The raising of Liquidity Reserve Requirement (LRR) for banks’ domestic deposits from 10 to 12 percent have removed about K22 billion from the banking system, with analysts saying this does not promote private sector credit access.
LRR is a portion of total deposits that commercial banks are mandated to keep with the central bank without earning interest and this adjustment means that out of the K1.117 trillion total deposits, the central bank is now keeping K134 billion, up from K111.7 billion.
In separate interviews on Tuesday, economists argue that increasing the LRR means further tightening of monetary policy and restricting lending, which is not an ideal for an economy such as like Malawi that is not producing.
University of Malawi economics lecturer Edward Leman said in an interview on Tuesday that the high LRR ratio coupled with the policy rate at 24 percent, raise the cost of borrowing and investment, which can suppress production and potentially prolong supply-driven inflation.
He said there is need for a gradual reduction of LRR ratio while ensuring that additional liquidity is channelled towards productive sectors, stressing that if credit finances production, it can expand supply rather than increase demand and imports.
Said Leman: “At the basic level, supply and demand matter. A lower LRR can improve banks’ lending capacity and potentially reduce the cost of credit, supporting investment and production.
“For Malawi, strengthening productive capacity may be more effective for achieving sustainable price stability than relying predominantly on tight monetary policy to suppress demand.”
In a separate interview, financial expert Brian Kampanje said cutting the LRR could free up more funds for lending which can boost production on the supply side and consumption through the consumers’ loans.
He, however, warned that any significant cut of LRR in a high interest rates environment is risky and highlighted that it could require banks to have good asset-liability strategy.
“The higher policy rate means more chances of higher default by borrowers while the depositors seek higher interest income and therefore banks must roll out good asset-liability strategy to comply with the tough LRR but at the same time make profits,” he said.
In its third Monetary Policy Statement of 2026, RBM justified the LRR increase, saying the decision will help reduce excess liquidity in the banking system that continues to fuel inflationary pressures.
Reads the statement in part: “The Monetary Policy Committee noted that earlier monetary policy actions have contributed to the observed decline in inflation. However, rising non-food inflation, elevated money supply growth, and excess liquidity conditions require continued attention.
“The increase in the LRR ratio on local currency deposits is expected to absorb excess liquidity in the banking system, further moderate money supply growth, and strengthen monetary policy transmission.”
Malawi is one of the countries with the highest LRR in Southern African Development Community above the regional average, which hovers between five and 10 percent.
In April 2020 when RBM cut LRR by 125 basis points from five percent to 3.75 percent, it instantly made available K12 billion into the banking system.
