
Although the Lombard facility is meant to assist liquidity-stressed banks and discipline the market, the provision has boomeranged, prompting a rise in interest rates, which is likely to cause more pain to businesses and consumers.
The Reserve Bank of Malawi (RBM) last December announced the introduction of a Lombard facility, an automatic window to assist stressed banks access liquidity at 27 percent, two percentage points above the bank rate, effective January 1 2014.
But in a sour turn of events, CDH Investment Bank (CDHIB) and Standard Bank have increased their base lending rates in the wake of the new facility.
Analysts also fear other commercial banks may follow suit.
CDHIB has increased its base lending rate to 40 percent while Standard Bank raised its prime rate to 39.5 percent.
But Chancellor College economics professor Ben Kaluwa in an interview yesterday said the RBM has effectively increased the bank rate by introducing the Lombard at a higher rate.
“It does not matter whether you call it a Lombard rate or RBM rate but effectively the bank rate has been increased. The commercial banks are responding to the increase,” he said.
Kaluwa said the market might be experiencing an improvement in liquidity because of the high interest rates because nobody wants to borrow at the current rates.
He argued that interest rates in Malawi are prohibitive that the only business that one can do is trading and not production.
A Nico Asset Managers weekly report shows that liquidity levels increased during the week ending January 3 to K7.21 billion a day from an average K4.29 billion while borrowing between banks decreased to K3.27 billion from K4.29 billion per day in the previous week.
The interbank lending rate—the rate at which banks borrow from each other to meet liquidity requirements—marginally increased to 24.88 percent.
RBM in the Monetary Policy Committee (MPC) minutes argued that the introduction of Lombard is aimed at containing risks to inflation outturn envisaged in the near future.
The November inflation rose to 22.9 percent according to the National Statistical Office (NSO).
RBM spokesperson Mbane Ngwira earlier argued Lombard will ensure that commercial banks have a standing access to money from the RBM as long as they meet requirements regardless of the liquidity situation on the market.