Bank promos: Dash for cash?
To Malawian commercial banks, last year was tight. Some had to fall back on expensive deposits and the uncollaterised discount window or breach the regulatory requirements.
After the May 2012 devaluation and floatation of the kwacha, the Reserve Bank of Malawi (RBM) has been implementing a tight monetary policy in an effort to rein in inflation.
RBM engaged in contractionary money market operations, raised the base lending rate to the current 25 percent while the Liquidity Reserve Requirement rose to 15.5 percent.
RBM’s tight monetary policy effectively mopped up the economy, however, it left some banks struggling to meet their regulatory requirements.
Commercial banks resorted to the RBM discount window to meet their liquidity needs while the hardest hit had to borrow from RBM through the temporary uncollateralised discount window.
In addition, some banks, according to the International Monetary Fund (IMF) Malawi country report, adjusted their balance sheets to the new conditions and a number of them have become providers of liquidity to other banks in a more active interbank market. Others engaged in deposit mobilisation, curtailment of new loans and injection of capital.
IMF in a recent press statement has urged the RBM to be more proactive in tightening monetary policy to rein in inflation pressures—hinting at the upholding of the tight monetary policy.
However, as a warning on possible breach of regulations, the IMF statement further urged the central bank to safeguard financial stability by strengthening its oversight of the banking system, especially with respect to banks that continue to have difficulties meeting prudential requirements—an indication that some commercial banks are on the brink of breaching the permissible limits.
Apparently, liquidity problems have eased, giving a breather to the struggling banks to get cheaper deposits or borrow from other banks.
RBM in the April Economic Review says money supply rose by K25.4 billion (about $635m) to K422.7 billion (about $1.05bn) in the month.
The central bank explains that the rise in currency in circulation was due to the seasonal transactional demand for money upon realisation of proceeds from agricultural produce sales, whereas the increase in demand deposits was a result of realignment of maturing fixed deposits from the term deposits category.
So, the improvement in liquidity may be temporary and thus commercial banks may face harder times again ahead bearing in mind the tight monetary policy.
To benefit from the improvement in liquidity and possibly build a treasury buffer, a number of commercial banks have launched promotions requiring customers to maintain a certain minimum balance.
Commercial banks seem to be making hay while the sun shines. Thus with lessons from last year on liquidity and the Basel II—which sets higher capital requirements—fast approaching and coming into effect next year, commercial banks are prudent enough to mobilise deposits.
