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Liquidity improves, bank deposits rise

Liquidity in the banking system has further improved with required reserves—a fraction of bank deposits—rising to K42.9 billion on September 9, official figures have shown.

bank-graphReserve Bank of Malawi (RBM) daily financial statistics indicate that the liquidity reserve requirement (LRR) which currently stands at 15.5 percent of bank deposits, rose to K42.9 billion on September 9, from

K41.8 billion on August 15, an indication that banks are still receiving more deposits.

Thus, the required reserves of K42.9 billion which equals to 15.5 percent of total deposits in the banking system means that total bank deposits stood at K276.8 billion on September 9.

A further analysis of the RBM’s daily reports indicates a general increase of deposits and deductively an improvement in liquidity since April this year when required reserves stood at about K37 billion rising to about K43 billion this month.

The improvement in liquidity has thus triggered a fall in interest rates with most commercial banks reducing their base lending rates by about two percentage points to around 38 percent, although the central bank has maintained its base lending rate at 25 percent since December 2012.

In an interview on Tuesday, Chancellor College economics professor, Ben Kaluwa said the rise in deposits in the banking system is good news for everyone.

“The increase in deposits is good because it triggers lower lending rates. The increase in deposits will not trigger inflation because this is supply side of money and government and investors may use the money if they need it,” said Kaluwa.

However, the RBM governor Charles Chuka was quoted in The Nation having said that the central bank will further tighten the monetary policy to achieve low inflation next year a feat that could result in low interest rates.

Apparently the low interest rates will trigger an improvement in nonperforming loans, a better performance of the property market which has been struggling due to exorbitant interest rates.

According to RBM figures, since April the required reserves have gradually been increasing. On May 15, the reserves stood at K36.48 billion, increased to K37.97 billion on June 17, K39.43 billion on July 15. The required reserves rose to K41.8 billion on August 15 and rose to K42.9 billion on September 9.

The Monetary Policy Committee minutes for August 6 indicate that the year-on-year growth in money supply dropped to 25.7 percent in June 2013 and was below the projected nominal GDP growth of 32.1 percent for 2013, reflecting a sustained tight monetary policy stance.

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