Banks respond to improved liquidity
Banking required reserves—a fraction of commercial bank deposits—rose by about 13 percent to K39.43 billion on July 15, from K34.92 billion on April 15, show the Reserve Bank of Malawi (RBM) daily money market reports.
Commercial banks are required to physically keep with the RBM a fraction of their deposits based on a liquidity reserve requirement (LRR) which currently stands at 15.5 percent.
Thus, the required reserves of K39.43 billion at the RBM on July 15 is equivalent to 15.5 percent of total deposits in the banking system and, deductively means that deposits in the financial system stood at K254.38 billion an indication that commercial bank deposits have increased.
Commenting on the changes, RBM spokesperson Mbane Ngwira in a telephone interview on Tuesday said the rise in the required reserves is an indication that liquidity has improved.
“This is a marketing season for tobacco and other farm produce. This has increased the bank deposits and due to the current LRR, the commercial banks are supposed to keep that money with the RBM,” said Ngwira.
The money market report for July 15 indicates that the banking system was projected to have excess reserves equivalent to K6.46 billion, a negative K0.5 billion under net money market operations and no transaction in foreign exchange operations.
Since April, the required reserves have gradually been increasing. On May 15, the reserves stood at K36.48 billion and rose to 37.97 billion on June 17.
RBM in its April Economic Review said that broad money supply (M2) rose 6.4 percent in April from K397.3 billion recorded in March.
The RBM explained that the upsurge in narrow money to K262.5 billion in April 2013 from the previous month’s position of K233.6 billion was attributed to both demand deposits, and notes and coins in circulation, each of which increased by K14.4 billion in April 2013.
RBM is implementing a tight monetary policy. In the last Monetary Policy Committee (MPC) meeting held on May 7, it was noted that although liquidity conditions remain tight generally, bank credit growth remains strong.
In light of the above developments, the MPC resolved to keep its monetary policy stance unchanged by maintaining RBM base lending rate at 25 percent and the liquidity reserve requirement at 15.5 percent. The committee feared that it would be premature to loosen monetary policy at that stage.
