Banks’ liquidity fluctuations normal—analyst

The liquidity level fluctuations that the country’s banking sector is facing is a normal occurrence that happens over time largely due to open market operations (OMOs) by Reserve Bank of Malawi (RBM), an economic and market analyst has said.

Commercial banks liquidity conditions have in recent months remained tight as evidenced by the interbank rate being kept close to policy rate and the stable liquidity levels.

A recent Nico Asset Managers monthly economic report which indicates commercial banks’ liquidity levels increased to K4.26 billion per day last month from K3.46 billion per day in the prior month.

The report indicates that on the other hand Access to the Lombard Facility—a discount window borrowing for stressed banks—averaged K4.09 billion per day from K9.95 billion.

But the analyst Cosmas Chigwe noted that last month there were more OMOs maturities than new take ups by RBM which must have automatically led to increased liquidity levels and consequently less borrowing on the Lombard Facility as seen in June.

He said: “It should be noted that overall the central bank appears to be committed to mopping up any excess liquidity created in the market mainly through fiscal expenditures.

“As such, market liquidity is expected to continue to remain tight although with some fluctuations as there is only so much the Central Bank can control and sometimes the market will not be willing to buy the short term government securities if they can find more lucrative alternatives.”

RBM spokesperson Mbane Ngwira earlier said it is the central bank’s strategy to contain certain macroeconomic variables in line with the growth prospects of the economy dismissing fears for a liquidity crisis.

He said the bank has been mopping up excess liquidity by rolling over maturing securities on top of issuing new securities.

Experts on the other hand have argued that for commercial banks as part of the financial sector and being drivers of the economy, liquidity squeeze is not a healthy sign, saying improvement in liquidity levels trigger fall in interest rates which could see increase in borrowing from commercial banks for investment purposes.

Commercial banks started facing liquidity problems after the devaluation and subsequent floatation of the kwacha in 2012, a situation which resulted in most banks facing a liquidity squeeze.

This pushed the central bank to introduce the discount window borrowing to normalise the liquidity position of struggling banks.