LRR cut boosts money supply

The cut in Liquidity Reserve Requirement (LRR) from 7.5 percent to 3.75 percent on foreign currency deposits and five percent on local currency deposits seems to have positively impacted on banks, with records indicating increased money supply in the banking system.

RBM figures indicate increased money supply in the banking system.

Commercial banks now have more liqudity at their disposal

LRR is the ratio of deposits that commercial banks keep with the Reserve Bank of Malawi (RBM) without earning interest.

RBM financial market development reports that the volume of interbank borrowing also decreased to an average K3.13 billion from K12.17 billion at an average interbank rate of 5.03 percent from 5.76 percent.

Further, the central bank figures also indicate there was no access on the Lombard facility— discount borrowing window for stressed banks—during the week under review.

Local investment banker Cosmas Chigwe said in an interview yesterday the development means banks now have more cash which could ultimately be used to lend to customers.

“This in principle is likely to result into increased lending with a reduced rate ultimately spurring growth. It is, thus, an ideal situation not only for banks, but the economy at large,” he said.

Chigwe, however, cautioned that if not properly managed, the development may be inflationary.

Earlier, RBM spokesperson Mbane Ngwira said the central bank believes the cut in LRR will help spur economic growth by making more cash available to lenders who would borrow for various investment needs, but also help banks have more cash and normalise their balance sheets.

Meanwhile, Bankers Association of Malawi (BAM) chief executive officer Violet Santhe said in response to e-mailed questions that the development is positive for both banks and consumers. She said banks will now have more funds for lending.

In recent years, money market analysts and players have been pressing the central bank to consider cutting the LRR as one possible monetary policy tool to help banks have more cash and normalise their balance sheets, but also as a tool that could potentially make credit available and cheaper to firms and households.

Share This Post