The Reserve Bank of Malawi (RBM) plans to institute a number of changes in the financial market that will have far-reaching impact in the way business is conducted.
The changes, among others—which have been agreed with the Financial Market Dealers Association (Fimda) and Bankers Association of Malawi (BAM)—will bring order and uniformity for calculating prices of financial instruments and retail products and also increase transparency and effectiveness across the entire financial sector.
They include the introduction of Malawi Interbank Offered Rater (Mibor), Master Repurchase Agreement (MRA), Market Maker and the Standing Deposit Rate.
RBM manager responsible for financial market developments Rodrick Wiyo said in an interview, the proposed changes have been in the pipeline for a long time.
The Mibor rate—the reference rate, which will act as the primary benchmark for short-terms interest rates—is modeled on the London Interbank Offered Rate, which is also the benchmark interest rate for many adjustable rate mortgages, business loans, and financial instruments traded on global financial markets.
Said Wiyo: “Currently, we don’t have Mibor in Malawi. We have talked about this for so long and we believe time has come for us to introduce the reference interest rate.”
He noted that everyone has been quoting their own interest rates, which made it difficult for the RBM introduce other products such as foreign exchange options, which are based on the reference rate.
Mibor will be calculated for eight maturities and will assist in the comparison of financial products and also strengthen the transmission mechanism for monetary policy, among others.
On the interbank money market, Wiyo observed that RBM wants to bring order particularly by ensuring that commercial banks sign agreement called MRA—a legal agreement designed for parties transacting in short-term repos.
The agreement will have standard provisions, terms and condition governing the domestic repo market.
“MRA is crucial to the development of a horizontal repo market and will address issues of collateral in interbank deals as well as facilitating development of the secondary market,” he said.
RBM also plans to introduce a market marker (MM), an institution that will deal in securities or other assets to buy and sell at specified prices at all time.
Financial market analysts believe the MM will culminate in the development of a secondary market to promote price discovery of financial instruments in the secondary market and also opportunities for investors such as short selling.
A standing deposit facility is also in the offing, which will ensure that excess funds is deposited overnight with the central bank.
The rationale is that when commercial banks are short of money, theborrow from RBM through what is called Lombard facility, whose interest rate is at two percentage points above the bank rate at 27 percent.
“The facility will provide the floor rate for the absorption of overnight excess liquidity from the banking system by the central bank. It is envisaged that it will to reduce interbank rate volatility and improve monetary policy transmission,” said Wiyo.
These developments were shared with financial market dealer last weekend in Mangochi during the Fimda 2016 Annual Lakeshore Conference.
At the conference, financial market analyst and investment banker, Misheck Esau, who is also chief executive officer of CDH Investment Bank (CDHIB) called for a shift to debt funding as an alternative to the traditional bank or money market funding to stimulate economic growth and infrastructure development.
Vice-President Saulos Chilima, who officially opened the conference, noted that despite a number of positive innovations in the financial infrastructure, the financial sector is yet to meet the growing needs for more diverse sources of finance.
He advised financial market dealers to address the challenge of missing markets such as the lack of long-term financing.