Liquidity shortages in the banking sector in Malawi has reached crisis levels with stressed commercial banks borrowing a record high of K806 billion (about $3.2 billion) from the Reserve Bank of Malawi (RBM) in July alone.
Analysts have since warned that the liquidity crunch could sink the banking industry and have urged the RBM to cut Liquidity Reserve Requirement (LRR) to free up capital.
Nico Asset Managers revealed this in its latest economic report for July that commercial banks borrowing in July averaged K25.9 billion per day which translates into K0.8 trillion being borrowed from the central bank.
â€œThe inter-bank market continues to experience severe liquidity shortages with the amount banks borrowing from the Reserve Bank during the month of July averaging K25.9 billion per day from an average of K17.17 billion during June 2012,â€ reads in part the economic report, quoting RBM figures.
Such a massive borrowing validates the gravity of the countryâ€™s â€˜credit crunchâ€™ as banksâ€™ excessive demand for capital soars.Â
Analysts have indicated that commercial banksâ€™ desperation for resources can also be seen by stiff competition among the banks in luring customers with rewards for opening accounts with them.
It has also transpired that collateral still remains a problem with the banks borrowing huge volumes from RBMâ€™s collateral free discount window, which was pegged at 18.5 percent in June, but has jumped to around 35 percent or plus 4 percentage points above each bankâ€™s base lending rate effectiveÂ August 1.Â
According to Nico Asset Manager, as a way of abating the severe liquidity shortage, RBM effected another bank rate hike on July 9 2012, putting it at 21 percent from 16 percent in June.
But the bank rate increase has resulted in yet another set of interest rates offered on fixed deposits and a higher average base lending rate offered by commercial banks at 31.5 percent from 23.5 percent in June 2012.Â
â€œAs a result, the amount being borrowed from the discount window in July was at an average rate of 20.75 percent compared to an average rate of 17 percent in June 2012,â€ it says.
The investment management firm has also observed that as liquidity shortage remains a problem, there is pressure for interests rates to continue rising.
It also says at present, commercial banks have started offering relatively high deposit rates to attract investors and ease liquidity pressure on the market.
â€œThe severe liquidity situation seems to be a protracted problem which might not be corrected in the short-term. A worst case scenario could see another bank rate hike which could result in treasury bills yields and lending rates rising,â€ it says.Â
Blame it on commercial banks
In a separate interview on Friday, professor of economics at Chancellor College, Ben Kaluwa, blamed commercial banks for triggering their own liquidity shortages by attributing the crisis to low deposits rates in the past which he said discourage savings culture.
â€œBanks have been misbehaving and I do not sympathise with them. Deposit rates were at as low as two percent and this discourages savings as spreads were high,â€ said Kaluwa.
He, however, agreed with proposals from other analysts to cut LRR currently at 15.5 percent.Â
LRR, which local analysts argue is currently high in Malawi, is most often used as a monetary policy tool for influencing the countryâ€™s borrowing and interest rates by changing the amount of funds available for banks to lend out.Â
â€˜Let sanity prevailâ€™
A money market analyst Chikavu Nyirenda on Monday expressed the need for sanity to prevail among banks and warned of severe consequences if the liquidity challenges are not resolved in time.
Said Nyirenda: â€œAs of last week, the situation [the level of borrowing by commercial banks from RBM] had not changed. Unless there is a particular reason RBM is not adjusting the liquidity reserve ratio, business will come to a halt and inflation will keep on rising.â€