RBM’s Lombard facility boomerangs
Although the Lombard facility is meant to assist liquidity-stressed banks and discipline the market, the provision has boomeranged, prompting a rise in interest rates, which is likely to cause more pain to businesses and consumers.
The Reserve Bank of Malawi (RBM) last December announced the introduction of a Lombard facility, an automatic window to assist stressed banks access liquidity at 27 percent, two percentage points above the bank rate, effective January 1 2014.
But in a sour turn of events, CDH Investment Bank (CDHIB) and Standard Bank have increased their base lending rates in the wake of the new facility.
Analysts also fear other commercial banks may follow suit.
CDHIB has increased its base lending rate to 40 percent while Standard Bank raised its prime rate to 39.5 percent.
But Chancellor College economics professor Ben Kaluwa in an interview yesterday said the RBM has effectively increased the bank rate by introducing the Lombard at a higher rate.
“It does not matter whether you call it a Lombard rate or RBM rate but effectively the bank rate has been increased. The commercial banks are responding to the increase,” he said.
Kaluwa said the market might be experiencing an improvement in liquidity because of the high interest rates because nobody wants to borrow at the current rates.
He argued that interest rates in Malawi are prohibitive that the only business that one can do is trading and not production.
A Nico Asset Managers weekly report shows that liquidity levels increased during the week ending January 3 to K7.21 billion a day from an average K4.29 billion while borrowing between banks decreased to K3.27 billion from K4.29 billion per day in the previous week.
The interbank lending rate—the rate at which banks borrow from each other to meet liquidity requirements—marginally increased to 24.88 percent.
RBM in the Monetary Policy Committee (MPC) minutes argued that the introduction of Lombard is aimed at containing risks to inflation outturn envisaged in the near future.
The November inflation rose to 22.9 percent according to the National Statistical Office (NSO).
RBM spokesperson Mbane Ngwira earlier argued Lombard will ensure that commercial banks have a standing access to money from the RBM as long as they meet requirements regardless of the liquidity situation on the market.
Firstly, this is great that these issues are now being discussed in the public forums. Secondly, let us give due to RBM for opening up. In the past no one knew what they were up to. I actually give RBM credit on the technical execution of what they have to do. I am a difficult man to satisfy but overall I am satisfied with the technical execution of RBM staff! I read detailed scores by IMF reports on Malawi and they seem satisfied with the effectiveness with which RBM executes agreed action plans.
Where the issue is as I see it is at strategic level, the big picture. How useful is “the good” stuff RBM is doing for economic growth, job creation and price stability? That is a pass not. Then you can ask yourself is it entirely RBM fault or the govt fault? Maybe the latter; the govt must devise an overarching goal that everything; every institution can rally behind including RBM. Without that then every institution is forgiven for pursuing its own idiosyncratic interests. Let me explain myself here by commenting on some of RBM recent initiatives. RBM has to satisfy two stakeholders; i) the international community including. IMF/World Bank and ii) the internal community: the govt, banks and the consumers. RBM must be commended on i) because they have met IMF requirements. The implementation of Basel II is a step in the right direction to wards meeting its international obligations but also safeguarding the consumer. Basel’s three pillars of managing operational risk, credit risk and market risks will ensure that banks in Malawi holding peoples deposits cannot go into bankrupt squandering people’s life savings. Banks will be better capitalised. Here in Europe Basel ii was mandatorily implement in 2008 after the crisis while the US followed in 2009. Although now Basel iii has replaced Basel ii, it would not have been wise to jump from zero to Basel iii. I suggest that RBM prepare an overview for those interested in Basel.
Internally, the consumer could be better served with lower lending rates. Internationally, the monetary control instruments/tools that RBM uses have been superseded. For example, use of monetary aggregates instead of inflation targeting, the use of interest rate targeting in stead of non borrowed reserves (NBR) for OMO, high liquidity reserve requirements (LRR) etc. but maybe Basel II will help some of these with ready made mathematical/financial formulas that come with it.
Lombard implementation is again good intention on the part of RBM to ensure that there is plenty of business capital resources in the economy. Although these issues fall deep into the echelons of specialised knowledge of monetary policy, (not food for public consumption), but in a democracy, we must explain these things so that no one is hoodwinked. As a background, the Lombard technique is an established practice where Reserve banks supplement bank rate also known as discount rate with a Lombard rate. Most notable bank here in Europe to use the Lombard rate is the Germany bank when it used to offer an additional 0.5% over and above the bank rate (discount rate). Now that has been discontinued coz the German bank has been ‘swallowed’ into the European central bank mechanism. Malawi being Malawi, everyone wants to over charge, so RBM has gone not for the 0.5% above its bank rate of 25% but for the whole 2%. So whereas on one hand you can understand that RBM is trying its best to make capital available so commercial banks can lend to as many business as possible. That noble cause is contradicted by the fact that high lending rates a) make Malawian made goods expensive b) start-ups, expanding SMEs, who need interest relief in their first 2 years, end up going bust due to high bank rates c) it discourages investment. The overall impact of these factors is that job creation and economic growth are compromised thereby perpetuating poverty. That is why I am advocating an “integrated development strategy” in Malawi to balance all conflicting requirements. For me, my concern is that when I eventually bring the industrial revolution to Malawi, many local Malawians will not be able to participate in investing because of these high rates. I want all Malawians to participate in wealth creation to meet their Malawian dreams by being employed as well as investing. I advocate for the lending rates to be cut to below 10%. I have several specific ideas on how that can be achieved. I am apolitical. Malawi is at the cusp of greatness and development, people!!!