Lombard facility access peaked at K11.5bn in June

Commercial banks starved of liquidity borrowed K11.5 billion in June through the Lombard facility, a rise of 56 percent from K7.36 billion the month before, according to the Reserve Bank of Malawi (RBM) figures, signalling liquidity squeeze in some banks.

The RBM introduced the Lombard facility or discount window borrowing in January this year to assist banks to manage their liquidity better than has been the case before.

The Lombard rate was set at a spread of two percentage points above the bank rate which was until July 9 2014 at 25 percent.

Currently, the bank rate—the rate at which commercial banks borrow from the central bank as a lender of last resort—is at 22.5 percent with the Lombard rate also revised down to 24.5 percent from 27 percent, meaning that commercial banks with appropriate collateral still have assured access to funds.

RBM figures also show that interbank borrowing—borrowing between banks—averaged K3.88 billion per day in June from K3.01 billion per day in May 2014, representing a month-to-month increase of 28.8 percent.

Interbank interest rates averaged 14.9 percent in June 2014, a drop from 17 percent in May 2014, according to RBM figures quoted by Nico Asset Managers monthly economic report for June 2014, which could indicate that some interbank activity was rather subdued in the month.

“Interest rates on the interbank market in June 2014 have stabilised to an average of 14.9 percent compared to 17 percent in May 2014 as a result of the slightly lower and less erratic liquidity levels. Commercial banks lending rates are still high with a range of 35 percent to 37.8 percent. As the cost of borrowing is still high, it may lead to a slowdown in private sector growth,” said the investment advisory firm.

Following the reduction in the bank rate, most of the commercial banks have pegged their lending rates at around 34 percent, slightly easing pressure on individual and corporate borrowers.

Liquidity in June, according to RBM figures, declined to an average of K3.95 billion per day compared to K89.2 billion the prior month.

Last week alone, some banks also borrowed K5.2 billion through the Lombard facility at 24.5 percent while overnight borrowing between banks averaged K3.76 billion per day, up from K3.29 billion per day in the week before.