recovery plan (ERP).
Last month, RBM implemented a directive that commercial banks facing liquidity challenges should access the non-collateralised window at four percentage points above banksâ€™ published base rates.
This was after the uncollateralised window borrowing of 23.5 percent expired on July 31 2012.
RBM governor Charles Chuka said in July that the continuance of the non-collateralised window, if still considered necessary, will attract a charge of four percentage points above the bankâ€™s prime lending rates.
This directive compelled most commercial banks to hike their base lending rates to above 40 percent to keep them afloat but hurting individual borrowers and companies.
RBM argued that the base rate plus four policy, which was discontinued on September 4 2012, was designed to rescue stressed banks which flocked the central bank for assistance.
But Alliance Capital Limited, the Blantyre-based registered portfolio and investment management firm has argued, in its weekly review, that the policy was damaging as it raised interest rates to record high, thereby denying individuals and private sector much-needed resources.
â€œThe previous [base rate plus four percent] policy was somewhat self-defeating as banks were still being forced to borrow at the higher rates and passing on these to customers via even higher lending rates to the detriment of the economy and recovery efforts,â€ says the firmâ€™s chief executive officer James Chikavu Nyirenda.
Nyirendaâ€™s assertion comes barely a week after government, through the Ministry of Economic Planning and Development unveiled ERP which aims to speed up the stability of the ailing economy currently dogged by high interest rates, sky-rocketing headline inflation rate and a low projected gross domestic product (GDP) rate of 4.3 percent.
That aside, the economy is also sitting on a historical spate of labour unrests in most private and public organisations as workers demand increased wages due to high cost of living emanating from the devaluation of the kwacha in May this year.
Nyirenda has since noted that after a sustained period of general liquidity challenges in the banking sector, the situation appears to be normalising based on the resumption of interbank activity â€˜at meaningful levels.â€™
He said over the past two weeks, inter-bank activity has moved from an average of K2.5 billion per day to K3.4 billion per day.
According to Nyirenda, over the same period, discount window accommodation has declined from an average of K16 billion per day to K15.1 billion per day, mostly via the uncollateralised window.
â€œPerhaps taking cognizance of the damaging consequences of the base rate plus 4 percent policy on uncollateralised borrowing, the Reserve Bank discontinued the policy with effect from September 4 2012. In its stead, the bank has structured a less punitive 23.5 percent uncollateralised window facility,â€ said Nyirenda.
RBM spokesperson Ralph Tseka could not be reached to comment on the matter as we went to press on Thursday.