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Home Business Business News

Interbank lending up 172 percent

by Johnny Kasalika
26/12/2012
in Business News
2 min read
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Interbank lending has gone up by about 172 percent in the past four weeks and experts say this is a sign that some banks are still struggling.

Lending between commercial banks has increased from K2.02 billion in the week ending November 30 to an average of K5.5 billion per day last week, according to the Reserve Bank of Malawi (RBM).

In an interview last week, Alliance Capital financial market expert Christian Majavina said the rise in volume of interbank lending is certainly a sign that some banks are strained and are finding it difficult to meet liquidity requirements.

“Most banks are finding it hard to meet liquidity requirements and this has also been worsened by the increase in the RBM base lending rate,” said Majavina.

During its meeting on December 3 2012, RBM’ Monetary Policy Committee (MPC) resolved to raise the base lending rate by 400 basis points to 25 percent from 21 percent and maintain the Liquidity Reserve Requirement (LRR) at 15.5 percent.

The MPC argued that the new rate is in line with developments in both non-food inflation and the Treasury bill yield which MPC said is one of the crucial indicators of market expectations.

MPC further noted that the year-on-year growth in money supply rose to 22.7 percent from 19.9 percent recorded in September 2012 underpinned largely by private sector credit which contributed 13.8 percentage points to the 22.7 percent monetary expansion.

Majavina, however, pointed out that the money market was illiquid and it was not necessary for the RBM to raise the base lending rate to mop up the economy off excess liquidity.

The interbank lending market is a market in which banks extend loans to one another to ensure that they hold an adequate cash to manage possible bank runs by clients. If a bank cannot meet these liquidity requirements, it will need to borrow money on the interbank market to cover the shortfall.

The recent developments on the money market, however, are thus a serious indication that some banks may not be able to meet demands by clients in case they demand immediate withdrawals.

Trending the interbank lending market for the past three weeks, in the week ending November 30, the volume averaged K2.02 billion per day, moved to K2.89 billion in the week ending November 7, jumped to K5.23 billion in the week ending December 14 and soared to K5.5 billion per day last week.

Interbank lending rates have followed a similar trend in the period.

The rate averaged 22.11 percent in the week ending November 30, moved to an average of 24 percent in the following week and moved to 24.79 percent by close of business on December 14 and rested on 25.69 percent by close of business a few notches above the RBM’s base lending rate on December 21.

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