Malawiâ€™s businesses are gripped with fear that base lending rates may jump again if commercial banks start accessing the non-collateralised discount window at four percentage points above published rates as directed by the Reserve Bank of Malawi (RBM), to address capital problems in financial institutions.
RBM introduced a non-collaterised discount window borrowing, now at 23.5 percent, on June 1 2012 to help commercial banks avert a liquidity squeeze which came about as a result of the 49 percent devaluation of the kwacha and subsequent floatation of the kwacha.
The facility, which the RBM called a temporary measure, closed on July 31.
Last month, the central bank Governor Charles Chuka indicated its continuance, if still considered needed, but said it will attract a charge of four percentage points above the borrowing bankâ€™s prime lending rates and additional charges may be imposed if access is considered excessive and/or prolonged.
Banks have put their base lending rates at between 30 percent and 33 percent following the Reserve Bank of Malawi (RBM) hike of the bank rate-the rate at which commercial banks borrow from the central bank-to 21 percent.
This means that if a bankâ€™s base rate is 32 percent, it would access the discount window at 36 percent, a development that could force them to increase further the base lending rates.
RBM spokesperson Ralph Tseka could not be reached to indicate if the facility is still continuing.
But indications on the market are that liquidity remains a challenge and figures show that in the week ending July 27 2012, the average daily window accommodation amounted to K20.7 billion (about $82.8m), according to Alliance Capital Limited.
At the same time, interbank market activity has been insignificant with an average of K2.6 billion (about $10.4m) changing hands at a rate ranging from 20 percent to 23.30 percent, said the market analysts, meaning that banks do not have enough money to lend to each other.
Information sourced from analysts show that so far, local commercial banks have borrowed over K0.5 trillion between June 1 and July 31 2012 to avert a credit crunch and possible bank failures.
“As we enter the month of August, there are fears that the general level of interest rates will increase once again if the Reserve Bank implements the directive for banks to access the uncollateralised window at four percentage points above their published base rates.
“It is our understanding that there has been some engagement on the issue between the central bank and commercial banks to see how best the situation can be handled,” reads part of the commentary from investment and portfolio managers.
But based on the extent of individual bank liquidity problems, the firm foresees a chaotic scenario where banks will raise deposit rates to attract funds at comparatively cheaper rates and may start charging higher “premiums” above their base rates to cover the cost of discount window accommodation.
On the market, banks have been on the overdrive mobilising savings, a clear reflection of the liquidity crunch-a time when cash resources are in short supply and demand is high- which could force banks to freeze lending, a development that may send an already weak economy down the cliff.
Consumers Association of Malawi (Cama) executive director John Kapito said the high lending rates could force bank customers to default on loan repayments, a situation that could poison the whole of the local financial system, including the insurance industry.
Malawi is staring in the face a failure in the banking system similar to the one experienced in the West at the height of the global financial crisis in 2008 if the capital problems persist.
Market analysts have said this is the first time in recent memory where the market has seen such movements emanating from the banks and, perhaps, reinforces the principle of a liberalised economy.