The recent move by Reserve Bank of Malawi (RBM) to cut the Liquidity Reserve Requirement (LRR) has potentially increased the money in circulation in the financial system as banks are now mandated to keep less money.
RBM’s Financial Market Developments reports show required reserves have fallen to K50.9 billion as at February 1 from K80.7 billion recorded on the same day in the previous week, effectively releasing about K30 billion into circulation.
The central bank made the decision to slash LRR from 7.5 percent to 5 percent on local currency deposits and from 7.5 percent to 3.75 percent on foreign currency deposits on Wednesday following the first Monetary Policy Committee (MPC) meeting.
RBM Governor Dalitso Kabambe said the MPC created room for LRR downward adjustment by resolving to incentivise commercial banks that invest in designated sectors and instruments resulting in release of substantial investible funds into the productive sectors of the economy.
Consequently, at 5 percent on local currency deposits, it means every commercial bank now has an obligation to keep K5 for every K100 deposited by its depositor.
Every commercial bank is obligated to hold minimum reserves of its customer deposits, normally in of cash which is physically stored at the central bank and that is what is called LRR.
Commenting on the development, economic statistician Alick Nyasulu said lowering the LRR means banks will have more funds at their disposal to lend.
Nonetheless, he said, the country should always remember that lending is just one avenue where banks invest their assets.
“The real test of increased private borrowing will depend on government appetite to borrow! If government does not control its borrowing then we should manage our expectations on the policy measures since treasury bills are a safe haven for banks to invest in as returns are guaranteed,” he said.
On his part, Malawi Confederation of Chambers of Commerce and Industry (MCCCI) chief executive officer Chancellor Kaferapanjira said the chamber is excited with this development and hopes that the cuts will be passed on to consumers of finance. Meanwhile, Bankers Association of Malawi (BAM) chief executive officer said in response to an e-mailed questionnaire the move will release some funds for lending, but was quick to mention that BAM is looking forward to inclusion of some parameters such as vault cash to be included when computing LRR.