The monetary policy decision by the Reserve Bank of Malawi (RBM) to revise downwards the Liquidity Reserve Requirement (LRR) has released K40.34 billion into the banking system, the central bank statistics have revealed.
LRR is a fraction of customer deposits and notes that each commercial bank must hold as reserves and is stored physically in the bank vault or a central bank’s strongroom.
The decision by the central bank to cut LRR from 15.5 percent to 7.5 percent for the first time in eight years, which took effect on August 1, followed a third Monetary Policy Committee (MPC) meeting last Tuesday and was chaired by governor Charles Chuka.
The decision means each commercial bank is now obligated to deposit K7.50 (and not K15.50 as was the case prior to July 28) at RBM and hold in its banking hall K92.50 for every K100 deposited by its customer.
Generally, RBM uses two monetary policy tools of bank or discount rate and LRR to influence lending rate cut, which is hovering at around 40 percent, although at times the central bank has recourse to other tools.
But RBM’s latest commentary on the banking system liquidity dated August 3 shows that excess reserves were estimated to close at K35.88 billion on Monday from K4.40 billion recorded last Friday.
“This mainly follows the reduction in LRR to 7.50 percent effective August 1 from 15.50 percent. K40.34 billion has been released into the banking system as a result of the reduced LRR,” says the RBM commentary.
The bank projects that excess reserves will close at K38.8 billion during the week ending tomorrow, August 7.
Economic commentator Edward Chilima on Tuesday expressed shock at the K40 billion being the injected figure into the system.
“But it is necessary for banks to narrow the interest rate spread,” Chilima said.
He said it was imperative and strategic for the country to have low interest rates to help most Malawians access finance at low cost.
Chuka hopes slashing LRR would enable banks to lower the spread between the prime lending rate and the policy rate currently at 25 percent.
Chilima, however, admitted that the move would be inflationary, but said it will depend on how the RBM will manage or control the rate currently at 21.3 percent as of June, according to the National Statistical Office (NSO).
On his part, head of Economics at Catholic University Gilbert Kachamba foresaw that slashing of LRR will only induce profitability of commercial banks, as they now have more resources at their disposal for lending out at high interest rates.
At 15.5 percent, Malawi’s LRR was said to be the highest in the Southern Africa Development Community (Sadc), which has an average LRR of 10 percent. n