Some commercial banks are struggling to meet their daily minimum liquidity requirements and have resorted to borrowing from Reserve Bank of Malawi (RBM), driving up interest rates.
Analysts have said this has the potential of threatening to uphold current prohibitive bank lending rates, hovering at 40 percent.
RBM figures show that financial institutions borrowed up to K16 billion per day in the last two weeks while the interbank lending rate hit over 25 percent by end November, compared to as low as seven percent in September.
Last week alone, the commercial banks borrowed about K30 billion through Lombard Facility or discount window borrowing at a rate of 27 percent.
An official from one of the local fund managers in an interview yesterday said the liquidity situation in the banks is dire.
He said two weeks ago, every commercial bank was struggling to meet regulatory liquidity requirements and, therefore, resorted to borrowing from the RBM facility although the interbank rate is lower.
“Two weeks ago every bank, including the big ones were on the run to meet liquidity requirements. The situation is now improving, but we foresee that it will still remain serious.
“We expect interbank lending to remain around 24 percent up to April next year when the tobacco marketing season will start,” said the analyst who did not want to be named.
He, however, said although interbank lending rates are high, commercial bank lending rates may not go up unless RBM decides to increase the policy rate at 25 percent because commercial banks raised lending rates and not deposit rates recently—widening the deposit-lending gap.
While he said liquidity crunch is seasonal and that it is being influenced by the depreciation of the kwacha, which has lost about 25 percent within two months, others have attributed the liquidity problems to RBM policy directive.
Mid-November, RBM directed that the foreign exchange Liquidity Reserve Requirement (LRR) which stands at 15.5 percent should be maintained in local currency and not in forex, a directive analysts argued reduced funds available for lending.
In the wake of the directive and change in monetary policy rate which was increased by 2.5 percentage points to 25 percent, commercial banks raised their lending rates with some prime rates hitting 40 percent.
RBM spokesperson Mbane Ngwira said the LLR directive was made to improve the transmission of monetary policies so that they serve their purpose.
He said that periodically, RBM reviews the transmission of monetary policies, arguing that because the LRR controls the supply of money which is kwacha-based, maintaining the reserves in local currency serves the function better.