Liquidity increase eases Malawi inter-bank rates
The softening in the inflation rate beginning March and the continued appreciation of the kwacha has improved commercial banks’ liquidity levels resulting in depressed inter-bank borrowing rates.
The inflation rate is currently at 34.6 percent, according to the National Statistical Office (NSO), while the local unit has appreciated by 3.5 percent against the dollar and is trading at a middle rate of K396 to the greenback buoyed by revenue from tobacco sales.
Money market figures from Alliance Capital Limited show that the average inter-bank borrowing rate has slumped from 42.1 percent to 29.3 percent with average borrowing at K3.4 billion (about $8.5m) per day from K9.5 billion (about $23.7m) the week before.
At the same time, discount window borrowing—banks’ borrowing from the Reserve Bank of Malawi (RBM) with collateral—averaged K7.6 billion per day, a drop from the previous week’s K15.6 billion (about $40m) per day.
A Blantyre-based money market analyst told Business News on Wednesday inter-bank rates attributed the dwindling in inter-bank rates to the improvement in the liquidity levels on the market because most of the banks now have money.
“Most of the funds from the banks were locked in treasury bills for a year when the rates were low. Now that the rates have gone up and most of the funds have matured, there has been a marked increase in liquidity levels,” said the analyst who did not want to be named.
The analyst said most companies and individuals have also slowed down on borrowing largely because of the prohibitive interest rates at over 50 percent which have made it difficult for recoup significant return on earnings.
In a weekly commentary, Alliance Capital Limited noted that the lowering inflation and the appreciation of the currency have led to an improvement in liquidity in the market thereby depressing interest rates.
“Now that the currency is appreciating in value, most people with foreign currency denominated accounts will be forced to trade their currencies for kwacha thereby increasing the foreign exchange supply in the economy,” reads the commentary.
After the 49 percent shock devaluation and the subsequent floatation on May 7, local banks started clearing a backlog of external payments by most importers which resulted in wiping out of excess liquidity on the market; hence, the banks started flocking to the central bank for help.
Most banks thereafter faced a liquidity squeeze—a time cash resources to meet depositors’ demands is in short supply.
Noticing that the demand for capital by the banks was so high, the RBM was prompted to introduce a non-collateralised discount window borrowing on June 1 at a rate of 18.5 percent and raised it to 23.5 percent in July.
However, the RBM discontinued the non-collateralised discount window borrowing in September last year arguing it had done enough to normalise the liquidity position of most banks.
The banks continued to borrow through the collaterised discount window.
Commenting on the banks liquidity, RBM Governor Charles Chuka said,”They [the banks] have run into a temporary problem where their kwacha resources are not what they should be. They had to pay out a lot of kwacha when they were buying dollars from RBM to help importers pay for arrears.”
