Malawi central bank in K800 billion bank bail out

Malawi’s central bank has in the last two months released MK806 billion (US$3 billion)to commercial banks seeking to avert a credit crunch, an  investment management firm said this week

“The inter-bank market continues to experience severe liquidity shortages with the amount banks borrowing from the Reserve Bank of Malawi during the month of July averaging K25.9 billion per day from an average of K17.17 billion during June 2012,” reads the  latest economic report by NICO Asset Managers Limited.

This is the first time Malawi, which is still reeling from an aid freeze by its Western donors that left the country on a brink of collapse,  has moved in to bail out banks. 

There was zero borrowing from the central bank before the  southern African nation scrapped its currency peg to the dollar in May,which triggered a devaluation of around 49 percent.

This, according to some economic experts, is one of the  reasons banks are facing liquidity shortages. 

“Following the substantial devaluation of the Kwacha this year  most banks were not prepared for  the subsequent inflow of foreign currency which virtually wiped out Kwacha balances that had  accumulated during the three year forex drought,” Dumbani Mzale said 

 “As a consequence, most banks were left with few kwacha balances to lend out which left the banks with no choice but to go to the Reserve Bank of Malawi (RBM) to borrow funds and boost their capital,” said  Mzale one of the leading economists in the influential Economic Association of Malawi.

 In response, the central bank  introduced a non-collateralized discount borrowing window at 18.5 percent for stressed banks to access money. It was later hiked to 23.5 percent because of increased demand.

“Banks have been misbehaving…Deposit rates were as low as 2 percent and this discourages savings as spreads were high and this has helped trigger the liquidity shortages,” said Ben Kalua, an economics  professor at university of Malawi.

The situation has left the country’s chamber of commerce and industry wary that many local companies may  have to close shop if the situation does not improve.

“The current kwacha shortages banks are experiencing may likely lead to massive bankruptcies by some private sector players as they will be denied borrowing for recapitalization, ” said  Chancellor Kaferapanjira, the industry’s representative.

Professor Kalua told a local daily that as an immediate measure to solve the liquidity challenges, the central bank needs to cut Liquidity Reserve Requirement (LRR) which is at 15 percent, the highest in southern Africa.

“Cutting LRR to as say 10 percent could help free the much needed resources into the banking community,” Kalua said.