Liquidity crisis: who is the culprit?

Five months after the low liquidity emerged in Malawi’s local banks, the situation seems not to be stabilising with available figures obtained from money market analysts indicating that the discount window accommodation is substantially increasing.

Market analysts argue that to gauge the seriousness of Malawi’s bank liquidity crisis, there is need to understand whether the problem is systemic or is bank specific where a few ‘sick’ banks are distorting the whole picture.

The Reserve Bank of Malawi (RBM) has not come out in the open to reveal the banks that are surviving by borrowing from the discount window, currently at 23.5 percent.

RBM spokesperson Ralph Tseka has not responded to an e-mailed questionnaire to name the banks, out of the country’s 12, that are in dire straits.

But Governor Charles Chuka, in an interview in September, said the low bank liquidity is a much different problem. He assured that Malawi’s banks are sound and well capitalised and doing their business.

“They have run into a temporary problem where their kwacha resources are not what they should be. They had to pay out a lot of kwacha when they were buying dollars from the RBM to help importers pay for arrears,” he explained then, adding that most of the bank are out of the discount window.

Floated kwacha

Malawi’s banks have since May, when the kwacha was suddenly devalued by about 50 percent and subsequently floated, been facing a liquidity squeeze—a time cash resources to meet depositors’ demands are in short supply.

After the shock devaluation, the bank started clearing a backlog of external payments by most importers which resulted in wiping out of excess liquidity on the market; hence, the banks started flocking to the central bank for help.

The commercial banks’ demand for cash was so high that RBM introduced a non-collateralised discount window on June 1 2012 to allow ‘stressed banks’ access fund to avert a possible bank failure.

Data provided by Blantyre-based Alliance Capital Limited show that discount window accommodation for the week ending November 9 2012 increased to an average of K23.14 billion per day, a 30 percent jump over the week before.

“Of even greater concern is the fact that practically 60 percent of the borrowing from the central bank is via the uncollateralised window at 23.50 percent vis a vis the normal discount window rate of 21 percent.

Discount window accommodation for the week was at an average weighted rate of 22 percent, down from 23.02 percent,” says a commentary from the portfolio and investment firm this week.

Since available data on the extent of borrowing from the discount window only gives an aggregate total, the firm says it is unable to ascertain the significance and implications of problems faced by individual banks and how the RBM intends to deal with the issue “to ensure continued public confidence and stability of the financial systems”.

“Suffice to say that with the observed daily accommodations, and on the premise that it is to the same affected banks, the central bank would appear to have become a lender of daily resort and not the traditional lender of last resort,” says the firm.

Analysts say this is clearly an abuse of the discount window facility; hence, the need to isolate the problems and come up with a more robust and meaningful resolution.